04

Question 1

Purpose of the Statement of Cash Flows

(4)

Answer 1

Provides information about:

• How a company generates and uses cash
• Helps investors and creditors assess the ability to settle liabilities and pay dividends
• Aids in determining need for external financing
• Allows assessment of management’s investing and financing policies

Question 2

Cash and Cash Equivalents

Definition and Examples

Answer 2

Definition:
- Short-term, highly liquid investments
- Easily convertible to known cash amount
- Maturity of three months or less

Examples:
- Money market accounts
- Treasury bills
- Commercial paper

Question 3

Framework of the Statement of Cash Flows

Answer 3

Three categories:

• Operating activities
• Investing activities
• Financing activities

Question 4

Operating Activities

Answer 4

Involves:

• Selling goods or rendering services
• Any receipts/payments not classified as investing or financing

Question 5

Investing Activities

Answer 5

Cash flows involve:

1. Acquiring or disposing of property, plant, and equipment
2. Purchasing or selling securities
3. Lending and collecting money

Question 6

Financing Activities

Answer 6

Cash flows involve:

1. Receiving cash from shareholders
2. Returning cash to shareholders
3. Borrowing from and repaying creditors

Question 7

Indirect Method: Cash Flow from Operating Activities

Answer 7

Steps:

1. Start with net income
2. Adjust for non-cash revenues/expenses (e.g. depreciation)
3. Adjust for changes in current assets and liabilities
4. Sum for net cash flow from operations

Question 8

Cash Flows from Investing Activities (Example)

Answer 8

Example:

• Purchase of fixtures and equipment: $10,200 cash outflow

Question 9

Cash Flows from Financing Activities (Example)

Answer 9

Example:

• $12,000 cash inflow from loan
• $100 cash outflow for dividends

Question 10

Jana Juice’s Net Cash Flow

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Answer 10

Statement of Cash Flows for June 2019:
- Net change in cash: $4,000
- Starting balance: $6,460
- Ending balance: $10,460

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Question 11

Supplemental Disclosures in Cash Flow Statements

Answer 11

Required Disclosures:

• Cash paid for interest and income taxes
• Schedule of non-cash investing/financing activities
• Policy on cash equivalents

are they required or supplemental?