CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ
BATCH 92 OCTOBER 2022 CPALE
PAS 7 STATEMENT OF CASH FLOWS
1. The primary purpose of the statement of cash flows is to provide information about
a. Difference between net income and associated cash receipts and disbursements
b. An entity’s activity to generate positive net cash flows
c. The cash receipts and cash payments of an entity during a period
d. An entity’s ability to meet cash operating needs
2. Cash equivalents are
a. Treasury bills, time deposits and money market funds purchased with excess cash.
b. Investments with original maturities of three months or less.
c. Readily convertible to known amount of cash
d. All of these are features of cash equivalents
3. All of the following can be classified as cash and cash equivalents, except
a. Redeemable preference shares acquired and due in 60 days
b. Treasury bills due for repayment in 90 days
c. Equity investments
d. A bank overdraft
4. Bank overdrafts that are payable on demand and the bank balance often fluctuates from positive to negative
as part of cash management shall be classified as
a. Operating
b. Investing
c. Financing
d. Component of cash and cash equivalents
5. In preparing the statement of cash flows, the purchase of a three-month Treasury bill would
a. Be treated as outflow from operating activities
b. Be treated as outflow from investing activities
c. Be treated as outflow from financing activities
d. Not be reported as operating, investing or financing activity
6. The proceeds from an earthquake disaster settlement should be classified as?
a. Cash flows from operating activities
b. Cash flows from investing activities
c. Cash flows from financing activities
d. Does not appear in the statement of cash flows
7. The statement of cash flows reports all of the following, except
a. The net change in cash for the period
b. The cash effects of operations during the period
c. The free cash flow generated during the period
d. Investing transactions.
8. Free cash flow is calculated as net cash provided by operating activities less
a. Capital expenditures
b. Dividends
c. Capital expenditures and dividends
d. Capital expenditures and depreciation
9. Which of the following should not be included under financing activities?
a. Cash effects of making loan and collecting loans granted
b. Cash effects of transactions obtaining resources from owners and providing them with a return on their
investment
c. Cash effects of borrowing money and repaying amounts borrowed
d. Cash effects of acquiring and disposing of treasury shares
10. Which statement is correct about the statement of cash flows?
a. The indirect method starts with income before income tax
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of cash flows.
 d. All of these statements are correct.

11. Under indirect method, cash flows from operating activities

a. Are always equal to accrual accounting income.
b. Are calculated as the difference between revenue and expenses.
c. Can be calculated by appropriately adding to or deducting from net income those items in the income
statement that do not affect cash.
d. Cannot be calculated.
12. Which is not an argument in favor of using the indirect or reconciliation method?
a. The differences between net income and cash provided by operations are highlighted
b. The direct method is nothing more than a cash basis income statement which will confuse and
create uncertainty for financial statement users who are familiar with the accrual basis
c. The direct method would lead to additional cost because the records are not on a cash basis
d. The indirect method shows higher quality cash flows from investing and financing activities
13. Cash advances and loans made by financing institutions are usually classified as
a. Operating activities
b. Investing activities
c. Financing activities
d. Component of cash and cash equivalents
14. Under IFRS, interest received and dividend received may be classified as
a. Operating
b. Investing
c. Operating or investing
d. Financing or investing
15. Under IFRS, interest paid may be classified as
a. Operating or financing
b. Operating or investing
c. Investing or financing
d. Operating
16. Under IFRS, dividends paid may be reported in which section of the statement of cash flows?
a. Financing
b. Operating
c. Financing or operating
d. Investing, financing or operating
17. Dividends received from an equity investee shall be presented as
a. Deduction from cash from operating activities
b. Addition to cash flows from operating activities
c. Deduction from cash flows from investing activities
d. Addition to cash flows from investing activities
18. The investment income under the equity method should
a. Not be shown
b. Be shown as cash inflow from investing activities.
c. Be shown as cash outflow for financing activities.
d. Be shown as deduction from net income under operating activities.
19. Which should not be disclosed in the statement of cash flows using the indirect method?
a. Interest paid, net of amounts capitalized
b. Income taxes paid
c. Cash flow per share
d. Dividends paid on preference shares
20. Supplemental disclosures required only when the using the indirect method include
a. A schedule reconciling net income with net cash flows from operating activities.
b. Amounts paid for interest and income taxes.
c. Amounts deducted for depreciation and amortization.
d. Significant noncash investing and financing activities.
21. In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash flow from
investing activities equals the carrying amount of the equipment
a. Plus the gain
b. Plus the gain and less the amount of tax attributable to the gain
c. Plus both the gain and the amount of tax attributable to the gain
d. With no addition or subtraction
22. In a statement of cash flows, if used equipment is sold at a loss, the amount shown as cash inflow from
investing activities equals the carrying amount of the equipment
a. Less the loss and the amount of tax
b. Less the loss plus the amount of tax
c. Less the loss
d. With no addition or subtraction
23. An increase in inventory would be reported in a statement of cash flows using the indirect method as
a. Addition to net income in arriving at net cash flow from operating activities.
b. Deduction from net income in arriving at net cash flow from operating activities.
c. Cash outflow from investing activities.
d. Cash outflow from financing activities.
24. In a statement of cash flows, depreciation is treated as an addition to net income because depreciation
a. Is a direct source of cash
b. Reduces income but does not involve cash outflow
c. Reduces income and involves cash inflow
d. Is a cash inflow for replacement of asset
25. The amortization of bond premium is presented using the indirect method as
a. Addition to net income in arriving at net cash flow from operating activities.
b. Deduction from net income in arriving at net cash flow from operating activities.
c. Cash outflow from investing activities.
d. Cash outflow from financing activities.
26. The amortization of bond discount is presented using indirect method as
a. Inflow and outflow of cash
b. Outflow of cash
c. Deduction from net income
d. Addition to net income
27. When using indirect method, the amortization of patent is reported as
a. Increase in cash flows from investing activities
b. Reduction in cash flows from investing activities
c. Increase in cash flows from operating activities
d. Reduction in cash flows from operating activities
28. Under indirect method, how should an unrealized gain on foreign currency transaction be presented?
\

