Chapter 12: Statement of Cash Flows
Statement of cash flows
A financial statement that highlights the major activities that impact cash flows and affect the overall cash balance
Free cash flow
A measure that assesses a company's ability to fund its capital expenditures and dividends from its net cash provided by operating activities
Direct Method
A method of computing the net cash provided by operating activities in which the income statement is reconstructed on a cash basis from top to bottom
Indirect method
A method of computing the net cash provided by operating activities that starts with net income and adjusts it to a cash basis
Basic Equation for Asset Accounts =
Beg. Balance + Debits - Credits = Ending Balance
Basic Equation for Contra Assets, Liability, and Stockholders' Equity Accounts =
Beg. Balance - Debits + Credits = Ending Balance
Cash equivalents on the statement of cash flows consist of any investment that can be converted into cash within one year.
FALSE
Cash received from the sale of equipment the company had used in its own operations would be considered an operating activity on a statement of cash flows.
FALSE
Investing activities on the statement of cash flows generate cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company's owners such as selling or repurchasing shares of common stocks and paying dividends.
FALSE
Negative free cash flow suggests that the company generated enough cash flow from its operating activities to fund its capital expenditures and dividend payments.
FALSE
When a company pays a supplier for inventory it has purchased, the cash outflow is recorded in the investing activities section of the statement of cash flows.
FALSE
When computing the net cash provided by operating activities under the indirect method on the statement of cash flows, an increase in prepaid expenses would be added to net income.
FALSE
Cash Equivalents
Short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds, that are made solely for the purpose of generating a return on temporarily idle funds
Buying property, plant, or equipment would be reported as a cash outflow on the investing activities section of the statement of cash flows.
TRUE
Collecting the principal on a loan to another company would be reported on the investing activities section of the statement of cash flows.
TRUE
Insurance and utility expenses are considered operating activities on the statement of cash flows.
TRUE
Money received from issuing bonds payable would be included as part of a company's financing activities on the statement of cash flows.
TRUE
Negative free cash flow does not automatically signal poor performance.
TRUE
Paying interest to lenders is classified as an operating activity on the statement of cash flows.
TRUE
Paying taxes to governmental bodies is considered a cash outflow in the operating activities section on the statement of cash flows.
TRUE
Paying wages and salaries to employees is classified as a cash outflow in the operating activities section of the statement of cash flows.
TRUE
The direct method of preparing the statement of cash flows will show the same increase or decrease in cash as the indirect method.
TRUE
Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, a loss on the sale of an asset would be added to net income.
TRUE
Under the indirect method of determining the net cash provided by operating activities on the statement of cash flows, an increase in accounts receivable would be subtracted from net income.
TRUE
When a company pays cash to repurchase its own common stock, this is reported as a cash outflow in the financing activities section of the statement of cash flows.
TRUE
Net cash provided by operating activities
The net result of the cash inflows and outflows arising from day to day operations
Investing activities
These activities generate cash inflows and outflows related to acquiring or disposing of noncurrent assets such as property, plant, and equipment, long term investments, and loans to another entity
Financing Activities
These activities generate cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company's owners, such as selling or repurchasing shares of common stock and paying dividends
Operating activities
These activities generate cash inflows and outflows related to revenue and expense transactions that affect net income
