Chapter 6 Self-test questions

. Which one of the following statements is not correct?

Under the indirect method, the total inflows and outflows from operations are ignored and the operating profit for a period is adjusted for increases or decreases in inventory, receivables, prepayments, payables and accruals and for the effect of non-cash items.

Depreciation is an accounting adjustment that allocates the cost of non-current assets to the accounting periods benefiting from their use.

The direct method takes all the cash inflows and outflows from operations and summarises them to produce the net cash inflow from operating activities.

Depreciation and profits and losses on the disposal of non-current assets are all cash flows.

. Which of the following are cash outflows from investing activities? Please select all that apply.

Interest paid

Investment in long term investments

Purchase of trademarks

Dividends received

. When preparing the statement of cash flows under the indirect method, an increase in trade payables is _____________ operating profit.

. The statement of cash flows, unlike the statement of profit or loss, is not drawn up on the accruals basis of accounting and so does not suffer from any distortion that might arise in the timing of the recognition of income and expenditure.

True

False

. Statements of cash flows are split into cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. Which category of cash flows would each of the following transactions fall into?

Purchase of new plant and equipment.

.

Purchase of goods for resale in a shop.

.

Sale of a patent.

.

Dividends paid.

. In the financial year ended 31 December 2021, Fergus Limited paid £200,000 to acquire new long-term investments and sold plant and equipment for £20,000. At the time of sale, the plant and equipment sold had a carrying amount of £15,000 and there was a profit on disposal of £5,000. What is Fergus Limited's cash outflow from investing activities for the year ended 31 December 2021?

£180,000

£185,000

£195,000

£205,000

. When calculating the cash flow from operating activities under the indirect method, which of the following are deducted from operating profit? Please select all that apply.

Loss on disposal of non-current assets.

Decrease in provisions.

Amortization of intangible non-current assets.

Increase in prepayments.

. Over time, cash inflows must exceed cash outflows in order for an entity to remain a ____________, a business that will continue in operational existence for the foreseeable future.

. The statement of cash flows is the only statement required for users to gain a full understanding of the financial position, performance and cash flow generating capability of an organisation.

True

False

. In the financial year ended 31 October 2021, Heather Limited received dividends of £15,000 and £10,000 in interest from the bank. A share issue in August 2021 raised £250,000 which was used to repay borrowings of £150,000. On 30 September 2021, a dividend of £50,000 was paid to shareholders. What is Heather Limited's cash inflow from financing activities for the year ended 31 October 2021?

£25,000

£35,000

£50,000

£100,000

. When calculating the cash flow from operating activities under the indirect method, which of the following are added to operating profit? Please select all that apply.

Decrease in trade receivables.

Decrease in trade payables.

Depreciation of property, plant and equipment.

Increase in accruals.

. Profits should always be anticipated when preparing the statement of profit or loss.

True

False

. Which one of the following would not be classified as cash and cash equivalents in the statement of cash flows?

Cash in a bank current account.

Cash in the tills of a retailer.

Cash in a deposit account requiring 120 days' notice.

A bank overdraft.

. Which one of the following would not be classified as a cash flow from operating activities?

Buying in raw materials for use in production.

Interest paid on borrowings used to finance the acquisition of plant and equipment used in operations.

Costs incurred in the day to day running of the business.

Delivery of goods to customers.

. Profit, the difference between income earned and expenditure incurred, equates to cash.

True

False

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