chapter 5: inhale cash flows

Question 1

what does the statement of cash flow explain?

Answer 1

how the cash balance at the beginning of the period changed to another cash balance at the end of the period

Question 2

what are cash equivalents?

Answer 2

short term highly liquid investments

readily convertible to known amounts of cash

less than three months to their maturity

subject to insignificant risks fo changes in value

Question 3

cash flows from operating activities

Answer 3

cash inflows and outflows directly related to earnings from normal operations

Question 4

what are the two alternatives to represent the operating activities section?

Answer 4

the direct method

the indirect method

Question 5

what is the direct method

Answer 5

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

more expensive to implement that the indirect method

Question 6

indirect method

Answer 6

presents operating activities section of the statement of cash flow starting with net earnings

eliminates non cash items from revenues and expenses

will arrive to cash inflow (outflow) from the operating activities

Question 7

does the indirect and direct method make a difference to find the total amount of cash inflows or outflows from operating activities? or does it remain the same?

Answer 7

the cash outflow or inflow result is the same with both methods

Question 8

what are cash flows from investing activites?

Answer 8

cash inflows and outflows related to acquisition or sale of long lived productive assets and investments in securities of other companies

the difference between inflows and outflows is called net cash inflows (outflows) from operating activities

Question 9

what are cash flows from financing activites?

Answer 9

cash inflows and outflows related to owners and creditors that finance enterprise and operations

difference between inflow and outflow is Calle ent cash inflow(outflow) form financing activities

Question 10

what is the net increase or decrease in cash

Answer 10

the combination of outflows and inflows of cash from operational, financing and investing activities

Question 11

what type of data do you need to prepare the statement if cash flow and why?

Answer 11

comparative statement of financial position to compute cash flows from all activities

complete statement of earnings to identify cash flows form operating activities

additional details about selected accounts because often times net change In account balance does not reveal underlying nature of cash flows

Question 12

true or false

any transaction that results in a change in cash must be accompanied by a shaven in liabilities, SE, or non-cash assets?

Answer 12

true

Question 13

when theres an increase in cash, what does in mean for either the liabilities, SE, and non cash assets

Answer 13

liabilities should increase, SE should increase, and non cash assets should decrease

or

liabilities should decrease, SE should decrease, and non cash assets should increase

Question 14

in the indirect method for cash flows regarding operating activities, what should you record to cash inflow if current non-cash assets decrease or current non-cash liabilities increase?

Answer 14

cash inflow increases

ex: when accounts receivable decrease because cash is collected, more cash is in the back account

Question 15

in the indirect method for cash flows regarding operating activities, what should you record to cash inflow if current non-cash assets increase or current non-cash liabilities decrease?

Answer 15

cash inflow decreases

ex: AR are more than the cash collected because revenues are more than cash collected

must substract the non-cash current asset from net earnings

Question 16

if inventories decrease, does cash flow increase or decrease?

why?

Answer 16

increase because the cash collected from the sale of inventory is more than the costs of selling

Question 17

if a prepaid expense is a used up (decrease in a prepaid expense), what happens to the cash inflow?

Answer 17

the cash inflow increases

Question 18

if accounts payable decrease, what happens to cash inflow?

Answer 18

it decreases

you paid cash to suppliers

Question 19

what are the two types of accounts mostly affected when recording cash flows from investing activities?

Answer 19

purchase and sale of property, land, land, equipment or intangibles assets (trademarks and patents) by cash

    these are non current assets

purchase or sale of short or long-term investments by cash

Question 20

what type of securities (such as government securities) are the equivalent of cash?

Answer 20

securities of maturities of three months or less

Question 21

securities with maturities of more than three months are considered what?

Answer 21

investments

Question 22

how do you calculate the cash flows with property, plant, and equipment (Investing activities)

Answer 22

you look at the change (bought and sold), then take off depreciation (operating activities)

the difference will be the cash flow

Question 23

what is the quality of earnings ratio

Answer 23

you try to calculate how many dollars were generated from operating activities per dollar of retained earnings

Question 24

what is the capital expenditure ratio ?

Answer 24

you calculate how many many dollars were generated from operating activities per dollar spent PPE, intangibles, and investments

Question 25

what does a higher ratio of capital expenditure mean?

Answer 25

less need for financing for current and future operations allows strategic acquisition, avoids debt, reduces risks of bankruptcy

Question 26

what does a higher ratio of capital expenditure mean?

Answer 26

greater ability to finance operations from cash flows less likely that company using aggressive revenues recognition strategies to increase net earnings

Question 27

what is the free cash flow measurement and how do you calculate it?

Answer 27

a measure of firm's ability to pursue long term investment opportunities cash flows from operating activities - dividends -capital expenditures

Question 28

what are capital expenditures

Answer 28

PPE intangibles investments

Question 29

what are the changes presented in cash flows from financing activities

Answer 29

notes payable to financial institutions (short term debt) and portions of long term debt non current liabilities shareholders' equity

Question 30

what are non cash investing and financing activities?

Answer 30

transactions that do not have direct cash flow effects reported as supplement to the statement of cash flows in narrative or shcedule form

Question 31

can gains or losses of a long lived asset be recorded as operating activity, financing activity, or investment activity depending on the situation? indirect method

Answer 31

yeeee

Question 32

where do you record an adjustment made to gain or losses made from the sale of a long lived asset? why? indirect method

Answer 32

on the operating activities section to avoid double counting the gain or loss

Question 33

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: purchase of short term investments

Answer 33

cash flow from investing activities

Question 34

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: net earnings

Answer 34

cash flow from operating activities

Question 35

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: change in accounts receivable

Answer 35

cash flow from operating activities

Question 36

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: additions to property, plant, and equipment

Answer 36

cash flow from investing activities

Question 37

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: change in prepayments and other current assets

Answer 37

cash flow from operating activities

Question 38

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: change in inventories

Answer 38

cash flow from operating activities

Question 39

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: change in accrued liabilities

Answer 39

cash flow from operating activities

Question 40

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: depreciation and amortizationn

Answer 40

cash flow from operating activities

Question 41

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: issuance of shares

Answer 41

cash flow form financing activities

Question 42

state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities: changes in accounts payable

Answer 42

cash flow from operating activities

Question 43

indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method) increase in inventories

Answer 43

decrease

Question 44

indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method) repayment of loans and borrowings

Answer 44

no effect

Question 45

indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method) depreciation expense

Answer 45

increase

Question 46

indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method) decrease in accounts receivable

Answer 46

increase

Question 47

indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method) increase in accounts and other payables

Answer 47

increase

Question 48

indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method) increase in prepaid expenses

Answer 48

decrease

Question 49

what do cash inflows from operating activities include?

Answer 49

cash sales collections on Accounts receivable and notes receivable arising from sales dividends on investments (?) interest on loans and investments (?)

Question 50

what do cash outflows from operating activities include?

Answer 50

payments to suppliers and employees payments for operating expenses, taxes, and interest

Question 51

what do cash inflows from investing activities include?

Answer 51

cash received from sale of operational assets sale of investments maturity value of bond investments principal collections on notes receivable that are not related to operations

Question 52

what do cash outflows from investing activities include?

Answer 52

cash payments to purchase operational assets and investments, and to make loans

Question 53

what do cash inflows from financing activities include?

Answer 53

contributed capital loans

Question 54

what do cash outflows from financing activities include?

Answer 54

payments for dividends the purchase of the company’s own shares principal payments on borrowing

Question 55

true or false Interest on borrowings may also be classified as a financing activity under IFRS

Answer 55

true

Question 56

what are non-cash investing or financing activities? give two examples

Answer 56

activities that would normally be classified as investing or financing activities, except no cash was received or paid ex: purchase of assets by issuing shares or bonds the repayment of loans using non-cash assets the conversion of bonds into shares

Question 57

how are non-cash investing or financing activities reported in statement of cash flows?

Answer 57

are not reported in the statement of cash flows, because there was no cash received or cash paid however, the activities are disclosed in a note or a separate schedule

Question 58

using the indirect method, depreciation expense and amortization are supposed to turn into a positive or negative cash flow?

Answer 58

positive cash flow

Question 59

do the depreciation and amortization accounts affect the cash flows from investing activities?

Answer 59

nah boy

Question 60

what does a capital expenditure ration of 1.57 indicate?

Answer 60

The ratio of 1.57 indicates that the cash generates from operations is more than sufficient to pay for the company’s investing activities no finance from external sources of pre-existing cash balances

Question 61

when you use the indirect method, do you add and debut items affecting cash, items not affect cash or both?

Answer 61

items not affect cash

Question 62

what does it mean if the capital expenditure ration is negative?

Answer 62

it means that the company did not invest with cash used from operating activities but cash from shareholders and creditors (financing)

Question 63

what is the free cash flow formula?

Answer 63

cash from operating activities - dividends - capital expenditures