Chapter 11: Cash Flows

Question 1

What is the definition of cash in cash flows?

Answer 1

Cash + Cash equivalents

Question 2

What are Cash eqivalents?

Answer 2

Short term, highly liquid investments - Have three months or less of a maturity date

Question 3

What are the categories for inflows and outflows?

Answer 3

Operating Activities
Investing Activities
Financing Activities

Question 4

Operating Activities definition?

Answer 4

Cash flows related to revenues & expenses on statement of earnings

Question 5

Indirect Method for Operating activities

Answer 5

+ Depreciation & Amortization expense
- Gain on sale of investing activities
+ Loss on sale of investing activities
+ decrease in operating assets
- Increase in operating assets
+ increase in operating liabilities
- Decrease in operating liabilities
= Net cash flows from operating activities

Question 6

Investing Activities Definition

Answer 6

Cash flows related to transactions involving long-lived productive assets & investments in the securities of other companies

Question 7

Inflows related to investing activities

Answer 7

• Cash received from
• Sale or disposal of P.P.E
• Sale or maturity of Investments in securities

Question 8

Outflows related to investing activities

Answer 8

• Cash paid for
• Purchase of P.P.E
• Purchase of investments in securities

Question 9

Cash flows from financing activities definition

Answer 9

Cash flows related to owners and creditors to finance the enterprise and its operations

Question 10

Inflows related to financing activities

Answer 10

-Cash received from
-Borrowing on notes, mortages, bonds, etc from creditors
- Issuing shares to shareholders

Question 11

Outflows related to financing activities

Answer 11

• Cash paid for
• Repayment of principal to creditors
• Interest on borrowings, if classified as financing activity
• Repurchasing shares from shareholders
• Dividends to shareholders

Question 12

What is the Cash flows Equation?

Answer 12

△Cash =△Liabilities+△S.E -△Non-Cash Assets

Question 13

Increase in Cash/Cash inflow=?

Answer 13

• Decrease in non-cash asset account
• Increase in liability & S.E accounts

Question 14

Decrease in cash/Cash outflow=?

Answer 14

• Increase in non-cash asset account
• Decrease in liability & S.E accounts

Question 15

What is the quality of earnings ratio?

Answer 15

How much cash does each dollar of net earning generate

Quality of Earning Ratio =Cash flow from operating activity / Net earnings

Question 16

Report Cash flows from investing

Answer 16

P.P.E & Intangible Assets
- Purchase = Outflow
- Sale = Inflow
Short or long-term investments & shares in other businesses
- Purchase = Outflow
- Sale = Inflow

Question 17

What are some common investing purchases?

Answer 17

Purchases of tangible productive products
- P.P.E
Purchase of intangible assets
- Trade marks, patents
Short or long term investments
- Shares or bonds in other companies
- GIC’s
- Securities > 3 months maturity

Question 18

What is the capital expenditure ratio?

Answer 18

Cash flow from operating activities / cash paid for capital expenditures

Question 19

Free cash flow equation

Answer 19

Cash flows from operating activities - dividends - capital expenditures

Question 20

How do you report cash flows from Short term debt?

Answer 20

Short term debt
- Borrowing from bank = inflow
- repayment of loan principle = outflow

Question 21

How do you report cash flows from Long term debt?

Answer 21

Long term debt
- Long term borrowing for cash = inflow
- Repayment of principal on long term borrowing = outflow

Question 22

What are some common investing sales?

Answer 22

Sale of productive assets
Sale of intangible assets
Maturity or sale of investments

Question 23

How do you report cash flows from Share capital?

Answer 23

• issuing of shares - inflow
• repurchase of shares = outflows

Question 24

How do you report cash flows from retained earnings?

Answer 24

payments of cash dividends = outflow

Question 25

What are some common financing activities?

Answer 25

• Proceeds from issuance of short & Long term debt
• Principal payments on short & long term debt
• Proceeds from issuance of shares
• Purchase of shares for retirement
• Interest and dividends

Question 26

Calculations for investing activities?

Answer 26

• Purchase of P.P.E or intangible assets
  + sale of P.P.E or intangible assets
• Purchase of investment securities
  + Sale or maturity of investment securities
  = Net cash flow from investing activities

Question 27

Calculations for financing activities?

Answer 27

+ Borrowings from bank
- repayment of loan principal
+issuance of long term debt for cash
- repayment of principal on long term debt
+ Issuance of shares
- repurchase of shares
- payment of dividends
= Net cash flow from financing activities