Accounting Made Simple 05

Question 1

1. What is a CASH FLOW STATEMENT?

Answer 1

It reports a company’s cash inflows and outflows over an accounting period.

Question 2

2. What are the major differences between the CASH FLOW STATEMENT and the INCOME STATEMENT?

Answer 2

a. There are often differences in timing between when an income or expense is recorded and when the cash actually comes in or goes out the door.
b. The CASH FLOW STATEMENT includes several types of transactions that are not included in the INCOME STATEMENT.

Question 3

3. Give an example of the difference in timing between performing a service and getting paid:

Answer 3

Checklist Construction builds a deck on 8-3-13, but does not get paid until 9-17-13.
In August, this is recorded as an increase in both SALES and ACCOUNTS RECEIVABLE.
The cash is not received until September, so the ACTIVITY DOES NOT APPEAR on August’s CASH FLOW STATEMENT.

Question 4

4. Give an example of transactions that are NOT included in the INCOME STATEMENT but ARE included in the CASH FLOW STATEMENT:

Answer 4

Checklist Construction takes out a bank loan.
The loan will not appear in the INCOME STATEMENT, as the transaction is NEITHER A REVENUE ITEM NOR AN EXPENSE ITEM.
It is simply an increase of an ASSET (cash) and a LIABILITY (Notes Payable).
However, because it is a CASH INFLOW, the loan WILL APPEAR on the CASH FLOW STATEMENT.

Question 5

5. Another example of the difference in timing between an ACTIVITY and CASH INFLOW/OUTFLOW, as it pertains to DIVIDENDS:

Answer 5

Checklist Construction pays out a 30k dividend. Remember, DIVIDENDS ARE NOT AN EXPENSE.
Therefore, THE DIVIDEND WILL NOT APPEAR ON THE INCOME STATEMENT, but WILL appear not the CASH FLOW STATEMENT as a CASH OUTFLOW.

Question 6

6. What are the CATEGORIES OF CASH FLOW on a Cash Flow Statement?

Answer 6

a. CASH FLOW FROM OPERATING ACTIVITIES
b. CASH FLOW FROM INVESTING ACTIVITIES
c. CASH FLOW FROM FINANCING ACTIVITIES.