ACCT 212 Chapter 13 Homework – Statement of
Cash Flows & Financial Analysis (Liberty University)
Question 1:
What is the primary purpose of the Statement of Cash Flows?
Answer:
The main purpose of the Statement of Cash Flows is to provide information about a company’s
cash inflows and outflows during a specific period. It helps users understand how the company
generates and uses cash in operating, investing, and financing activities, offering insights into
liquidity and financial health.
Question 2:
What are the three main sections of the Statement of Cash Flows?
Answer:
The three main sections are:
1. Operating activities – cash flows from the core business operations.
2. Investing activities – cash flows related to buying and selling long-term assets or
investments.
3. Financing activities – cash flows from borrowing, repaying debt, issuing stock, or paying
dividends.
Question 3:
Why is net income different from cash flow from operations?
Answer:
Net income is calculated using accrual accounting, which includes non-cash items such as
depreciation, credit sales, or accrued expenses. Cash flow from operations adjusts net income
to reflect only actual cash transactions, making it more accurate in showing liquidity.
,Question 4:
What is the difference between the direct and indirect method of preparing the Statement of
Cash Flows?
Answer:
• Direct method lists actual cash receipts and payments from operations (e.g., cash
received from customers, cash paid to suppliers).
• Indirect method starts with net income and adjusts for non-cash expenses, changes in
current assets/liabilities, and gains/losses. Most companies use the indirect method.
Question 5:
Give an example of a cash inflow and outflow for investing activities.
Answer:
• Inflow: Cash received from selling equipment or investments.
• Outflow: Cash paid to purchase land, buildings, or long-term investments.
Question 6:
How are dividends reported in the Statement of Cash Flows?
Answer:
Dividends paid are reported as cash outflows in the financing activities section since they
represent distributions to shareholders. However, dividends received are reported under
operating activities (if using U.S. GAAP).
Question 7:
Why is depreciation added back to net income in the indirect method?
Answer:
Depreciation is a non-cash expense that reduces net income but does not involve any cash
outflow. Therefore, it is added back to net income to accurately reflect cash generated from
operating activities.
, Question 8:
If accounts receivable increases during the year, how does this affect operating cash flows?
Answer:
An increase in accounts receivable means more credit sales and less cash collected. Therefore, it
decreases operating cash flow when preparing the cash flow statement under the indirect
method.
Question 9:
What type of activity is issuing bonds considered in the Statement of Cash Flows?
Answer:
Issuing bonds is a financing activity because it involves raising funds through borrowing, leading
to a cash inflow in the financing section.
Question 10:
How can the Statement of Cash Flows help investors and creditors?
Answer:
It helps investors and creditors evaluate a company’s ability to generate cash, pay debts, finance
growth, and return profits to shareholders. Unlike net income, it shows actual liquidity, which is
critical for decision-making.
Question 11:
If accounts payable increases during the year, how does this affect cash flow from operating
activities?
Answer:
An increase in accounts payable means the company delayed paying suppliers, conserving cash.
Therefore, it increases cash flow from operating activities under the indirect method since less
cash was used to settle obligations.
Question 12:
Cash Flows & Financial Analysis (Liberty University)
Question 1:
What is the primary purpose of the Statement of Cash Flows?
Answer:
The main purpose of the Statement of Cash Flows is to provide information about a company’s
cash inflows and outflows during a specific period. It helps users understand how the company
generates and uses cash in operating, investing, and financing activities, offering insights into
liquidity and financial health.
Question 2:
What are the three main sections of the Statement of Cash Flows?
Answer:
The three main sections are:
1. Operating activities – cash flows from the core business operations.
2. Investing activities – cash flows related to buying and selling long-term assets or
investments.
3. Financing activities – cash flows from borrowing, repaying debt, issuing stock, or paying
dividends.
Question 3:
Why is net income different from cash flow from operations?
Answer:
Net income is calculated using accrual accounting, which includes non-cash items such as
depreciation, credit sales, or accrued expenses. Cash flow from operations adjusts net income
to reflect only actual cash transactions, making it more accurate in showing liquidity.
,Question 4:
What is the difference between the direct and indirect method of preparing the Statement of
Cash Flows?
Answer:
• Direct method lists actual cash receipts and payments from operations (e.g., cash
received from customers, cash paid to suppliers).
• Indirect method starts with net income and adjusts for non-cash expenses, changes in
current assets/liabilities, and gains/losses. Most companies use the indirect method.
Question 5:
Give an example of a cash inflow and outflow for investing activities.
Answer:
• Inflow: Cash received from selling equipment or investments.
• Outflow: Cash paid to purchase land, buildings, or long-term investments.
Question 6:
How are dividends reported in the Statement of Cash Flows?
Answer:
Dividends paid are reported as cash outflows in the financing activities section since they
represent distributions to shareholders. However, dividends received are reported under
operating activities (if using U.S. GAAP).
Question 7:
Why is depreciation added back to net income in the indirect method?
Answer:
Depreciation is a non-cash expense that reduces net income but does not involve any cash
outflow. Therefore, it is added back to net income to accurately reflect cash generated from
operating activities.
, Question 8:
If accounts receivable increases during the year, how does this affect operating cash flows?
Answer:
An increase in accounts receivable means more credit sales and less cash collected. Therefore, it
decreases operating cash flow when preparing the cash flow statement under the indirect
method.
Question 9:
What type of activity is issuing bonds considered in the Statement of Cash Flows?
Answer:
Issuing bonds is a financing activity because it involves raising funds through borrowing, leading
to a cash inflow in the financing section.
Question 10:
How can the Statement of Cash Flows help investors and creditors?
Answer:
It helps investors and creditors evaluate a company’s ability to generate cash, pay debts, finance
growth, and return profits to shareholders. Unlike net income, it shows actual liquidity, which is
critical for decision-making.
Question 11:
If accounts payable increases during the year, how does this affect cash flow from operating
activities?
Answer:
An increase in accounts payable means the company delayed paying suppliers, conserving cash.
Therefore, it increases cash flow from operating activities under the indirect method since less
cash was used to settle obligations.
Question 12:
