Module 10

Question 1

What is a cash flow statement?

Answer 1

shows the changes in a business’s cash during an accounting period by listing the cash inflows and outflows from its operating, investing and financing activities during the period.

Question 2

What is the purpose of a cash flow statement?

Answer 2

a. It primarily provides information about a business’s ability to remain solvent (meet obligations) and to grow.
b. Managers and others study a business’s cash flows because the business cannot survive if it does not have enough cash to operate on a day-to-day basis and if it does not pay its debts when they are due.

Question 3

What is the beginning cash balance?

Answer 3

the amount of cash listed on its balance sheet at the end of the last accounting period (which is also the balance sheet for the beginning of the current period).

Question 4

What is the ending cash balance?

Answer 4

the amount of cash listed on its balance sheet at the end of the current accounting period.

Question 5

What are cash inflows?

Answer 5

another way of saying ‘transactions that resulted in increases in cash’.

Question 6

What are cash outflows?

Answer 6

another way of saying ‘transactions that resulted in decreases in cash’.

Question 7

How do you calculate the ending cash balance?

Answer 7

beginning cash balance + cash inflows - cash outflows = ending cash balance

Question 8

What are the affects of inflows on a cash flow statement?

Answer 8

a. decreases in assets (other than cash)
b. increases in liabilities
c. Increases in owner’s equity

Question 9

What are the affects of outflows on a cash flow statement/

Answer 9

a. increases in assets
b. decreases in liabilities
c. decreases in owner’s equity

Question 10

When can a decrease in asset other than cash occur?

Answer 10

A decrease in an asset other than cash causes an inflow (increase) of cash when cash is received in exchange for the asset.

Question 11

When can an increase in liabilities occur?

Answer 11

An increase in a liability causes an inflow (increase) of cash when a business receives cash in exchange for the liability.

Question 12

When can an increase in owner’s equity occur?

Answer 12

a. Investments by owners
An additional investment causes an inflow (increase) of cash because the owner has used cash from personal sources to increase his/her investment in the business.
b. Generation of net income

Question 13

What are the three sections of a cash flow statement?

Answer 13

a. Cash flows from operating activities;
b. Cash flows from investing activities; and
c. Cash flows from financing activities.

Question 14

What are operating activities?

Answer 14

Operating activities show the cash flows associated with the business’s day-to-day activities or principal revenue-generating activities

Question 15

What does the operating activities section show?

Answer 15

a. Represent net inflows from operations, and only cash received and paid.
b. Expenses and revenue on an accrual basis are not included.
c. The operating activities on the CFS include any sources and uses of cash from business activities. In other words, it reflects how much cash is generated from a company’s products or services.

Question 16

What are examples of operating activities?

Answer 16

o	The primary activities of buying inventory or materials; 
o	Selling and delivering goods for sale;
o	Interest payments;
o	Income tax payments;
o	Payments made to suppliers of goods and services used in production;
o	Salary and wage payments to employees;
o	Rent payments;
o	Providing services; and
o	Administrative activities.
o	Accounts payable

Question 17

How may a business report operating cash inflows under the direct method?

Answer 17

1. collections from customers;
2. collections of interest; and
3. other operating receipts.

Question 18

How may a business report operating cash outflows?

Answer 18

1. payments to suppliers;
2. payments to employees;
3. payments of interest; and
4. other operating payments.

Question 19

How can cash collected from customers be calculated?

Answer 19

Cash collected from customers = Sales revenue + decrease/- increase in Accounts Receivable.

Question 20

What is the salaries expenses account?

Answer 20

includes the amount of salaries earned by employees during the period. It includes salaries that were recorded as owed to employees at the end of the period for work they did during the accounting period (ie business owes the employees the money but they haven’t paid yet).

Question 21

How are payments to employees recorded in the cash flow statement?

Answer 21

• When Salaries Payable increases, an expense is recorded (but no cash is paid). When it decreases, cash is paid (but no expense is recorded).
• Payments to employees can be calculated by adding the payments for the period.

Question 22

What are investing activities?

Answer 22

include any sources and uses of cash from a company’s investments. Usually involves non-current assets.

Question 23

What are some examples of investing activities?

Answer 23

o Lending money and
o Collecting on the loans;
o Acquisition and disposal of long-term assets;
o Investing in other companies; and
o Buying and selling property and equipment.

Question 24

What are financing activities?

Answer 24

Cash from financing activities often includes the sources of cash from investors or banks, as well as the uses of cash paid to shareholders.

Question 25

What are some examples of financing activities?

Answer 25

o Movements in equity and non-current liabilities; o Obtaining capital from the owner, o Providing the owner with a return on their investment; o Obtaining capital from creditors, and o Repaying the amounts borrowed. o Debt financing o Financing equity

Question 26

What can the cash flow statement tell external users?

Answer 26

a. Evaluate the business's need for additional cash for existing or expanding operations b. comparison to other companies can show where their cash is going c. See whether most cash is from operating activities (desirable)

Question 27

What is solvency?

Answer 27

business's ability to pay its long term debts as they come

Question 28

What are limitations of the balance sheet?

Answer 28

they focus on the relationship between a business’s assets and liabilities without regard for the business’s ability to generate the cash needed to pay its debts. By showing a business’s sources and uses of cash, the cash flow statement provides additional information about a business’s management of cash.

Question 29

What are cash flow returns?

Answer 29

the business’s cash flows divided by the dollar amount of its assets or owner’s equity.

Question 30

What do cash flow returns tell us?

Answer 30

A business’s ability to generate enough cash to remain in business and earn a satisfactory profit can also be studied by computing its cash flow returns

Question 31

What is the relationship between cash flow statement and income statement?

Answer 31

The income statement and the cash flow statement are related because both report on a business’s activities during an accounting period. The difference between the two is that the income statement reports on activities using accrual accounting, whereas the cash flow statement reports only on cash activities.

Question 32

What is the operating cash flow margin?

Answer 32

Net cash flow provided by operating activities/net sales

Question 33

What does the operating cash flow margin tell us?

Answer 33

This ratio describes how much net cash the business generated from each dollar of net sales.

Question 34

\What is the cash return on total assets ratio?

Answer 34

(net cash flow provided by operating activities + interest paid)/average total asset

Question 35

What does the cash return on total assets tell us?

Answer 35

A business’s cash return on total assets measures how well the business is using its resources to generate net cash from operating activities.

Question 36

What is the cash return on owner's equity?

Answer 36

Net cash flow provided by operating activities/average owner's equity

Question 37

What does the cash return on owner's equity tell us?

Answer 37

A business’s cash return on owner’s equity measures how much net cash from operating activities the business generated with each dollar of owner’s capital

Question 38

What do cash ratios in general tell us?

Answer 38

These cash return ratios help managers and external users to assess whether or not the business is generating enough cash from its operating activities.

Question 39

What is the direct method?

Answer 39

Subtracting the operating cash outflows from the operating cash inflows to determine the net cash provided by (or used in) operating activities on the cash flow statement

Question 40

What is the indirect method?

Answer 40

Adjusting net income to compute net cash provided by operating activities on the cash flow statement