a. As an inflow under financing activities

b. It should be ignored as it is an unrealized gain
c. It should be disclosed n the notes to the financial statements
d. As a deduction from net income under operating activities
29. Which is not disclosed in the statement of cash flows when prepared under the direct method?
a. The major classes of gross cash receipts and gross cash payments
b. The amount of income taxes paid
c. A reconciliation of net income to net cash flow from operations
d. A reconciliation of ending retained earnings to net cash flow from operations
30. Noncash investing and financing activities are
a. Reported in the statement of cash flows only if the direct method is used
b. Reported in the statement of cash flows only if the indirect method is used
c. Disclosed in a note or separate schedule accompanying the statement of cash flows
d. Not reported
CASH AND ACCRUAL BASIS
31. Accrual accounting is used because
a. Cash flows are considered less important.
b. It provides a better indication of ability to generate cash flows than the cash basis.
c. It recognizes revenue when cash is received and expenses when cash is paid.
d. It is simple to apply.
32. Which statement regarding accrual versus cash basis of accounting is true?
a. The cash basis is appropriate for some smaller entities
b. The cash basis is less useful in predicting the timing and amounts of future cash flows
c. Application of the cash basis results in an income statement reporting revenue and expenses
d. The cash basis requires a complete set of records
33. Under accrual basis, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses are recognized.
b. Precede or coincide with but never follow the period in which revenue and expenses are recognized.
c. Coincide with or follow but never precede the period in which revenue and expenses are recognized.
d. Only coincide with the period in which revenue and expenses are recognized.
34. Which statement does not describe a deferral?
a. Deferral of revenue occurs when cash is received and recognized in financial income.
b. Deferral typically results in the recognition of a liability or prepaid expense.
c. Cash collected in advance of services being rendered.
d. Cash paid up front for a one-year insurance policy.
35. Total net income over the life of an entity is
a. Higher under cash basis than under accrual basis.
b. Lower under cash basis than under accrual basis.
c. The same under the cash basis and accrual basis.
d. Not susceptible to measurement.
ERROR CORRECTION
36. Which of the following errors will not self-correct in the next year?
a. Accrued expenses not recognized at year-end
b. Accrued revenues that have not been collected not recognized at year-end
c. Depreciation expense overstated for the year
d. Prepaid expenses not recognized at year-end
37. The overstatement of ending inventory in the current year will cause
a. Retained earnings to be understated in the current year-end statement of financial position
b. Cost of goods sold to be understated in the income statement of next year
c. Cost of goods sold to be overstated in the income statement of the current year
d. Statement of financial statement not to be misstated in the next year-end
38. If the beginning inventory in the current year is overstated, the net income for current year would be
a. Understated and assets correctly stated.
b. Understated and assets overstated.
c. Overstated and assets overstated.
d. Understated and assets understated.
39. If at year-end, an entity erroneously excluded some goods from the ending inventory and also erroneously
did not record the purchase, these errors would cause
a. No effect on net income, working capital and retained earnings.
b. The cost of goods available for sale and net income to be understated.
c. The ending inventory and retained earnings to be understated.
d. The ending inventory and cost of goods sold to be understated.
40. An entity received goods on consignment at year-end and had recorded the transaction as a purchase and
included the goods in inventory. The effect of this on the financial statements would be
a. No effect.
b. Net income was correct and current assets and current liabilities were overstated.
c. Net income, current assets and current liabilities were overstated.
d. Net income and current liabilities were overstated.