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Accounting: business
reporting for decision
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6th edition
by
Birt et al.
© John Wiley & Sons Australia, Ltd 2017

Chapter 7: Statement of cash flows
Learning objectives
1. Assess the purpose and usefulness of a statement of cash flows

Q1, Q2, Q3, Q4, Q5, Q6, Q7, Q8, Q9, Q51, Q52
2. Outline the format and the classification of cash flows in the statement of cash flows
Q10, Q11, Q12, Q13, Q14, Q15, Q16, Q17, Q18, Q19, Q20, Q21, Q22, Q23, Q24,
Q25, Q26, Q27, Q28, Q29, Q30, Q31, Q32, Q53, Q54, Q55, Q56, Q57, Q58, Q59
3. Produce a statement of cash flows using the direct method and a reconciliation using
the indirect method
Q33, Q34, Q35, Q36, Q37, Q38, Q39, Q40, Q60, Q61, Q62, Q63
4. Evaluate an entity’s performance using a statement of cash flows

Q41, Q42, Q43, Q44, Q45, Q46, Q47, Q48, Q49, Q50, Q64, Q65
© John Wiley and Sons Australia, Ltd 2017 7.1

Testbank to accompany Accounting: business reporting for decision making 6e
Multiple-choice questions
1. The primary purpose of the statement of cash flows is to:
a. provide information about the profit or loss during the accounting period.
*b. provide information about the cash receipts and cash payments made during
the accounting period.
c. show the deficit of cash during the period.
d. show the cash balance at the end of the period.
Correct answer: b
Learning Objective 7.1 ~ Assess the purpose and usefulness of a statement of cash flows
2. Which of the following information can be obtained from a statement of cash flows
but is not obvious from looking at financial statements prepared on an accrual basis?
a. Whether the entity is collecting its receivables in a timely manner.

b. Whether the entity is generating cash from its operations.
c. Whether the entity is likely to be able to pay its debts as and when they fall
due.
*d. All the above options are true.
Correct answer: d
3. Which of the following statements is true?
a. For an entity to survive, the net cash flow from operating activities should be
negative.
b. For an entity to survive, the net cash flow from investing activities should be
positive.
c. For an entity to survive, the net cash flow from financing activities should be
positive.
*d. For an entity to survive, the net cash flow from operating activities should be
positive.
Correct answer: d

4. Which of the following items would not appear in a statement of cash flows?
*a. Depreciation expense.

b. Lease payments.
c. Dividends received.
d. Payment of wages.
Correct answer: a
5. When preparing a statement of cash flows, net cash from operating activities +
investing activities + financing activities = net increase/decrease in cash for the year.
What appears next on the statement?
*a. Add the beginning balance of cash for the year to determine the ending
balance of cash for the year.
b. Deduct the beginning balance of cash for the year to determine the ending
balance of cash for the year.
c. Deduct cash paid to suppliers to determine the ending balance of cash for the
year.
d. Nothing. The statement is complete.
Correct answer: a
6. Which of these causes a difference between the profit in the income statement and the
net cash increase in the statement of cash flows?
a. Depreciation.
b. Prepaid insurance.
c. Credit purchases not yet paid.
*d. All of the above.
Correct answer: d

7. Which relationship between items in the statement of cash flows (CF) and items in the
balance sheet (BS) is not correct?
a. Cash from investing activities (CF); Non-current assets (BS).

b. Cash from financing activities (CF); Non-current liabilities and equity (BS).
*c. Cash from financing activities (CF); Non-current assets (BS).
d. Cash from operating activities (CF); Current assets and liabilities (BS).
Correct answer: c
8. In the current accounting period, sales (calculated on an accrual basis) are $180 000
and the cash received from sales is $215 000, therefore:
a. cash sales for the period were greater than credit sales.
*b. credit sales that occurred in a previous period may have been paid for in the
current period.
c. credit sales that occurred in the current period may not yet have been paid for.
d. none of the options are correct.
Correct answer: b
9. Proceeds from the sale of motor vehicles will be included in the statement of cash
flows as:
a. a financing activity.
*b. an investing activity.
c. an operating activity.
d. a cash activity.
Correct answer: b
10. Which of the following is not a characteristic of cash and cash equivalents?
a. They have a very low, or insignificant, risk of changing in value.

