Question

a._____ T or F  Certificates of deposit,commercial paper and U.S. Treasury Bills with original maturity of 3 months or less are examples of highly liquid investments and are classified as cash equivalents. (if false, identify and correct error)

b. _____ T or F  Depreciation expense reduces operating income in the Income Statement, but does not require the use of cash. It is reported in the Statement of Cash Flow, within the Financing Activities section, as a separately stated item: addition to net income (if false, identify and correct error)

Answer 1

a. Certificates of deposit,commercial paper and U.S. Treasury Bills with original maturity of 3 months or less are examples of highly liquid investments and are classified as cash equivalents.

The given statement is absolutely true. The above instruments can be easily sold as and when need arises thus these are highly liquid investments and are classified as cash equivalents.

b. Depreciation expense reduces operating income in the Income Statement, but does not require the use of cash. It is reported in the Statement of Cash Flow, within the Financing Activities section, as a separately stated item: addition to net income.

The above statement is false. Although depreciation is a non cash expense and it reduces operating income in the income statement but in the Statement of Cash Flow, within the Financing Activities section, it is not reported as a separately stated item: addition to net income. Depreciation is shown in the Operating Activities section as a separately stated item: addition to net income.