Chapter 4 Statement of Cash Flows
Which of the following items is included in the adjustment of net income to obtain cash flow from operating activities?
*Depreciation expense for the period. *The change in deferred taxes. *The amount by which equity income recognized exceeds cash received.
Why has cash flow from operations become increasingly important as an analytical tool?
*Inflation has distorted meaningfulness of net income. *High interest rates can put the cost of borrowing to cover short-term needs out of reach for many firms. *Firms may have uncollected accounts receivable and unsalable inventory on the books.
Which of the following current liability accounts is included in the adjustment of expenses to obtain cash flow from operating activities?
Accounts payable and Accrued liabilities
Which of the following current assets is included in the adjustment of net income to obtain cash flow from operating activities?
Accounts receivable, Inventory, Prepaid expenses
Which of the following statements is false? AP
An increase in accounts payable represents accounts not yet collect in cash. FALSE Accounts payable increase represents not yet paid cash.
Which item may be of concern when analyzing cash flow from financing activities?
Borrowing each year to repay debt from prior years.
What is implied if the inventory account has increased?
Cash flow from operating has decreased relative to net income.
What are external sources of cash?
Cash inflows from investing and financing activities.
What are internal sources of cash?
Cash inflows from operating activities.
Which of the following would increase cash from operating activities?
Decreasing accounts receivable.
Which item is a non-cash item that would be added to net income to convert it to cash flow from operating activities?
Depreciation
The amounts on a cash flow statement cannot be manipulated. T/F
False, COGS, etc.
Cash from sales of property, plant and equipment is considered an operating activity on the cash flow statement. T/F
False, PPE is considered an investing activity.
Proceeds from borrowing are a financing cash outflow. T/F
False, proceeds from borrowing are a financing cash inflow.
What type of accounts are notes payable and current maturities of long-term debt?
Financing accounts.
How would the repayment of debt principal be classified?
Financing outflow.
Which of the following statements is false? firm difficulty
Firms only have financial difficulties when both the net income and cash flow from operations are negative. FALSE Net income can be positive, while cash flows are consistently negative which is not a good sign.
How would the sale of a building be classified?
Investing inflow.
Order of Cash flow
Net income + depreciation expense + deferred tax liability inc. +- operating activities +- investing activities +- financing activities = net change in cash
The change in retained earnings is affected by which of the following?
Net income and payment of dividends.
What type of accounts are accounts receivable and inventory?
Operating accounts.
What is the preferred method to generate cash in a firm?
Operating activities.
How would revenue from sales of goods and services be classified?
Operating inflow.
How would payments for taxes be classified?
Operating outflow.
The statement of cash flows segregates cash inflows and outflows by:
Operating, investing, and financing activities.
The following item would be classified as a financing activity on the statement of cash flows:
Payment of dividends.
The following item would be classified as an operating activity on the statement of cash flows:
Payments for inventory.
Which of the following items would be a way to manipulate the cash flow from operating activities amount on the statement of cash flows?
Recording and item that should be recorded as an operating activity as an investing activity.
The following item would be classified as an investing activity on the statement of cash flows:
Sale of property.
Which of the following could lead to cash flow problems?
Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by suppliers
How is the statement of cash flows connected to the balance sheet?
The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash.
An outflow of cash would result from which of the following?
The decrease in a liability account.
An inflow of cash would result from which of the following?
The decrease in an asset account other than cash.
Why are gains and losses from asset sales removed from net income when calculating the cash flows from operating activities?
The entire proceeds from sales of long-lived assets are included in investing activities.
How is it possible for a firm to be profitable and still go bankrupt?
The firm has positive net income but has failed to generate cash from operations.
Which method of calculating cash flow from operations requires the adjustment of net income for deferrals, accruals, non-cash, and non-operating expenses?
The indirect method.
All of the following are reasons that the statement of cash flows is useful to the analyst except:
The statement of cash flows is the only financial statement that cannot be manipulated. (it can be manipulated).
Which statement is true for gains and losses from capital asset sales?
They are included in cash flows from investing activities.
Analyzing the statement of cash flows helps determine the future external financing needs of a business firm. T/F
True.
Cash flow from operations represents the "cash" income from the company's business operations. T/F
True.
Cash outflows result from increases in asset accounts and decreases in liability and equity accounts. T/F
True.
The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying causes of strength and weakness. T/F
True.
The statement of cash flows shows the changes in the balance sheet accounts between periods. T/F
True.
Where can we confirm the net change in cash flow?
the balance sheet account cash change
