Chp. 12- Statement of Cash Flows

Creditors look at the statement of cash flows to determine if a company is likely to pay:

dividends

Businesses use ____ (not net income) to pay wages, dividends, and loans.

cash

Financial statement users cannot look to the balance sheet for information about changes in a company’s cash because the balance sheet:

shows a company’s cash balance at a point in time, but it doesn’t explain the activities that caused changes in its cash.

Financial statement users cannot look to the income statement for information about changes in a company’s cash because the income statement:

just focuses on the operating results of the business, excluding cash that is received or paid when taking out or paying down loans, issuing or acquiring the company’s own stock, and selling or investing in long-lived assets.

Cash is defined to include cash, cash equivalents, and ______ cash.

restricted

Cash equivalents are:

short-term, highly liquid investments purchased within three months of maturity.

One reason why some investments are considered cash equivalents is because they are so near to:

maturity that their value is unlikely to change.

Cash flows from operating activities are the cash inflows and outflows related directly to:

the revenues and expenses reported on the income statement.

Operating activities involve:

day-to-day activities with customers, suppliers, employees, landlords, and others.

Cash flows from investing activities are the cash flows and outflows related to:

the purchase and disposal of investments and long-lived assets.

Cash flows from financing activities include exchanges with:

stockholders and cash exchanges with lenders (for principal on loans).

Typical cash inflows from operating activities include:

collecting from customers, receiving dividends, receiving interest

Typical cash outflows from operating activities include:

purchasing services (electricity, etc.) and goods for resale, paying salaries and wages, paying income taxes, paying interest

Typical cash inflows from investing activities include:

sale or disposal of equipment, sale or maturity of investments in securities

Typical cash outflows from investing activities include:

purchase of equipment or intangibles. purchase of investments in securities

Common cash inflows from financing activities include:

borrowing from lenders through formal debt contracts, issuing stock to owners

Common cash outflows from financing activities include:

repaying principal to lenders, repurchasing stock from owners, paying cash dividends to owners

Although exceptions exist, a general rule is that operating cash flows cause changes in:

current assets and liabilities.

Although exceptions exist, a general rule is that investing cash flows affect:

noncurrent assets.

Although exceptions exist, a general rule is that financing cash flows affect:

noncurrent liabilities or stockholders’ equity accounts.

The first step in preparing the statement of cash flows is to:

determine the change in each balance sheet account (subtract this year’s beginning balance from this year’s ending balance)

Two alternative methods may be used when presenting the operating activities section of the statement of cash flows:

direct and indirect

The direct method:

reports the components of cash flows from operating activities as gross receipts and gross payments.

The indirect method:

presents the operating activities section of the cash flow statement by adjusting net income to compute cash flows from operating activities.

Unlike the analysis of operating activities, where you are concerned only with the net change in selected balance sheet accounts, an analysis of investing (and financing) activities requires that you identify and separately report:

the causes of both increases and decreases in account balances.

To determine the cause of the change in the Property and Equipment account, accountants would examine the detailed accounting records for:

purchases (increases) and disposals (decreases).

Interest is considered an ______ activity.

operating

The four Corporate Life Cycle Phases:

introductory, growth, maturity, decline

In the maturity phase, the company continues to enjoy positive operating cash flows but no longer has opportunities for expanding the business, so it reduces spending on investing activities and instead uses it cash for:

financing activities such as repaying lenders and returning excess cash to shareholders.

During the decline phase, a company’s operating cash flows again become negative, prompting:

lenders to demand repayment of loans (i.e., negative financing cash flows).

During the decline phase, a company’s operating cash flows again become negative, prompting lenders to demand repayment of loans. To fund these repayments, the company:

sells off its long-term assets, resulting in significantly positive investing cash flows.

The operating activities section indicates how well a company is able to generate cash:

internally through its operations and management of current assets and current liabilities.

Although it might seem counterintuitive at first, healthy companies tend to show negative cash flows in the:

investing section of the statement of cash flows.

If you see a positive total cash flow in the investing activities section, you should be concerned because it could mean:

the company is selling off its long-term assets just to generate cash inflows.

Changes in current assets and current liabilities are recorded under which section of the cash flow statement?

operating activities

Changes in long-term assets are recorded under which section of the cash flow statement?

investing activities

Changes in long-term assets are recorded under what section of the cash flow statement?

financial activities

Changes in dividends and equity is reported under which section of the cash flow statement?

financial activities

Which section of the cash flow statement differs between the indirect and direct reporting methods?

the operating activities section