b. They are highly liquid investments.
c. They include short-term borrowings with a maturity of less than 3 months.
*d. None of the above. They are all characteristics of cash and cash equivalents.
Correct answer: d
Learning Objective 7.2~ Outline the format and the classification of cash flows in the
statement of cash flows

11. The correct order of activities for the preparation of a statement of cash flows is:
a. cash flows from financing activities, cash flows from operating activities, cash
flows from investing activities.
b. cash flows from investing activities, cash flows from financing activities, cash
flows from operating activities.
*c. cash flows from operating activities, cash flows from investing activities, cash
flows from financing activities.
d. cash flows from investing activities, cash flows from operating activities, cash
flows from financing activities.
Correct answer: c
Learning Objective 7.2 ~ Outline the format and the classification of cash flows in the
12. Which of these is not an example of cash or cash equivalents?
*a. Money market deposit with 6 months maturity.

b. Bank overdraft.
c. Bank and non-bank bills.
d. Bank deposits.
Correct answer: a
13. A business purchases equipment worth $50 000 to be used in their manufacturing
process. This transaction would be classified as which type of activity in the statement
of cash flows?
a. Financing.
b. Non-cash.
c. Operating.
*d. Investing.
Correct answer: d

14. When reconciling operating profit after tax with net cash flow from operating
activities, which of the following adjustments is not correct?
a. Add back amortisation.

b. Add an increase in a current liability.
c. Deduct an increase in a current asset.
*d. Deduct a loss on the sale of an asset.
Correct answer: d
15. Which of the following represents an investing activity on the statement of cash
flows?
a. Repaying money previously borrowed.

b. Receiving cash from a share issue.
*c. Collecting cash on loans previously made to other entities.
d. Obtaining cash from creditors.
Correct answer: c
16. The section of the statement of cash flows that is generally considered to be the best
measure of a company’s ability to generate cash is:
a. each section gives an equal estimation.

*b. cash flows from operating activities.
c. cash flows from financing activities.
d. cash flows from investing activities.
Correct answer: b

17. Cash receipts from dividends are classified as which activity in the statement of cash
flows?
a. Financing.
b. Investing.
*c. Operating.
d. Financing or investing.
Correct answer: c
18. Cash outflows from financing activities include:
a. cash paid for the purchase of shares.

b. the lending of money to another business.
c. payment of income tax.
*d. dividends paid to shareholders.
Correct answer: d
19. Which of these would not be classified as an operating activity in a statement of cash
flows?
a. Payment of interest expense.

b. Cash received as payment for the purchase of goods on credit.
c. Cash dividends received.
*d. Loan repayments.
Correct answer: d
20. A reconciliation between the operating profit after tax and the net cash flow from
operating activities:
a. highlights changes in the working capital accounts from one year to the next.
b. reinforces the link between the cash received from operating activities and the
reported profit or loss for the period.
c. shows the differences in accrual transactions and cash flow.
*d. all the above options are correct.
Correct answer: d

21. In which section of the statement of cash flows would the purchase of new machinery
be included?
a. Cash flows from operating activities.

*b. Cash flows from investing activities.
c. Cash flows from financing activities.
d. Purchases of new equipment items are not included in the statement of cash
flows.
Correct answer: b
22. An entity’s net cash flow from operating activities is important for users of the
statement of cash flows because it:
a. indicates the entity’s ability to generate cash.

b represents the entity’s cash flows from normal business operations.
c. indicates that the business is meeting its current obligations.
*d. all of the above options are true.
Correct answer: d
23. In the current financial period, accrued expenses are recorded as $250 000 and the
cash paid for expenses, as shown in the statement of cash flows, is $180 000. This
means that:
a. expenses may have been paid for in advance in the previous period.
b. expenses may have been incurred in the current period and have not been paid
by the end of the current period.
c. depreciation may have been recorded in the statement of profit or loss.
*d. all of the options are correct.
Correct answer: d

24. From the information below, the net cash flow from operating activities is:
Cash contributions from owner $8000

Receipt of bank interest $50
Dividend payment to shareholders $2500
Cash receipts from customers $4500
Cash purchase of computer $2100
Depreciation on computer $50
Cash payments to suppliers $3500
a. an inflow of $5500.
*b. an inflow of $1050.
c. an outflow of $2100.
d. an inflow of $6900.
Correct answer: b
Feedback: (Receipt of bank interest $50 plus cash receipts from customers $4500 less cash
payments to suppliers $3500 = $1050).
25. From the information below, the total net cash flow from investing activities is:
Borrowed $15 000 cash

