Cash Flow vs. Income Statement Quiz

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Questions and Answers

How does the statement of cash flow differ from the statement of income?

Cash flow reflects cash basis rather than accrual basis of accounting and focuses on more than just operating activities, including investing and financing activities.

What are the categories of cash flows in the direct method?

Receipts from customers, payments to suppliers, payments to employees, payments of interest, payments of income taxes.

Why are cash flows from operating activities important?

They result from what the company is in the business of doing, are the source for future debt repayments, and are the source for future dividends payments.

What is the purpose of an internal control system?

To safeguard the company's assets. Signup and view all the answers

What risks are included when customers pay on account?

Customers not paying after the 30 days or whatever the time is. Signup and view all the answers

Carrying amount = _____.

Full value of company's accounts receivable less the allowance for doubtful accounts. Signup and view all the answers

What are the 2 methods to determine the bad debts amount?

Percentage of credit sales method and Aging of accounts receivable method. Signup and view all the answers

What is the most common starting point for the operating activities section in the Statement of Income?

Net earnings or Net Income or Profit. Signup and view all the answers

What are the 3 categories of Business Activities?

Financing activities, investing activities, operating activities. Signup and view all the answers

A company's financing comes from which 2 sources?

Investors through issuance of shares and creditors through taking out loans or making purchases on credit. Signup and view all the answers

A company's operating activities are related to the company's _____.

Revenues and expenses. Signup and view all the answers

What is Working Capital?

Current Assets - Current Liabilities. Signup and view all the answers

What is the accounting equation?

Assets = Liabilities + Shareholders' Equity. Signup and view all the answers

Most common measures of liquidity is _____.

Working Capital. Signup and view all the answers

What is Goodwill?

A premium that has been paid on the acquisition of another company. Signup and view all the answers

Which statement is true regarding public and private companies?

All of the above. Signup and view all the answers

What are the basic characteristics of a liability?

It is a present obligation of the entity, expected to settle through an outflow of resources, and results from an event that has already happened. Signup and view all the answers

Which financial reporting standard is associated with public companies?

International Financial Reporting Standards (IFRS) Signup and view all the answers

Study Notes

Statement of Cash Flow vs. Statement of Income

Statement of Cash Flow: Focuses on cash transactions, including operating, investing, and financing activities.
Statement of Income: Focuses on accrual accounting, reflecting revenues earned and expenses incurred, regardless of when cash is received or paid.

Cash Flow Categories

Operating Activities: Cash flows from the company's core business operations, such as sales, purchases, salaries, and interest payments.
Investing Activities: Cash flows related to the acquisition and disposal of long-term assets, like property, plant, and equipment.
Financing Activities: Cash flows related to the company's capital structure, including debt, equity, and dividends.

Importance of Cash Flow from Operating Activities

Core Business Performance: Reflects the company's ability to generate cash from its primary operations.
Debt Repayment: Provides funds for future debt obligations.
Dividend Payments: Supports the company's ability to distribute dividends to shareholders.

Cash-to-Cash Cycle Challenge

The time lag between receiving cash from customers (inflow) and paying suppliers (outflow) can impact a company's cash flow.

Internal Control Systems

Purpose: Safeguard the company's assets.

Accounts Receivable and Bad Debts

Risks: Customers may not pay on time, leading to potential losses.
Carrying Amount: Represents the full value of accounts receivable less the allowance for doubtful accounts.
Bad Debts Methods:
- Percentage of Credit Sales: Estimates bad debts as a percentage of credit sales.
- Aging of Accounts Receivable: Estimates bad debts based on the age of receivables, assuming older receivables are more likely to be uncollectible.

Key Accounting Concepts

Earnings Per Share (EPS): Measures a company's profitability per share outstanding, reflecting the earnings available to each shareholder.
Working Capital: Measures a company's short-term liquidity, calculated as current assets minus current liabilities.
Accounting Equation: Assets = Liabilities + Shareholders' Equity, representing the foundational concept of accounting.

Financial Statements

Statement of Income: Measures a company's financial performance by reflecting revenues, expenses, and profit over a specific period.
Statement of Changes in Equity: Details changes in shareholder equity components, including transactions with shareholders and company operations.

Public vs. Private Companies

Public Companies: Shares are traded publicly on stock exchanges.
Private Companies: Shares are not publicly traded.

Financial Reporting Standards

International Financial Reporting Standards (IFRS): Used by public companies to report their financial performance.
Accounting Standards for Private Enterprises (ASPE): Used by private companies.

Business Activities

Financing: Raising capital through equity or debt financing.
Investing: Acquiring or disposing of long-term assets.
Operating: The company's day-to-day activities of generating revenue and incurring expenses.

Goodwill

Definition: An intangible asset representing the premium paid for an acquisition, exceeding the fair market value of the acquired company's identifiable assets.

Liabilities

Characteristics:
- Present Obligation: An obligation that must be settled.
- Expected Settlement: An obligation that is expected to be settled through an outflow of resources.
- Past Event: An obligation arising from a previous event.

Accrued Liabilities

Definition: Amounts owed related to expenses that have been incurred but not yet paid, such as interest or warranty expenses.

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Description

Test your understanding of the differences between the Statement of Cash Flow and the Statement of Income. Explore the various categories of cash flow activities and their importance in financial reporting. This quiz will enhance your knowledge of core business performance and cash management.