U3, AOS 2 - Uses of a CFS Flashcards
What is the primary purpose of a cash flow statement?
To provide a summary of cash inflows and outflows over a specific period.
True or False: A cash flow statement helps assess a company’s liquidity.
True
Fill in the blank: A cash flow statement is divided into three main sections: operating, investing, and ______.
financing
What does operating cash flow represent?
Cash generated from normal business operations.
Why is it important for stakeholders to analyze cash flow statements?
To evaluate the financial health and performance of a business.
Multiple Choice: Which section of the cash flow statement includes cash transactions for purchasing equipment?
Investing activities
What can a negative cash flow indicate?
The company may be spending more cash than it is generating.
True or False: Cash flow statements are only useful for large corporations.
False
Multiple Choice: Which of the following is NOT a benefit of preparing a cash flow statement?
It guarantees profitability.
What is one reason businesses create cash flow statements?
To manage cash effectively and prevent liquidity crises.
True or False: Cash flow statements are prepared using the accrual basis of accounting.
False
What do financing activities in a cash flow statement reflect?
Cash transactions related to borrowing and repaying debt, and equity transactions.
What is Cash Flow Cover?
Cash Flow Cover is a financial metric that measures a company’s ability to cover its debt obligations with its cash flow.
What does Cash Flow Cover indicate?
a liquidity indicator that measures the number of times Net Cash Flows from Operations is able to cover average current liabilities.
True or False: A higher Cash Flow Cover ratio suggests better financial health.
True
What is the formula for calculating Cash Flow Cover?
Cash Flow Cover = Net Operating Cash Flow / Average Current Liabilities
Fill in the blank: Cash Flow Cover is used to assess a company’s ability to meet its _____ obligations.
debt
How does a low Cash Flow Cover ratio affect investors?
A low Cash Flow Cover ratio may raise concerns for investors about the company’s ability to repay its debts.
True or False: Cash Flow Cover can be used to compare companies in different industries.
False
What is the relationship between Cash Flow Cover and financial leverage?
Higher financial leverage can lead to a lower Cash Flow Cover ratio, indicating higher risk. This is because a greater proportion of a firms cash is tied up in paying down debt.
What does a Cash Flow Cover ratio of less than 1 imply?
It implies that the company does not generate enough cash flow to cover its debt obligations.
Fill in the blank: Cash Flow Cover can help assess a company’s _____ stability.
financial
What is the impact of increasing operational cash flow on Cash Flow Cover?
Increasing operational cash flow improves the Cash Flow Cover ratio.
Multiple Choice: Which factor does NOT affect Cash Flow Cover? A) Operating Cash Flow B) Total Debt Service C) Market Share
C) Market Share
What does Cash Flow Cover help lenders evaluate?
It helps lenders evaluate the risk of default on loans.
True or False: Cash Flow Cover only considers net income.
False
What is a potential limitation of Cash Flow Cover?
It may not account for non-cash expenses or changes in working capital.
What is a common use of Cash Flow Cover in financial analysis?
It is commonly used in assessing loan applications and creditworthiness.
How can companies improve their Cash Flow Cover ratio?
By increasing cash flow through better operations or reducing debt obligations.
