Chapter 2 Statement of Cashflows and Free Cashflow

Which of these is a requirement of the Sarbanes-Oxley Act of 2002?

A corporate board's audit committee must have considerable experience with GAAP.

Which of these statements is correct concerning the structure of a statement of cash flows? Select all that apply. Multiple select question.

An increase in accounts payable is an addition to the cash flows from operating activities. A decrease in fixed assets is an addition to the cash flows from investing activities.

A statement of retained earnings showed a beginning retained earnings balance of $24 and an ending balance of $22. Net income was positive. What do you know given this information?

Cash dividends paid exceeded net income.

Which one of these is the definition of cash flows from investing activities?

Cash flow from investing activities is defined as the cash flows associated with the purchase or sale of fixed or other long-term assets.

The statement of cash flows separates cash flows into which of the following categories?

Cash flow from investing activities. Net change in cash and marketable securities Cash flow from financing activities. Cash flow from operating activities.

What is the definition of cash flows from operations?

Cash flow from operations is defined as the cash flows that are the direct result of the production and sale of the firm's products.

The Sarbanes-Oxley Act of 2002 requires senior management of a firm to do which one of these?

Certify the financial statements are accurate and representative of the firm's earning

Which one of these is an addition to the cash flows from investing activities?

Decrease in other long-term assets

Which one of these accounts is a noncash expense?

Deprecation Amortization

Which of these are added or subtracted from net income to compute the net cash flows from operating activities? Select all that apply.

Depreciation Increase in inventory Decrease in accrued wages and taxes

Which one of these statements related to the recording of financial statement items based on GAAP is (are) correct?

Expenses related to the production of a product are recorded on the income statement when that product is sold, not when the expenses are paid.

Explain why following GAAP to record sales on an income statement may differ from the cash flows generated by those sales.

GAAP requires the revenue from a sale be recorded at the time of sale, which may not coincide with the cash flow from the sale.

Which of these is (are) a source of cash? Select all that apply.

Increase in long-term debt Decrease in inventory

A firm has an operating cash flow of $600, a net change in gross fixed assets of $100, and a change in net operating working capital of $50. What is the firm's free cash flow (FCF)?

Reason: IOC = Change in gross fixed assets + Change in net operating working capital. FCF = OCF - IOC = $600 - ($100 + $50) = $450

A firm has EBIT of $600, depreciation of $200, and a tax rate of 34 percent. What is the operating cash flow?

Reason: OCF = EBIT(1 - Tax rate) + Depreciation = $600(1 - 0.34) + $200 = $596

Which one of these correctly defines the net change in cash and marketable securities as it is used on the statement of cash flows?

The net change in cash and marketable securities is the sum of the cash flows from operations, investing activities, and financing activities.

True or false: A decrease in a long-term asset account balance is a cash flow from investing activity.

True

True or false: The cash flows that result from debt and equity financing transactions are cash flows from financing activities.

True

Which one of these is a subtraction from the cash flows from financing activities?

buying back common stock

A firm with positive operating cash flow but negative free cash flow may be

investing heavily in operating capital

The statement of retained earnings reconciles the dividends paid and the change in retained earnings to which one of these?

net income