chapter 13

Question 1

companies can choose between which two methods

Answer 1

indirect or direct method

Question 2

which method do companies prefer more

Answer 2

indirect method

Question 3

what is the general format of the indirect method

Answer 3

start with net income and reconcile noncash items. Companies should then adjust for changes in their current accounts and arrive at net cash from operating activities.

Question 4

when there is a depreciation, is there a flow of cash

Answer 4

no

Question 5

if there is a loss

Answer 5

we must add it back on the statement of cash flows to solve for cash from operating activities

Question 6

if there is a gain

Answer 6

we must deduct it on the statement of cash flows to solve for cash from operating activities.

Question 7

The cash received from disposition

Answer 7

will be included in the investing section as it is not part of the company’s primary business activities.

Question 8

increase In a/r

Answer 8

show a decrease in the cash flow statement

Question 9

what are operating activities

Answer 9

day to day activities of the business
sake of goods and services

Question 10

what are investing activities

Answer 10

purchase and sale of long lived assets needed to operate the company
sale of pppe
sale of long term debt
collecting principal on loans

Question 11

what are financing activities

Answer 11

obtaining and repaying the funds to finance the operations of the business
sale of shares’ issue of debt

Question 12

what are the four phases of a company lifecycle

Answer 12

: introductory, growth, maturity and decline

Question 13

what is the free cash flow ratio

Answer 13

measures the discretionary cash flow remaining from operating activities available to use to expand operations, reduce debt, pursue new opportunities, pay additional dividends, etc
how much extra cash a company has
want it to be higher
difficult to compare companies of different size

Question 14

free cash flow is calculated as

Answer 14

net cash provided (used) by operating activities – net capital expenditures – dividends paid.

Question 15

what is free cash flow

Answer 15

represents excess, discretionary cash flow that a company can use to expand operations, reduce debt, increase dividends, or buy back shares
solvency measure–> if negative may be bad

Question 16

what are net capital expenditures

Answer 16

Net capital expenditures are amounts paid for the acquisition of property, plant, and equipment less any proceeds from the disposal of such assets.

Question 17

when would net capital expenditures be shown as a positive

Answer 17

If the proceeds received from the disposition of these assets exceeds the cash used to purchase new assets, the net capital expenditures amount in the formula shown above will result in an addition rather than a deduction

Question 18

what are cash equivalents

Answer 18

ash equivalents are short-term, highly liquid (easily sold) investments that have insignificant risk and are readily convertible to cash within a very short time.

Question 19

what happens in the introductory phase

Answer 19

company will report a net loss

Question 20

why is operating start negative

Answer 20

company will usually not generate positive cash from its operating activities until near the end of the growth phase.

Question 21

why is investing negative

Answer 21

In these phases, because the company is making significant investments in its long-lived assets, it will use cash for investing activities.

Question 22

why does cash for financing activities start positive

Answer 22

usually positive because debt and equity are issued to pay for the investing activities and cover the operating activities’ shortfall.

Question 23

as a company moves to the ,maturity and decline phases, what ahpepens

Answer 23

patterns will revise

Question 24

why is understanding the relationship between the categories of cash flows important

Answer 24

• helps gain a better insight into the nature of a company activities
• forecasting future cash is also important