Question

True or False

1. The approach to preparing the cash flow statement relies on the following rearrangement of the balance sheet equation: Change in cash = Change in (Liabilities + Stockholders' Equity + Noncash Assets).

2. Major investing and financing activities that do not involve cash do not have to be reported as part of the statement of cash flows.

3. In the decline phase, the company continues to enjoy positive operating cash flows but stops spending cash on investing activities and instead uses its cash for financing activities such as repaying lenders and returning excess cash to shareholders.

4. Under the indirect method, changes in current assets are used in determining cash flows from operating activities and changes in current liabilities are used in determining cash flows from financing activities.

5. The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents.

6. Using the T-account approach to preparing the statement of cash flows, an increase in Accounts Payable would appear on the debit side of the Cash account.

7. When preparing the operating activities section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income.

8. Maya Company's purchase of 100 shares of Labrador Inc. common stock would be reported as a financing activity on its statement of cash flows.

9. When preparing the operating activities section of the statement of cash flows using the direct method, a gain or loss from selling equipment is reported in the operating activities section of the statement of cash flows.

10. When preparing the operating activities section of the statement of cash flows using the indirect method, accumulated depreciation is added to net income in the operating section.

Answer 1

Q. No.	Answer	Explanation
1	FALSE	Correct equation is "(liabilities + stockholders' equity - noncash assets)"
2	TRUE	Non cash items related to financing and investing activity are not reported in cash flow statement.
3	FALSE	In the declining phase, Company start getting negative cash flows.
4	FALSE	Change in current assets and liabilities both are used in operating activities only.
5	TRUE	Cash flow explains the changes in cash during the period.
6	TRUE	As this is a increase in cash.
7	FALSE	Decrease in accounts receivables I added back in net income.
8	FALSE	Will be reported in Investing activities.
9	TRUE	Gain or loss is adjusted in net income in operating activities
10	FALSE	Not accumulated depreciation only depreciation for current year is added back.