Ch. 11 Statement of Cash Flows

Question 1

Statement of cash flows

Answer 1

A summary of cash inflows and cash outflows during the reporting period sorted by operating, investing, and financing activities.
-Includes only transactions that affect cash accounts

Question 2

Operating activities

Answer 2

Includes cash receipts and cash payments for transactions relating to revenue and expense activities.
-Same activities reported in the income statement.

Question 3

Investing activities

Answer 3

Includes cash transactions involving the purchase and sale of long-term assets and current investments.

• Companies periodically invest cash to replace or expand productive facilities such as buildings, land, and equipment.
• They might also invest in other assets, such as stocks or bonds or other firms

Question 4

Financing activities

Answer 4

Includes cash transactions resulting from the external financing of a business.

• Coming from stockholders and lenders
• Includes:
• -borrowing and repaying debt
• -issuing and repurchasing stock
• -paying dividends

Question 5

Non-cash activities

Answer 5

Significant investing and financing activities that do not affect cash.

• reported either directly after the cash flow statement or in a note to the financial statements.
• Examples:
• -purchase of long-term assets by issuing debt (notes payable)
• -purchase of long-term assets by issuing stock
• -conversion of bonds payable into common stock
• -exchange of long-term assets

Question 6

Indirect method

Answer 6

Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows.

• Only affects the operating section
• More popular (about 99% use it)-easier and less costly to prepare

Question 7

Direct method

Answer 7

Adjusts the items on the income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes.

• Only affects the operating section
• Less popular
• If a company decides to use this method, it must also report the indirect method either along with the statement of cash flows or in a separate note to the financial statements.
• More logically presents the cash inflows and outflows from operations.

Question 8

Cash return on assets

Answer 8

Net cash flows from operating activities divided by average total assets; measures the operating cash flow generated per dollar of assets.

Question 9

Cash flow to sales

Answer 9

Net cash flows from operating activities divided by sales revenue; measures the operating cash flow generated per dollar of sales.

Question 10

Asset turnover

Answer 10

Sales revenue divided by average total assets; measures the sales revenue generated per dollar of assets.