ch 13 test 1 Flashcards
What does the Statement of Cash Flows show?
Overall increase or decrease in cash during the period
It also shows how the company generated and used cash.
What are the three categories of business operations?
- Operating activities
- Investing activities
- Financing activities
What does cash refer to on the Statement of Cash Flows?
Currency and cash equivalents
It encompasses both physical cash and other forms like bank deposits.
What are operating activities?
Day-to-day profit-making activities that affect net income, current assets, and current liabilities.
What are investing activities?
Buying or selling long-term assets, affecting property, plant, equipment, stock, and loans.
What are financing activities?
Generating capital or paying it back, affecting long-term liabilities and stockholders’ equity.
True or False: Interest income is classified as a cash flow from investing activities.
False
Interest income is classified as a cash flow from operating activities.
What is the direct method of presenting operating activities?
Lists the receipt and payment of cash for specific operating activities.
What is the indirect method of presenting operating activities?
Begins with net income and reconciles it back to cash basis through adjustments.
Fill in the blank: Cash received from interest income is classified as cash flows from _______.
[operating activities]
What adjustments are made to convert net income to cash basis?
- Noncash expenses and revenues
- Adjust for gains and losses
- Changes in current asset accounts
- Changes in current liability accounts
What happens to depreciation expense when preparing cash flows from operating activities?
It is added back to net income.
What is the effect of a gain on the sale of property, plant, and equipment on net income?
It is deducted from net income.
How are increases in current assets treated when calculating cash flows?
Subtracted from net income.
How are decreases in current liabilities treated when calculating cash flows?
Added to net income.
What is the first step in using the indirect method?
Begin with the company’s net income and adjust for noncash expenses and revenues.
What type of information is needed to prepare the Statement of Cash Flows?
- Income statement for the current year
- Comparative balance sheets
- Miscellaneous additional information
What is the formula for calculating cash flows from investing activities?
Beginning long-term asset balance + Purchases of assets – Assets sold = Ending balance.
What should be analyzed to prepare the financing section of the cash flows?
Changes in long-term liability and equity accounts.
What happens to cash when long-term debt is issued?
Cash received increases.
What happens to cash when dividends are paid?
Cash used decreases.
Fill in the blank: Cash paid for equipment is classified under _______.
[investing activities]
True or False: Payment of dividends is classified as an expense on the income statement.
False
Payment of dividends is classified as a financing activity.