Sold motor vehicle $1400
Paid Income tax $20 000
Paid Dividends $8500
Received cash from customers $18 000
Cash purchase of furniture $2700
Depreciation on furniture $270
a. an inflow of $1400.
b. an outflow of $2700.
c. an inflow of $6500.
*d. an outflow of $1300.
Correct answer: d
Feedback: (Sold motor vehicle $1400 less purchase of furniture $2700 = ($1300)).

26. If customers owe $120 000 at the beginning of the year and $95 000 at the end of the
year, and credit sales total $250 000 for the year, the cash received from customers
during the year is:
a. $120 000
b. $370 000
*c. $275 000
d. $155 000
Correct answer: c
27. The amount owing to suppliers for inventory purchases at the beginning of the year is
$118 000 and at the end of the year is $94 000. If total credit purchases of inventory
for the year are $160 000, the cash paid to suppliers of inventory for the year is:
*a. $184 000

b. $66 000
c. $278 000
d. $254 000
Correct answer: a
28. Calculate the net cash flow from operating activities by adjusting the operating profit
after tax.
After-tax profit for the year $50 000

Depreciation 8 000
Decrease in accounts receivable 22 000
Decrease in accounts payable 13 000
a. $15 000
b. $41 000
*c. $59 000
d. $65 000
Correct answer: c

29. Changes in non-current liabilities and equity in the balance sheet appear in the
statement of cash flows under:
a. the reconciliation of operating profit with cash flow from operating activities.
b. operating activities.
c. investing activities.
*d. financing activities.
Correct answer: d
30. Which of the following items would be classified as investing activities in a statement
of cash flows?
a. Proceeds from dividends.

b. Proceeds from borrowings.
c. Proceeds from customers.
*d. Proceeds from sale of machinery.
Correct answer: d
31. Which of the following would not be classified as a cash flow from investing
activities?
a. Proceeds from repayment of loans to other parties.

b. Proceeds from the sale of plant and equipment.
*c. Cash from borrowings.
d. Purchase of furniture.
Correct answer: c

32. Which of the following statements in relation to converting accrual information to the
cash basis is correct?
*a. An increase in current assets means less cash.

b. A decrease in current assets means less cash.
c. An increase in current liabilities means less expense.
d. A decrease in current liabilities means more cash.
Correct answer: a
33. Assume all inventory items are purchased for cash. If cash payments for inventory in
the period total $37 000 and the cost of sales, calculated under the accrual basis, is
$40 000:
a. inventory on hand has increased by $3000 during the period.

*b. inventory on hand has decreased by $3000 during the period.
c. creditors are owed $3000 at the end of the period for inventory purchases.
d. creditors are owed $40 000 at the end of the period for inventory purchases.
Correct answer: b
Learning Objective 7.3 ~ Produce a statement of cash flows using the direct method and a
reconciliation using the indirect method
34. Using the information below, the net cash flow from operating activities is:
Cash received from customers $213 000

Cash paid for salaries and other expenses 185 000
Cash received from the sale of equipment 12 000
Gain on the sale of equipment 8 000
a. inflow of $20 000.

b. inflow of $12 000.
*c. inflow of $28 000.
d. inflow of $8 000.
Correct answer: c

35. If the balance of the plant and equipment asset account at the beginning of the year is
$800 000, the closing balance is $650 000, and plant and equipment originally
purchased for $165 000 are sold during the year, the amount spent on purchases of
new plant and equipment during the year equals:
a. $485 000
b. $135 000
c. $150 000
*d. $15 000
Correct answer: d
36. If profit after tax is $28 000 and increases in inventory and accounts receivable total
$17 000, the net cash flow from operating activities is:
a. outflow of $11 000.

