Acct 201 Chapter 12

Statement of cash flows

A basic financial statement that provides information about the cash receipts and cash payments of an entity during a period, classified as operating, investing, and financing activities, in a format that reconciles the beginning and ending cash balances.

Current cash debt coverage

A cash-based ratio used to evaluate liquidity, calculated as net cash provided by operating activities divided by average current liabilities.

Cash debt coverage

A cash-based ratio used to evaluate solvency, calculated as net cash provided by operating activities divided by average total liabilities.

Direct method

A method of determining net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. The direct method shows operating cash receipts and payments.

Indirect method

A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities.

Product life cycle

A series of phases in a product's sales and cash flows over time. These phases, in order of occurrence, are introductory, growth, maturity, and decline.

Investing activities

Cash flow activities that include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash and (b) lending money and collecting the loans.

Financing activities

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

Operating activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

True or False A primary objective of the statement of cash flows is to show the income or loss on investing and financing transactions.

FALSE

True or False Cash flow from investing activities is considered the most important category on the statement of cash flows because it is considered the best measure of expected income.

FALSE

True or False Free cash flow is cash from operations less dividends.

FALSE

True or False Noncash investing and financing activities must be reported in the body of a statement of cash flows.

FALSE

True or False The statement of cash flows classifies cash receipts and payments as operating, nonoperating, financial, and extraordinary activities.

FALSE

True or False Using the direct method, major classes of investing and financing activities are listed in the operating activities section.

FALSE

True or False Using the indirect method, an increase in accounts payable during a period is deducted from net income in calculating cash provided by operations.

FALSE

Free cash flow

Net cash provided by operating activities after adjusting for capital expenditures and dividends paid.

True or False A statement of cash flows indicates the sources and uses of cash during a period.

TRUE

True or False An increase in inventory would be added to cost of goods sold to determine net purchases for the period.

TRUE

True or False During the maturity phase, cash from operations and net income are approximately the same.

TRUE

True or False During the year, Income Tax Expense amounted to $12,500 and Income Taxes Payable increased by $1,500; therefore, the cash paid for income taxes was $11,000.

TRUE

True or False Operating activities include the cash effects of transactions that create revenues and expenses.

TRUE

True or False The acquisition of a building by issuing bonds would be considered an investing and financing activity that did not affect cash.

TRUE

True or False The cash debt coverage ratio indicates a company's ability to repay its liabilities from cash generated from operations.

TRUE

True or False The current cash debt coverage ratio is considered a better representative of liquidity than the current ratio because it involves the entire year rather than a balance at one point in time.

TRUE

True or False The payment of interest on bonds payable is classified as a cash outflow from operating activities.

TRUE

True or False The statement of cash flows explains the difference between net income, as shown on the income statement, and the net cash flows generated from operations.

TRUE

True or False The statement of cash flows is a required statement that must be prepared along with an income statement, balance sheet, and retained earnings statement.

TRUE

True or False Under the indirect method, gains and losses from the sale of equipment used in operations would be included in the cash flows from operating activities section on the statement of cash flows.

TRUE

True or False Using the indirect method, an increase in accounts receivable during a period is deducted from net income in calculating cash provided by operations.

TRUE