Statement of Cash Flows

Question 1

What is the purpose of the operating activities section in the statement of cash flows?

Answer 1

to adjust Net Income to show how much cash came from daily business activities.

1) Noncash expenses/revenues
2) Non operating gains/losses
3) Changes in working capital (Current assets & liabilities)

Question 2

Which noncash items are added back to net income under the indirect method?

Answer 2

1. Depreciation
2. Amortization (patents, bond discounts)
3. Losses on sale of assets
4. Non cash expenses (bad debt, write-downs, warranty expense)

Question 3

What noncash items are subtracted from net income under the indirect method?

Answer 3

1) Gain on sale of assets
2) Amortization of bond premium
3) Equity in earnings from investees

Question 4

How do changes in current assets and liabilities affect operating cash flow under the indirect method?

Answer 4

Assets have an inverse relationship with cash

Liabilities have a direct relationship with cash

Question 5

Which adjustments in the indirect method come from the Income Statement and which come from the Balance Sheet

Answer 5

Income Statement
- Net Income
- Noncash items (depreciation, gains/losses, amortization)

Balance Sheet
-Changes in current assets and current liabilities

Question 6

What type of transactions are included in financing activities in the statement of cash flows?

Answer 6

Financing activities are related to borrowing and repaying debts and equity

typically long term liabilities and stockholders equity