1. A firm's cash flows will differ from net income each period for all of the following reasons except:
   a. cash receipts from customers do not necessarily occur in the same period in which a firm recognizes revenues.
   b. cash expenditures to employees, suppliers, and governments do not necessarily occur in the same period in which a firm recognizes expenses.
   c. the company is sustaining losses each period.
   d. cash inflows and outflows that pertain to investing and financing activities do not immediately flow through the income statement.

the company is sustaining losses each period.

2. As products move through the maturity phase, companies invest to ___________ productive capacity.
   a. increase
   b. decrease
   c. maintain
   d. Not enough information to answer this question.

maintain

3. Under the indirect method of preparing the statement of cash flows, add backs to net income include all of the following except:
   a. depreciation expense
   b. deferred tax expense
   c. gains on sale of equipment
   d. share-based compensation

gains on sale of equipment

4. All of the following are firms that may experience a long lag between the expenditures of cash and the receipt of cash from customers, except:
   a. restaurants
   b. wineries
   c. construction companies
   d. aerospace manufacturers

restaurants

5. Academic research has found that market rates of return on common stock are the most highly correlated with:
   a. net income.
   b. cash flow from operations.
   c. EBITDA.
   d. cash flow from investing activities.

net income.

6. When net income is high relative to operating cash flows, we describe the firm as having recorded:
   a. income-decreasing accruals.
   b. income-increasing accruals.
   c. income-neutral accruals.
   d. abnormal accruals.

income-increasing accruals.

7. When net income is low relative to operating cash flows, we describe the firm as having recorded:
   a. income-decreasing accruals.
   b. income-increasing accruals.
   c. income neutral accruals.
   d. abnormal accruals.

income-decreasing accruals.

8. As a complement to the balance sheet and the income statement, the statement of cash flows is an informative statement for analysts for all the following reasons except:
   a. The statement of cash flows provides information to assess the financial health of a firm. Analysts increasingly recognize that cash flows do not necessarily track income flows. A firm with a healthy income statement is not necessarily financially healthy, and vice versa. Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash.
   b. The existence of negative cash flows from operations can be eliminated by using this financial statement.
   c. The statement of cash flows highlights accounting accruals, which can provide insight into the overall sustainability and quality of a firm's reported earnings.
   d. Analysts who understand the types of information this statement presents and the kinds of interpretations that are appropriate find that the statement of cash flows reveals information about the economic characteristics of a firm's industry, its strategy,
   and the stage in its life cycle.

The existence of negative cash flows from operations can be eliminated by using this financial statement.

9. Which of the following transactions would not create a cash flow?
   a. Payment of a cash dividend.
   b. The company purchased some of its own stock from a stockholder.
   c. Amortization of patent for the period.
   d. Sale of equipment at book value (i.e. no gain or loss).

Amortization of patent for the period.

10. Which of the following would not be a cash flow from investing activities?
    a. Sale of a patent.
    b. Collection of interest revenue on a long-term note receivable.
    c. Collection of principal of a note receivable.
    d. Purchase of long-term investments.

Collection of interest revenue on a long-term note receivable.