Chapter 4

Question 1

statement of cash flows

Answer 1

tells how a company generated cash (inflows) and how it used cash (outflows)

Question 2

liquidity

Answer 2

ability to pay near-term liabilities and take advantage of investment opportunities

Question 3

solvency

Answer 3

ability to pay long-term liabilities

Question 4

cash equivalents

Answer 4

short-term, highly liquid investments that are easily convertible to a known cash amount and close enough to maturity that their market value is not sensitive to interest rate changes

Question 5

examples of cash equivalents

Answer 5

treasury bills, commercial paper, money market funds

Question 6

operating activities

Answer 6

selling or rendering services; activities include any cash receipts or payments that are not classified as investing or financing activities

Question 7

what type of activity is cash receipts from customers for sales made or services rendered (or in anticipation of future deliveries of goods or services)

Answer 7

operating inflow activity

Question 8

what type of activity is cash receipts of interest and dividends

Answer 8

operating inflow activity

Question 9

what type of activity is other cash receipts that are not related to investing or financing activities (rentals, lawsuit settlements, refunds received from suppliers)

Answer 9

operating inflow activity

Question 10

what type of activity is cash payments to employees or suppliers

Answer 10

operating outflow activity

Question 11

what type of activity is cash payments to purchase inventories

Answer 11

operating outflow activity

Question 12

what type of activity is cash payment of interest to creditors

Answer 12

operating outflow activity

Question 13

what type of activity is cash payments of taxes to governments

Answer 13

operating outflow activity

Question 14

what type of activity is other cash payments that are not related to investing or financing activities (contributions to charity, lawsuit settlements)

Answer 14

operating outflow activity

Question 15

investing activities

Answer 15

acquisition and disposal of property, plant, and equipment assets and intangible assets; purchase and sale of government securities and securities of other companies (stocks, bonds, securities not classified as equivalents) and the lending and subsequent collection of money

Question 16

what type of activity is cash receipts from sales of property, plant, and equipment assets and intangible assets

Answer 16

investing inflow activity

Question 17

what type of activity is cash receipts from sales of investments in government securities and securities of other companies

Answer 17

investing inflow activities

Question 18

what type of activity is cash receipts from repayments of loans by borrowers

Answer 18

investing inflow activities

Question 19

what type of activity is cash payments to purchase property, plant, and equipment assets

Answer 19

investing outflow activities

Question 20

what type of activity is cash payments to purchase government securities of other companies (including acquisitions)

Answer 20

investing outflow activities

Question 21

what type of activity is cash payments made to lend money to borrowers

Answer 21

investing outflow activities

Question 22

financing activities

Answer 22

receives cash from shareholders, returns cash to shareholders, borrows from creditors, repays amounts borrowed

Question 23

what type of activity is cash receipts from issuances of common stock and preferred stock and from sales of treasury stock

Answer 23

financing inflow activity

Question 24

what type of activity is cash receipts from issuances of bonds payable, mortgage notes payable and other notes payable

Answer 24

financing inflow activity

Question 25

what type of activity is cash payments to acquire treasury stock

Answer 25

financing outflow activity

Question 26

what type of activity is cash payments of dividends

Answer 26

financing outflow activity

Question 27

what type of activity is cash payments to settle outstanding bonds payable, mortgage notes payable, and other notes payable

Answer 27

financing outflow activity

Question 28

direct method

Answer 28

presents components of cash flow from operating expenses as a list of gross cash receipts and gross cash payments; less than 5% of companies use this

Question 29

indirect method

Answer 29

reconciliation of net income to operating cash flow is used for cash flow from operations; begins with net income and applies a series of adjustments

Question 30

why is the indirect method popular for statement of cash flows?

Answer 30

its easier and less expensive, companies that use the direct method are required to present supplemental disclosure showing reconciliation of net income to cash from operations anyways

Question 31

when do cash flows from investing activities increase?

Answer 31

sales of assets

Question 32

when do cash flows from investing activities decrease?

Answer 32

purchase of assets

Question 33

when do cash flows from financing activities increase?

Answer 33

taking on liability or issuing shares

Question 34

when do cash flows from financing activities decrease?

Answer 34

repaying principal on a financial liability or paying dividends to shareholders or making share repurchases

Question 35

noncash investing and financing actities

Answer 35

do not affect cash flows; issuance of stocks, bonds, or leases in exchange for PPE for example; exchange of long term assets for other long term assets; conversion of long term debt into common stock

Question 36

operating cash flow to current liabilities equation

Answer 36

operating cash flow/average current liabilities

Question 37

operating cash flow to capital expenditures equation

Answer 37

operating cash flow/annual capital expenditures

Question 38

free cash flow equiation

Answer 38

operating cash flow-net capital expenditures