*b. inflow of $11 000.
c. inflow of $45 000.
d. outflow of $45 000.
Correct answer: b
37. If the opening balance of dividends payable is $120 000 and the closing balance is
$90 000, and dividends declared at the end of the period are $50 000, how much cash
was paid for dividends in that period?
a. $0
*b. $80 000
c. $20 000
d. $40 000
Correct answer: b

38. If the opening balance of borrowings was $330 000, the closing balance was $550 000
and a total of $240 000 was paid off the entity’s borrowings during the period, how
much additional cash did the entity borrow during the period?
a. $90 000
b. $3100 000
*c. $460 000
d. $120 000
Correct answer: c
39. If the opening balance of accrued expenses is $34 000, the closing balance is $38 000
and accrued expenses recognised at the end of the period is $20 000, how much was
paid for accrued expenses during the period?
a. $14 000
*b. $16 000
c. $18 000
d. $28 000
Correct answer: b
40. Using the indirect method to prepare the statement of cash flows, which of the
following statements is true?
a. Decrease in current assets means a decrease in cash.

b. Increase in current assets means an increase in cash.
*c. Increase in current liabilities means an increase in cash.
d. Decrease in current liabilities means an increase in cash.
Correct answer: c

41. Investors have increased their reliance on the statement of cash flows due to:
a. the relative difficulty in manipulating the statement of cash flows compared

with the ability to manipulate the statement of profit or loss.
b. the comparison of profit or loss to the cash flow from operating activities
providing insight to an entity’s ability to meet its obligations.
c. the statement highlighting an entity’s ability to reinvest in its operations.
*d. all of the options are correct.
Correct answer: d
Learning Objective 7.4 ~ Evaluate an entity’s performance using a statement of cash flows
42. Free cash flow is:
a. the cash available to loan to other entities.

b. the cash available to pay current liabilities.
*c. the cash available to repay debt, pay dividends and expand operations.
d. the cash available to purchase supplies.
Correct answer: c
43. Which of the following is not an early warning indicator of cash flow problems?
a. Operating activities are paid for using proceeds raised from the issue of shares.
*b. Cash received from customers is greater than cash paid to suppliers.
c. Operating cash outflows.
d. The entity continues to borrow more money than it repays.
Correct answer: b
44. Which of the following cash flow ratios is used to determine an entity’s solvency?
*a. Debt coverage ratio.

b. Free cash flow ratio.
c. Cash adequacy ratio.
d. Cash flow ratio.
Correct answer: a

45. Which of the following statements concerning the cash adequacy ratio is true?
a. It measures the entity’s ability to reinvest in its operations and to make

distributions to owners from its operating cash flow.
b. It expresses the cash flow from operating activities as a percentage of capital
expenditure plus dividends.
c. A ratio result greater than one suggests a good performance.
*d. All of the statements are true.
Correct answer: d
46. Which of the following would assist an entity wanting to improve their cash flow?
a. Selling surplus inventory.

b. Investing surplus cash.
c. Utilising the available credit terms when paying suppliers.
*d. All of the above options would assist in improving cash flow.
Correct answer: d
47. A possible explanation for a company reporting a loss on the statement of profit or
loss, but a positive cash inflow of funds from operations is:
a. a decrease in accounts payable.

*b. a decrease in accounts receivable.
c an increase in accounts receivable.
d an increase in inventory.
Correct answer: b
48. The formula for the cash adequacy ratio is :
*a. cash from operating activities divided by (capital expenditure plus dividends
paid).
b. non-current liabilities divided by cash from operative activities.
c. cash from operating activities divided by non-current liabilities.
d. cash from financing activities divided by net assets.
Correct answer: a

49. Which of the following statements concerning the cash flow ratio is true?
a. The cash flow ratio is a better measure of liquidity than the current ratio
because it is calculated using cash flow generated over a whole reporting
period rather than the current assets at a point in time.
b. The cash flow ratio is used to assess liquidity.
c. The cash flow ratio compares the cash flow from operating activities with the
current liabilities.
*d. All of the above statements are true.
Correct answer: d
50. Cash from operating activities less the amount spent on capital expenditure is the
formula for:
a. the cash flow to sales ratio.

b. the cash adequacy ratio.
*c. free cash flow.
d. the debt coverage ratio.
Correct answer: c

