Week 2: Statement of Cash Flow

Question 1

The three sections of the statement of cash flow

Answer 1

Operations

Investing

Financing

Question 2

Cash flow of operations

Answer 2

Everything not in investing or financing goes into operating

Includes interest expenses

Question 3

Two ways to calculate the cash flow of operations

Answer 3

Direct method

Indirect method

Question 4

Direct method

Answer 4

One has to show how much money is paid to who; then, add those together

Question 5

Indirect method

Answer 5

One starts with net income, then one adds adjustments (such as depreciation and changes to accounts receivable, accounts payable, inventory etc.)

This method is easier than the direct method and most companies favor it

Question 6

Cash flows of investing

Answer 6

Things that go in here:

Buying and selling of PPE

Loans to other companies

Investments

Question 7

Cash flows of financing

Answer 7

Three things go in here

1. Cash dividends
2. Issuing or buying back your own stock
3. Borrowing money

Question 8

Rules of cash flow statements

Answer 8

Liabilities and cash go in the same direction

Stockholder’s equity and cash go in the same direction

Non-cash assets and cash go in the opposite direction

Question 9

Statement of Cash Flow

Answer 9

Explains why the cash went up or down during the year

Question 10

Calculate Operations of cash flow using the following numbers:

Net Sales 4,000
Divs declared 170
COGS 2,000
Inventory Increase 100
Accounts payable increase 300
SG&A expenses 500
Bank loan 250
Equipment Purchase 300

Answer 10

Net Sales +4000
1. find NI
4,000 - 2,000 (COGS) - 500 (SGA) = 1,500 (NI)

2. Add/subtract the operation cash flows
Net Income +1,500
Dividends +0 (financing)
Inventory increase -100
Accounts payable increase +300
Bank loan +0 (financing)
Equipment purchases +0 (investing)

Total 1,700