False Statements about GAAP - CFA Level 1 Exam | Test Prep

False Statements about GAAP

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Question

Which of the following is/are FALSE under GAAP?

I. The change in cash balances in consecutive Balance sheets equals the operating cash flow of the firm over that period.

II. The investing, financing and operating cash flows must together balance out to zero, to preserve the relationship, cash in = cash out.

III. Dividends received from investments in the stocks of other firms are classified under investing cash flows.

IV. Interest paid on debt financing is classified as operating cash flow.

Answers

Explanations

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A. B. C. D.

A

The change in cash balances of a firm can come about due to investing and financing cash flows, in addition to operating cash flows. Therefore, (I) is false. The relationship cash in = cash out is incorrect since the difference between the two goes into changing the cash balance of the firm. Hence, the operating, investing and financing cash flows need not balance out. It is very important to remember the following points about dividends and interests:

1. Dividends received from stock investments are considered operating cash flows.

2. Dividends paid on equity are considered financing cash flows.

3. Interest payments on debt are considered operating cash flows.

4. Interest received from debt investments are considered operating cash flows.

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