U3, AOS 2 - Uses of a CFS

Question 1

What is the primary purpose of a cash flow statement?

Answer 1

To provide a summary of cash inflows and outflows over a specific period.

Question 2

True or False: A cash flow statement helps assess a company’s liquidity.

Answer 2

True

Question 3

Fill in the blank: A cash flow statement is divided into three main sections: operating, investing, and ______.

Answer 3

financing

Question 4

What does operating cash flow represent?

Answer 4

Cash generated from normal business operations.

Question 5

Why is it important for stakeholders to analyze cash flow statements?

Answer 5

To evaluate the financial health and performance of a business.

Question 6

Multiple Choice: Which section of the cash flow statement includes cash transactions for purchasing equipment?

Answer 6

Investing activities

Question 7

What can a negative cash flow indicate?

Answer 7

The company may be spending more cash than it is generating.

Question 8

True or False: Cash flow statements are only useful for large corporations.

Answer 8

False

Question 9

Multiple Choice: Which of the following is NOT a benefit of preparing a cash flow statement?

Answer 9

It guarantees profitability.

Question 10

What is one reason businesses create cash flow statements?

Answer 10

To manage cash effectively and prevent liquidity crises.

Question 11

True or False: Cash flow statements are prepared using the accrual basis of accounting.

Answer 11

False

Question 12

What do financing activities in a cash flow statement reflect?

Answer 12

Cash transactions related to borrowing and repaying debt, and equity transactions.

Question 13

What is Cash Flow Cover?

Answer 13

Cash Flow Cover is a financial metric that measures a company’s ability to cover its debt obligations with its cash flow.

Question 14

What does Cash Flow Cover indicate?

Answer 14

a liquidity indicator that measures the number of times Net Cash Flows from Operations is able to cover average current liabilities.

Question 15

True or False: A higher Cash Flow Cover ratio suggests better financial health.

Answer 15

True

Question 16

What is the formula for calculating Cash Flow Cover?

Answer 16

Cash Flow Cover = Net Operating Cash Flow / Average Current Liabilities

Question 17

Fill in the blank: Cash Flow Cover is used to assess a company’s ability to meet its _____ obligations.

Answer 17

debt

Question 18

How does a low Cash Flow Cover ratio affect investors?

Answer 18

A low Cash Flow Cover ratio may raise concerns for investors about the company’s ability to repay its debts.

Question 19

True or False: Cash Flow Cover can be used to compare companies in different industries.

Answer 19

False

Question 20

What is the relationship between Cash Flow Cover and financial leverage?

Answer 20

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.

Question 21

What does a Cash Flow Cover ratio of less than 1 imply?

Answer 21

It implies that the company does not generate enough cash flow to cover its debt obligations.

Question 22

Fill in the blank: Cash Flow Cover can help assess a company’s _____ stability.

Answer 22

financial

Question 23

What is the impact of increasing operational cash flow on Cash Flow Cover?

Answer 23

Increasing operational cash flow improves the Cash Flow Cover ratio.

Question 24

Multiple Choice: Which factor does NOT affect Cash Flow Cover? A) Operating Cash Flow B) Total Debt Service C) Market Share

Answer 24

C) Market Share

Question 25

What does Cash Flow Cover help lenders evaluate?

Answer 25

It helps lenders evaluate the risk of default on loans.

Question 26

True or False: Cash Flow Cover only considers net income.

Answer 26

False

Question 27

What is a potential limitation of Cash Flow Cover?

Answer 27

It may not account for non-cash expenses or changes in working capital.

Question 28

What is a common use of Cash Flow Cover in financial analysis?

Answer 28

It is commonly used in assessing loan applications and creditworthiness.

Question 29

How can companies improve their Cash Flow Cover ratio?

Answer 29

By increasing cash flow through better operations or reducing debt obligations.