Cash Flow Statement QUESTIONS AND ANSWERS 2022

Cash Flow Statement Quiz Cash flows from operating activities ANS: operating cash flows) are the cash inflows and outflows that relate to acquiring (purchasing or manufacturing), selling, and delivering goods or services. Cash flows from operating activities Cash Inflows/Outflows ANS: Cash inflows from operating activities include: -cash sales to customers -collection of accounts -receivable arising from credit sales -cash dividends received -interest received on investments in equity and debt securities Cash outflows from operating activities include payments: -to suppliers for goods and services -to employees for wages and salaries -to governments for taxes -to lenders for interest on debt. Cash flows from investing activities ANS: investing cash flows) are the cash inflows and outflows that relate to acquiring and disposing of operating assets and investments in other companies (current and long-term), lending money, and collecting loans Cash flows from investing activities Cash Inflows/Outflows ANS: Cash inflows from investing activities include cash received from: -the sale of property, plant, and equipment -the collection of the principal amount of a loan (a note receivable) -the sale of investments in other companies Cash outflows from investing activities include payments made to: -acquire property, plant, and equipment -purchase debt or equity securities of other companies as an investment -loan money to others (notes receivable) Cash flows from financing activities ANS: financing cash flows) include obtaining resources from creditors and owners. Cash flows from financing activities Cash Inflows/Outflows ANS: Cash inflows from financing activites include cash received from the: -issuance of stock -Issuance of debt (bonds or notes payable) Cash outflows from financing activities include cash payments to: -repay the principal amount borrowed (bonds or notes payable) -Repurchase a company's own stock (treasury stock) -Pay dividends Preparing a Statement of Cash flows cont. ANS: Five basic steps are required to prepare the statement of cash flows: Step 1: Compute the net cash flow from operating activities. Step 2: Compute the net cash flow from investing activities. Step 3: Compute the net cash flow from financing activities. Step 4: Combine the net cash flows from operating, investing, and financing activities to obtain the net increase (decrease) in cash for the period. Step 5: Compute the change in cash for the period and compare this with the change in cash from step 4 Adjustments to net income are necessary for two reasons under the indirect method: ANS: to eliminate income statement items that do not affect cash (such as depreciation and gains/losses on sales of assets) and To adjust accrual-basis revenues and expanses to cash receipts and cash payments. Preparing the statement of cash flows using the indirect method ANS: -Add to net income any noncash expenses and subtract from net income any noncash revenues. -Add to net income any losses and subtract from net income any gains. -Add to net income any decreases in current assets or increases in current liabilities that are related to operating activities. -Subtract from net income any increases in current assets and decreases in current liabilities that are related to operating activities. How to Calculate Cash Flow from Operating Activities ANS: Add to Net Income -Noncash Expenses -Losses -Decreases in Current Assets -Increases in Current Liabilities Subtract from Net Income -Noncash Revenues -Gains -Increases in Current Assets -Decreases in Current Liabilities