Fill in the blanks
51. The time taken from the purchase of inventory from suppliers to receiving the cash
from the sale of that inventory to customers is called the operating ______ ________.
a. cash cycle
52. The statement of cash flows assists decision makers in assessing an entity’s ability to
_______________cash flows.
a. generate
53. A healthy business would normally expect to have a net cash __________ (inflow or
outflow) from operating activities.
a. inflow
54. Cash __________________ are highly liquid investments and short-term borrowings
that are subject to an insignificant risk of change in value.
a. equivalents
55. A net total cash outflow in investing activities is considered ____________(normal or

abnormal) for a healthy growing business.
a. normal
56. Borrowing money and raising share capital are included as ________________
activities on a statement of cash flows.
a. financing

57. Cash flows from investing activities arise from changes in non- ___________
____________ on the balance sheet.
a. current assets
58. The receipt of dividends would be classified as a cash inflow from ______________
activities.
a. operating
59. __________ expense relating to property, plant and equipment is a common business
expense that is not included in the statement of cash flows.
a. Depreciation
60. During the financial period the amount owing from debtors increased by $40 000. If
the credit sales for the period are $500 000 the cash inflows from debtors on the
statement of cash flows will be __________.
a. $460 000
61. If dividends declared at the end of the period are $10 000, and the balance of
dividends payable increased by $2000 over the period, the amount of dividends paid
during the year is equal to _________.
a. $8000
62. The opening balance of inventory is $50 000 and the closing balance is $15 000. If
cost of sales is $500 000 for the period, assuming creditors' balances have not altered,
the amount of cash paid to suppliers is _____________.
a. $465 000

63. The ___________ method of preparing a statement of cash flows adjusts an entity’s
profit or loss for the effects of non-cash transactions and deferrals or accruals of
operating activities.
a. indirect
64. Decision makers have increased their reliance on the statement of cash flows due to
the relative difficulty in manipulating the statement of ____________
_______________ compared with manipulating the statement of profit or loss.
a. cash flows
65. Comparing an entity’s profit or loss with its’ net cash from operating activities can
indicate how well an entity is managing its ______________ _____________.
a. working capital

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Instant Download PDF Accounting Business Reporting For Decision Making 6th Edition Birt Test Bank Full Chapter

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Accounting Business Reporting for

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© John Wiley & Sons Australia, Ltd 2017

Chapter 7: Statement of cash flows

1. Assess the purpose and usefulness of a statement of cash flows

4. Evaluate an entity’s performance using a statement of cash flows

© John Wiley and Sons Australia, Ltd 2017 7.1

1. The primary purpose of the statement of cash flows is to:

a. Whether the entity is collecting its receivables in a timely manner.

3. Which of the following statements is true?

© John Wiley and Sons Australia, Ltd 2017 7.2

*a. Depreciation expense.

© John Wiley and Sons Australia, Ltd 2017 7.3

a. Cash from investing activities (CF); Non-current assets (BS).

a. They have a very low, or insignificant, risk of changing in value.

© John Wiley and Sons Australia, Ltd 2017 7.4

12. Which of these is not an example of cash or cash equivalents?

*a. Money market deposit with 6 months maturity.

© John Wiley and Sons Australia, Ltd 2017 7.5

a. Add back amortisation.

a. Repaying money previously borrowed.

a. each section gives an equal estimation.

© John Wiley and Sons Australia, Ltd 2017 7.6

18. Cash outflows from financing activities include:

a. cash paid for the purchase of shares.

a. Payment of interest expense.

© John Wiley and Sons Australia, Ltd 2017 7.7

a. Cash flows from operating activities.

a. indicates the entity’s ability to generate cash.

© John Wiley and Sons Australia, Ltd 2017 7.8

Cash contributions from owner $8000

Borrowed $15 000 cash

© John Wiley and Sons Australia, Ltd 2017 7.9

*a. $184 000

After-tax profit for the year $50 000

© John Wiley and Sons Australia, Ltd 2017 7.10

a. Proceeds from dividends.

a. Proceeds from repayment of loans to other parties.

© John Wiley and Sons Australia, Ltd 2017 7.11

*a. An increase in current assets means less cash.

a. inventory on hand has increased by $3000 during the period.

Cash received from customers $213 000

a. inflow of $20 000.

© John Wiley and Sons Australia, Ltd 2017 7.12

a. outflow of $11 000.

© John Wiley and Sons Australia, Ltd 2017 7.13

a. Decrease in current assets means a decrease in cash.

© John Wiley and Sons Australia, Ltd 2017 7.14

a. the relative difficulty in manipulating the statement of cash flows compared

42. Free cash flow is: