Chapter 9 (Statement of Cash Flows)

Question 1

• Cash = currency & coins, balances in ________ accounts, checks and money orders from customers for deposit
• Cash equivalents = highly liquid investments that can be converted to cash in the short-term (less than _ months)
  
  • Ex. money market funds, treasury bills, commercial paper

Answer 1

checking
3

Question 2

Cash Flows Statement Activities
- _________ Activities: directly related to earnings from normal operations
- _________ Activities: related to the acquisition or sale of fixed (long-term) assets and investments in other companies
- __________ Activities: related to transactions with owners and creditors

Answer 2

Operating
Investing
Financing

Question 3

Operating Activities
- Inflows: Cash received from customers, and from _________ or ________ on investments made on other companies
- Outflows: Cash paid for _________ of goods for resale and services, salaries and wages, income taxes, and interest on liabilities
- Takeaway: Activity impacting the income statement is considered a cash flow from operating activities

Answer 3

dividends or interest
purchases

Question 4

Investing Activities
- Inflows: Cash received from ____ or disposal of PP&E, and from ____ of investments in securities
- Outflows: Cash paid for the ________ of PP&E, or for the ________ of investments in securities
- Takeaway: either spending cash to grow/maintain business (outflow), or collecting cash by selling assets (inflow)

Answer 4

sale (x2)
purchase (x2)

Question 5

Financing Activities
- Inflows: Cash received from borrowing on notes, mortgages, bonds, etc. from creditors, and from issuing _____ to owners
- Outflows: Cash paid for repayment of principle to creditors (excluding interest), repurchasing stock from owners, or paying _________ to owners
- Takeaway: Raising money to finance the business (inflow), settling debts or returning profits to investors (outflow)

Answer 5

stock
dividends

Question 6

Two formats for reporting operating activities
- ______ Method: reports the cash effects of each operating activity
- ________ Method: Starts with accrual net income and converts to cash basis
- Both methods result in the ____ total operating cashflow

Answer 6

Direct
Indirect
same

Question 7

• Direct Method: Operating cash receipts - operating cash payments = Net cash used by operating activities
• Indirect Method: start with ___ ______, then +/- changes in current operating assets and liabilities
  
  • • Noncash expenses such as __________ and amortization
  • • Losses and - Gains
• Takeaways: Noncash expenses reduce __, but don’t involve actual cash going out. Therefore, we add them back to get the true cash generated by operations.
  
  • Increase in current assets → cash _______ (bought/used cash to acquire assets), and decrease in current assets → cash ______ (collected/sold those assets for cash)
  • Increase in current liabilities → cash ______ (delayed payments, kept cash), and decrease in current liabilities → cash _______ (paid what was owed, cash went out)

Answer 7

net income
depreciation
outflow, inflow
inflow, outflow

Question 8

• Formula: Change in ____ = Change in Liabilities + Change in Equity - Change in Non-____ Assets
  ** tells when to add/subtract during indirect method**
  Direct Method Conversion
• Replace accrual basis NI with individual income statement line items
• +/- each item reconciling NI to operating cash flow
  
  • The investing and financing sections are the ____ regardless of whether direct or indirect method is used

Answer 8

Cash (x2)
same

Question 9

• Additional Disclosures: Non-cash _________ and _________ activities reported on statement of cash flows or in a note
  
  • Ex. Purchasing fixed assets by issuing debt or common stock, converting debt into common stock, exchanged assets with another company
• Free Cash Flow = Cash flow from __________ activities - capital ____________ (not net)
  
  • The amount of cash flow generated beyond what is needed to operate the business at its current productive capacity

Answer 9

financing and investing
operating, expenditures

Question 10

• Operating Cash Flow to Current Liabilities Ratio = Cash flow from operating activities / ________ current liabilities
  
  • Measures a company’s ability to pay its current liabilities using operating cash flows: looking for a ratio > .
• Operating Cash Flow to Capital Expenditures Ratio = Cash flow from operating activities / Annual net capital expenditures
  
  • Measures a company’s ability to finance its capital expenditures from operating cash flow
  • A ratio > _ indicates that current operating activities are generating sufficient cash to fund capital investment
  • Firms in a growth phase of their life cycle will likely have a _____ ratio than firms in a mature phase (b/c they’re expanding)

Answer 10

Average
> 0.5
> 1
lower

Question 11

Worksheet Takeaways (Indirect Method):
- When a company’s receivables ________ during the year, cash from operating activities is lower than net income by the _______ in receivables
- When a company’s payables _________ during the year, cash from operating activities is higher than net income by the _________ in payables

Answer 11

increase (x4)