Chapter 12

Question 1

The statement of cash flow focuses on:

Answer 1

(1) Operations
(2) Investing
(3) Financing

Question 2

The Statement of Cash Flows shows the cash received and paid for day-to-day activities with customers, suppliers, and employees.

Answer 2

Operations

Question 3

The Statement of Cash Flows shows cash paid and received from buying and selling long-term assets.

Answer 3

Investing

Question 4

The Statement of Cash Flows shows cash received and paid for exchanges with lenders and stockholders.

Answer 4

Financing

Question 5

Checking, Savings, Currency and Cash Equivalents

Answer 5

Cash

Question 6

Short-term, highly liquid investments that are easily converted into cash and that have very little risk of loss.

Answer 6

Cash Equivalents

Question 7

The cash flows from __________ section of the Statement of Cash Flows shows us the inflows and outflows of cash that directly relate to income from normal operations reported on the Income Statement.

Answer 7

Operating activities

Question 8

Operating cash inflows includes:

Answer 8

(1) Cash collected from customers
(2) Receiving dividends
(3) Receiving interest

Question 9

Operating cash outflows include:

Answer 9

(1) Purchasing services and goods for resale
(2) Paying salaries and wages
(3) Paying income taxes
(4) Paying interest

Question 10

Affects current assets and current liabilities.

Answer 10

Operating

Question 11

Affects noncurrent assets.

Answer 11

Investing

Question 12

Affects noncurrent liabilities or stockholders’ equity accounts.

Answer 12

Financing

Question 13

Reports the total cash inflow or outflow from each main type of transaction (that is, transactions with customers, suppliers, employees, etc.). The difference between these cash inflows and outflows equals the net cash provided by (used for) operating activities.

Answer 13

Direct Method

Question 14

Starts with net income from the income statement and adjusts it by eliminating the effects of items that do not involve cash (for example, depreciation) and including items that do have cash effects. Adjusting net income for these items yields the amount of net cash provided by (used for) operating activities.

Answer 14

Indirect Method

Question 15

Net cash flows provided by (used for) _________ is always the same under the direct and indirect methods. Also, the choice between the two methods affects only the operating activities section of the statement of cash flows, not the _____ and _______ sections.

Answer 15

(1) Operating Activities
(2) Investing
(3) Financing

Question 16

Information needed to prepare a statement of cash flows:

Answer 16

(1) Comparative balance sheet
(2) Income Statement
(3) Additional details concerning selected accounts

Question 17

Change in Cash Equation:

Answer 17

Change in (Liabilities + Stockholder’s Equity - Noncash Assets)

Question 18

This method computes operating cash flows indirectly, by adding and subtracting items from Net Income.

Answer 18

Indirect Method

Question 19

(1) Provides more detailed information
(2) Identifies cash inflows and outflows relationships
(3) Prepared by adjusting accrual basis to cash basis
(4) Investing and financing sections for the two method are identical.

Answer 19

Direct Method

Question 20

With the _______, we convert each revenue and expense on the income statement to a cash flow.

Answer 20

Direct Method

Question 21

Net Income + (Noncash expenses such as depreciation and amortization) + Losses - Gains =

Answer 21

Cash Flows from Operating Activities (Indirect Method)

Question 22

Adjusting Net Income to Operating Cash Flow

Answer 22

Net Income 
\+ Non Cash Expenses 
\+ Loss on sale of PPE 
- Gains on sale of PPE 
\+ Decreases in Current Assets 
- Increases in Current Assets 
\+ Increases in Current Liabilities 
- Decreases in Current Liabilities 
= Operating Cash Flow

Question 23

Using the indirect method, an overall increase in accounts receivable implies that cash collections were _____ than sales on account.

Answer 23

Less

Question 24

Using the indirect method, an overall decrease in accounts receivable implies that cash collections were _____ than sales on account.

Answer 24

Greater

Question 25

Using the indirect method, an overall increase in accounts payable implies that cash payments were ______ than purchases on account.

Answer 25

Less

Question 26

Using the indirect method, an overall decrease in accounts payable implies that cash payments were ______ than purchases on account.

Answer 26

Greater

Question 27

When a current liability increases, it means that cash paid for expenses was _____ than total expense for the period.

Answer 27

Less

Question 28

When a current liability decreases, it means that cash paid for expenses was _____ than total expense for the period.

Answer 28

Greater

Question 29

Adjusting Net Income to Operating Cash Flows using the indirect method:

Answer 29

Increase in Account Balance During Year:
Current Assets –> Subtract from net income
Current Liabilities –> Add to net income

Decreases in Account Balance During Year
Current Assets –> Add to net income.
Current Liabilities –> Subtract from net income.

Question 30

When evaluating cash flow from operations, the most important consideration is that cash flows must be _______over the long-run for a company to be successful.

Answer 30

Positive

Question 31

Given that cash flow from operations are positive, an upward trend in the amount of these cash flows indicates ________.

Answer 31

Growth and efficient operations

Question 32

Although it might seem counterintuitive at first, healthy companies tend to show ______ cash flows in the investing activities section of the statement of cash flows

Answer 32

Negative

Question 33

Little operating cash flow, significant investing outflows, significant financing inflows

Answer 33

Start Up Companies

Question 34

Negative operating cash flows, funded by selling long term assets, significant inflows from financing

Answer 34

Companies Facing Financial Difficulty

Question 35

Positive operating inflow, sufficient to pay for additional investments in assets and pay down debt, negative investing outflows.

Answer 35

Healthy Companies

Question 36

Analyzing Statement of Cash Flow

Answer 36

Start Up:
Operating –> + (small)
Investing –> -
Financing –> +

Financial Difficulty:
Operating –> -
Investing –> +
Financing –> +

Healthy:
Operating –> +
Investing –> -
Financing –> +/-