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11. Which of the following statements is most accurate regarding cash flow statements prepared under IFRS and U.S. GAAP? A. Under U.S. GAAP, bank overdrafts should be classified as a financing cash flow. B. Under IFRS, interest paid can be reported either as an operating or an investing cash flow. C. Both the direct and indirect formats of cash flow statements are allowed under IFRS and U.S. GAAP, but indirect is encouraged under IFRS only.

Ans: A. Under U.S. GAAP, bank overdrafts are not considered part of cash and cash equivalents and are classified as financing cash flows. The following table indicates the cash flow classification differences between U.S.GAAP and IFRS: Transaction U.S.GAAP IFRS Interest received CFO CFO/CFI Interest paid CFO CFO/CFF Dividends received CFO CFO/CFI Dividends paid CFF CFO/CFF Taxes paid CFO CFO/CFI/CFF Bank overdrafts CFF N/A* *under IFRS, bank overdrafts are considered part of cash equivalents and are not reported on the cash flow statement.

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12. The following is selected data from a company’s operations: Net Income $100,000 Increase in Accounts receivable 12,000 Increase in Accounts payable 9,000 Depreciation and amortization 8,000 The cash flow from operations is closest to: A. $89,000. B. $105,000. C. $111,000.

Ans. B. Net Income 100,000 plus Depreciation & Amortization 8,000 less Increase in Accounts Receivable (12,000) plus Increase in Accounts Payable 9,000 Net Cash from Operations 105,000

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13. A company reports its interest payments on long-term debt as a financing activity under IFRS. If the company reports under U.S. GAAP, the most likely effect would be: A. an increase in cash flow from operations. B. a decrease in cash flow from investing activities. C. an increase in cash flow from financing activities.

Ans: C. Interest payments can be reported either as operating or financing cash flow under IFRS, but can only be reported as operating cash flow under U.S. GAAP. The interest payment was originally reported as financing activity under IFRS, but under U.S. GAAP, it would be an operating activity. Therefore, cash flow from financing activities would increase, and operating cash flows decrease by the same amount. The following table indicates the cash flow classification differences between U.S.GAAP and IFRS: Transaction U.S.GAAP IFRS Interest received CFO CFO/CFI Interest paid CFO CFO/CFF Dividends received CFO CFO/CFI Dividends paid CFF CFO/CFF Taxes paid CFO CFO/CFI/CFF Bank overdrafts CFF N/A* *under IFRS, bank overdrafts are considered part of cash equivalents and are not reported on the cash flow statement.

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14. The following information (in millions) on a company is available: Cost of goods sold $ 500 Increase in total assets 250 Increase in total liabilities 200 Change in inventory (30) Change in accounts payable (25) The amount of cash (in millions) that the company paid to its suppliers is closest to: A. $445. B. $495. C. $505.

Ans: B. Cost of goods sold $500 Less: Decrease in inventory (30) Equals purchases from suppliers $470 Plus: Decrease in accounts payable 25 Cash paid to suppliers $495

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15. Which of the following statements is most accurate regarding cash flow ratios? A. Interest coverage ratio is calculated as operating cash flow over interest payments. B. Debt payment ratio measures the firm’s ability to pay debts with operating cash flows. C. Reinvestment ratio measures the firm’s ability to acquire assets with investing cash flows.

Ans: B. Debt payment ratio measures the firm’s ability to satisfy long-term debt with operating cash flow. Debt payment= A is incorrect. The interest coverage ratio measures the firm’s ability to meet its interest obligations. Interest coverage ratio= Note: if interest paid was classified as a financing activity under IFRS, no interest adjustment is necessary. C is incorrect. The reinvestment ratio measures the firm’s ability to acquire long-term assets with operating cash flow. Reinvestment ratio=

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16. A firm reports sales of €50,000,000 for the year ended December 31, 2009. Its accounts receivable balances were €6,000,000 at January 1, 2009 and €7,500,000 at December 31, 2009. The company’s cash collections from sales (€) for 2009 is closest to: A. 42,500,000. B. 48,500,000. C. 51,500,000.

Ans: B. The cash collections from sales is equal to sales less the change in receivables: €50,000,000 - (€7,500,000-€6,000,000) = €48,500,000.

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17. A company issued shares to acquire a large tract of undeveloped land for future development. The most likely recording of this transaction in the cash flow statement is as a(n): A. disclosure in a note or supplementary schedule. B. outflow from investing activities, and an inflow from financing activities. C. outflow from operating activities, and an inflow from financing activities.

Ans. A. Non-cash transactions are not reported in the cash flow statement but if they are significant they are reported in a note or supplementary schedule.

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18. The following information is available about a company ($ millions): Year ended 31 December 2011 2010 Sales 322.8 320.1 Net income 27.2 26.8 Cash flow from operations 15.3 38.1 During 2011 the company most likely decreased the: A. proportion of sales made on a cash basis. B. inventory, anticipating lower demand for its products in 2012. C. proportion of interest-bearing debt relative to trade accounts payable.

Ans: A. Sales, net income, and net margin are relatively constant for the two years. The substantial drop in cash flow from operations could be attributed to an increase in receivables and/or inventory. A decrease in the proportion of cash sales implies an increase in the proportion of credit sales, increasing accounts receivable. An increase in accounts receivable would decrease cash flow from operations.

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19. A company accrued wages of $2,000 and collected accounts receivable of $10,000. Which of the following best describes the effect of these two transactions on the company? A. Net income will increase B. Current ratio will decrease C. Cash from operations will decrease

Ans: B. Accruing wages increases current liabilities, but collecting receivables has no effect on current assets therefore the current ratio decrease. A is incorrect. Accruing wages increases expenses, but collecting receivables has no effect on sales therefore the net income decrease. C is incorrect. Collecting accounts receivable increases cash flow from operations and accruing wages increases current liabilities, which also increases cash flow from operations so cash from operations will increase not decrease.

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20. A company is buying back its stocks to offset the dilution of earnings from its stock option program. Which of the following statements best describes the effect on the financial statements of the amount spent to buy back the stocks? The amount spent reduces: A. net income. B. cash from operating activities. C. cash from financing activities.

Ans: C. Financing activities include cash flows that result from: borrowing or repaying debt principal, issuing or repurchasing equity capital, and paying cash dividends. The amount spent to buy back stocks to offset dilution is classified as a financing activity on the cash flow statement and therefore cash from financing decreases. A is incorrect. Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. Buying back stock will not affect the net income. B is incorrect. Operating activities include cash flows from the sale of a company’s goods/services, the cash impact of changes in operating assets and liabilities, and adjustments for noncash items reported on the income statement (using the indirect method).