Which of the following descriptions best describes cash flows from investing activities? Those activities that relate to:
A.changing the size or financial structure of an entity;
B.altering the composition of the debt of an organisation;
C.the acquisition or disposal of non-current assets;
D.restructuring the working capital components of a business.
6.The following would be included amongst cash flows from financing activities:
A.selling or otherwise disposing of inventory for cash;
B.changing the size of total equity by issuing new shares for cash;
C.paying creditors of a business;
D.purchasing a new building for cash.
7.The following activities would be presented amongst the cash flows from operating activities on a statement of cash flows.
8.Cash flows from the following activities would be presented amongst the investing activities on a statement of cash flows.
9.Cash flows from the following activities would be presented amongst the financing activities on a statement of cash flows.
Issue of shares and other equity
10.For the purpose of presentation in a statement of cash flows, government taxes on the income of a business entity are regarded as:
D.a non-cash item to be disclosed in the notes.
11.The statement of cash flows presentation method that separates gross cash inflows from cash outflows is known as the:
12.Greta Limited had net profit of $33 000 during the financial year. Included in profit was a depreciation expense of $14 000. Across the year Accounts receivable increased by $11 000 and Accounts payable increased by $5 000. The amount of cash flow from operating activities is:
13.Stanton Stationery Limited had a net profit after tax of $50 000 for the financial year. Included in this profit was a depreciation expense of $10 000 and a gain on sale of Investments of $2 000. Accounts Receivable increased by $3 000; Inventories increased by $1 000 and Accounts Payable increased by $6 000. The cash flow from operating activities amounted to:
14.During the financial year Sugar Limited had sales of $420 000. The opening balance of Accounts receivable was $90 000, and the closing balance was $127 000. Bad debts amounting to $7 000 were written off during the period. The cash receipts from sales during the year amounted to:
15.During the financial year, Huang Limited has a Cost of Goods Sold amounting to $294 000. Opening balances were: Inventory $36 000; Accounts Payable $28 000. Closing balances were: Inventory $45 000; Accounts Payable $26 000. A discount of $1 000 for prompt payment was received. The amount of cash paid for goods purchased during the year was:
Bright Limited has the following ledger account balances: Income tax payable Opening balance $52 000; Closing balance $33 000. The amount of tax expense accrued at the end of the year was $ 28 000. The amount that has been paid during the year to the taxation authorities for incomes taxes is:
17.The following items could be included in the closing cash balance that is presented in the balance sheet of Mohammed Limited:
Short-term money market deposits
18.When presenting the reconciliation note of operating profit and cash flows from operating activities:
A.Increases in current assets during the year should be added back from the reconciliation
B.Increases in current liabilities during the year should be added back from the reconciliation
C.Dividend revenue should be deducted from the reconciliation where dividends received have been classified as operating cash flows.
D.Dividend revenue should be deducted from the reconciliation where dividends received have been classified as financing cash flows.
19.The following item would appear in a statement of cash flows:
A.conversion of equity to debt;
B.recognition of leased assets;
C.acquisition of equipment in exchange for debentures;
D.proceeds from the settlement of a court case.
The appropriate presentation treatment for non-cash investing and financing transactions is to:
A.show them in the statement of cash flows after the disclosure of the ending balance of cash;
B.present them in the statement of cash flows above the operating activities;
C.exclude them from the statement of cash flows;
D.exclude them from the investing and financing sections and include them in the operating section.
This is the end of the test. When you have completed all the questions and reviewed your answers, press the button below to grade the test.
Answer: Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.
- Operating activitiesA section of the statement of cash flows that includes cash activities related to net income, such as cash receipts from sales revenue and cash payments for merchandise. include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.
- Investing activitiesA section of the statement of cash flows that includes cash activities related to noncurrent assets, such as cash receipts from the sale of equipment and cash payments for the purchase of long-term investments. include cash activities related to noncurrent assets. Noncurrent assets include (1) long-term investments; (2) property, plant, and equipment; and (3) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)
- Financing activitiesA section of the statement of cash flows that includes cash activities related to noncurrent liabilities and owners’ equity, such as cash receipts from the issuance of bonds and cash payments for the repurchase of common stock. include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (1) the principal amount of long-term debt, (2) stock sales and repurchases, and (3) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)
shows examples of cash flow activities that generate cash or require cash outflows within a period. presents a more comprehensive list of examples of items typically included in operating, investing, and financing sections of the statement of cash flows.
Figure 12.2 Examples of Cash Flow Activity by Category
*Receipts of cash for dividends from investments and for interest on loans made to other entities are included in operating activities since both items relate to net income. Likewise, payments of cash for interest on loans with a bank or on bonds issued are also included in operating activities because these items also relate to net income.
Question: Which section of the statement of cash flows is regarded by most financial experts to be most important?
Answer: The operating activities section of the statement of cash flows is generally regarded as the most important section since it provides cash flow information related to the daily operations of the business. This section answers the question, “how much cash did we generate from the daily activities of our core business?” Owners, creditors, and managers are most interested in cash flow generated from daily activities rather than from a one-time issuance of stock or a one-time sale of land. The operating activities section allows stakeholders to assess the ongoing viability of the company. We discuss how to use cash flow information to evaluate organizations later in the chapter.
Business in Action 12.2
Cash Activity at Home Depot and Lowe’s
The Home Depot. Inc., and Lowe’s Companies, Inc., are large home improvement retail companies with stores throughout North America. A review of the statements of cash flows for both companies reveals the following cash activity. Positive amounts are cash inflows, and negative amounts are cash outflows.
Amounts are in millions.
This information shows both companies generated significant amounts of cash from daily operating activities; $4,600,000,000 for The Home Depot and $3,900,000,000 for Lowe’s. It is interesting to note both companies spent significant amounts of cash to acquire property and equipment and long-term investments as reflected in the negative investing activities amounts. For both companies, a significant amount of cash outflows from financing activities were for the repurchase of common stock. Apparently, both companies chose to return cash to owners by repurchasing stock.
Key Takeaway
- The three categories of cash flows are operating activities, investing activities, and financing activities. Operating activities include cash activities related to net income. Investing activities include cash activities related to noncurrent assets. Financing activities include cash activities related to noncurrent liabilities and owners’ equity.
Review Problem 12.2
Identify whether each of the following items would appear in the operating, investing, or financing activities section of the statement of cash flows. Explain your answer for each item.