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50. How will a firm’s operating cash flow be affected by a decrease in accounts receivable and by an increase in accounts payable? A. Both will increase operating cash flow. B. Both will decrease operating cash flow. C. One will increase operating cash flow and one will decrease operating cash flow.

Ans: A. A decrease in the accounts receivable amount on the balance sheet indicates that cash collections exceed revenues (sales). This increases operating cash flow because receivables are being collected. An increase in the accounts payable amount on the balance sheet indicates that purchases form suppliers exceed cash payments. This increases operating cash flow because the cash was not used to pay the suppliers.

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51. An analyst gather the following data about a company: Net sales $4,000 Dividends declared 170 COGS 2,000 Inventory increased by 100 Accounts payable increased by 300 Cash expenses for other inputs 500 Long-term debt principal repayment 250 Cash tax payments 200 Purchase of new equipment 300 The company’s CFO, based on these data only, is: A. $1,200. B. $1,500. C. $1,575. D.

Ans: B. Sales $4,000 Cash received from customers 4,000 Since no change in AR COGS (2,000) Increase in inventory (100) Increase in AP 300 Other cash input expenses (500) Cash paid for inputs (2,300) Cash paid for taxes (200) CFO 1,500

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52. Bao Inc. is involved in an exchange of debt for equity. In which of the following sections of the cash flow statement would Bao record this transaction? A. Investing activities section. B. Financing activities section. C. Footnotes to the cash flow statement.

Ans: C. This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.

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53. Which of the following statements about the analysis of cash flows is least accurate? A. Interest payments on debt are not a financing cash flow under U.S.GAAP. B. Both the direct and indirect methods involve adding back noncash items such as depreciation and amortization. C. When using the indirect method, an analyst should add any losses on the sales of fixed assets to net income.

Ans: B. When using the direct method of calculating operating cash flows, depreciation and amortization are not “added back” (to net income) because we don’t begin with net income under the direct method. Depreciation and amortization are noncash charges and are not used under the direct method. The other statements are true. Interest payments on debt affect cash flow from operations. When using the indirect method, an analyst should add any losses on sales of fixed assets to net income since they are not operating cash flow.

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54.  Bao Inc. had $4 million in bonds outstanding that were convertible into common stock at a conversion rate of 100 shares per $1,000 bond. In 2012, all of the outstanding bonds were converted into common stock. Bao’s average share price for 2012 was $15. Bao’s statement of cash flows for the year ended December 31, 2012, should most likely include: A. a footnote describing the conversion of the bonds into common stock. B. cash flows from financing of +$4 million from issuance of common stock and -$4 million from retirement of bonds. C. cash flows from financing of +$6 million from issuance of common stock and -$4 million from retirement of bonds and cash flows from investing of -$2 million for a loss on retirement of bonds.

Ans: A. Conversion of bonds into common stock is a non-cash transaction, but the conversion should be disclosed in a footnote to the statement of cash flows.

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55. In the statement of cash flows, a company is allowed to classify interest paid:

A. in either the operating or financing section under IFRS.

B. in either the operating or financing section under U.S. GAAP.

C. only in the financing section under both IFRS and U.S. GAAP.


Ans: A.

US GAAP requires that interest paid be classified as an operating cash flow; IFRS allows interest paid to be classified as either an operating or financing activity.


Reference: question 3.