Accounting : Statement of Cash Flows

Study concepts, example questions & explanations for Accounting

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Example Questions

Example Question #1 : Statement Of Cash Flows

On the statement of cash flows, an increase in inventory would be reported in which of the following sections?

Possible Answers:

Financing activity

None of these

Investing activity

Operating activity

Correct answer:

Operating activity

Explanation:

There are three primary types of cash flow activities and the statement of cash flows has a section for each activity: operating, investing, and financing. Operating activities are defined as changes in current assets and current liabilities. Investing activities are described as changes in long-term assets. Last, financing activities are changes in long-term liabilities and stockholders' equity; therefore, an increase in inventory would be reported as an operating activity. 

Example Question #2 : Statement Of Cash Flows

Which of the following are considered to be cash equivalents?

Possible Answers:

Commercial paper

Money market funds 

Treasury bills

All of these

Correct answer:

All of these

Explanation:

In order for an asset to be considered as cash equivalent, it needs to be readily convertible into cash; furthermore, they must be near maturity so that they carry little to no risk of value alteration due to changes in interest rates. Generally, cash equivalents include investments with maturities of three months or less from the date of purchase. All of these—Treasury bills, commercial paper, and money market funds—are cash equivalents. 

Example Question #3 : Statement Of Cash Flows

On the statement of cash flows, an increase in inventory would be reported in which of the following sections?

Possible Answers:

Investing activity

None of these

Financing activity

Operating activity

Correct answer:

Operating activity

Explanation:

There are three primary types of cash flow activities and the statement of cash flows has a section for each activity: operating, investing, and financing. Operating activities are defined as changes in current assets and current liabilities. Investing activities are described as changes in long-term assets. Last, financing activities are changes in long-term liabilities and stockholders' equity; therefore, an increase in inventory would be reported as an operating activity. 

Example Question #4 : Statement Of Cash Flows

Which of the following are considered to be cash equivalents?

Possible Answers:

Commercial paper

Treasury bills

All of these

Money market funds 

Correct answer:

All of these

Explanation:

In order for an asset to be considered as cash equivalent, it needs to be readily convertible into cash; furthermore, they must be near maturity so that they carry little to no risk of value alteration due to changes in interest rates. Generally, cash equivalents include investments with maturities of three months or less from the date of purchase. All of these—Treasury bills, commercial paper, and money market funds—are cash equivalents. 

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