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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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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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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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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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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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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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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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10. A firm reported the following financial statement items: Cash Flow Item (€) Net income 2,100 Non-cash charges 400 Interest expense 300 Capital expenditure 210 Working capital expenditures 0 Net borrowing 1,600 Tax rate 40% The free cash flow to the firm is closest to: A. €2,110. B. €2,470. C. €2,590.

Ans: B. Cash Flow Item Amount (€) Net income 2,100 Plus non-cash charges 400 Plus interest expense (1 – Tax rate) 300 (1 – 0.40) 180 Less capital expenditure (210) Less working capital expenditures 0 FCFF €2,470

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9. Which of the following is least likely a benefit of the direct method for reporting cash flow from operating activities? Compared with the indirect method, the direct method provides: A. supplementary data under U.S. GAAP. B. details on the specific sources of operating receipts and payments. C. insight on differences between net income and operating cash flows.

Ans: C. Under the direct method, cash flow from operations accumulates cash received from customers, cash paid to suppliers, cash paid to employees, cash paid for interest, etc. This method provides specific detail on a firm’s operating cash receipts and cash payments for a given reporting period, while eliminating the effects of accrual accounting. It provides supplementary data under U.S. GAAP. Providing insight on the differences between net income and cash flow is a benefit of the indirect method. The indirect method starts with net income and integrates a series of adjustments to calculate cash flow from operations.

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8.The following items are from a company’s cash flow statement. Classification of cash flow Description Amount (￡000s) Operating activities Cash received from customers 55,000 Investing activities Interest and dividends received 10,000 Financing activities Net repayment of revolving credit loan 12,000 Which of the following standards and formats did the company most likely use in the preparation of its financial statements? A. IFRS, direct format B. IFRS, indirect format C. Either IFRS or U.S. GAAP, direct format

Ans: A. The direct method of cash flow statement presentation shows the specific cash inflows and outflows that result in reported cash flow from operating activities (cash from customers, cash to suppliers, etc.). Companies using IFRS can decide to report interest and dividend receipts as either an investing or operating activity, whereas under U.S. GAAP, they must report such income as an operating activity. The listed operating and investment activities indicate that the company reports under IFRS, using the direct method.