Questions and Answers
What does the Statement of Cash Flows show?
Shows the changes in cash for the same period of time as that covered by the income statement.
How does the statement of cash flows differ from the other major financial statements?
The other financial statements are based on accrual accounting, whereas the cash flow statement shows all increases and decreases in cash.
What are Operating Activities in the context of the statement of cash flows?
Includes cash inflows and outflows related to the normal course of business operations.
What do Investing Activities refer to in the statement of cash flows?
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What does Financing Activities represent in the cash flow statement?
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What does the cash flow statement report?
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What does the cash flow statement help users assess?
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If the income statement reports sales revenue of $1 million, does that mean the company collected $1 million dollars from customers?
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Which income statement item does not have a cash effect?
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What are Operating Cash Inflows derived from?
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What are some examples of Operating Cash Outflows?
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What types of assets are included in Long-term Assets?
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What do Investments in the cash flow statement represent?
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What constitutes Investing Cash Inflows?
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What are examples of Investing Cash Outflows?
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What are Financing Cash Inflows?
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What constitutes Financing Cash Outflows?
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What is the major purpose of the operating activities section of the cash flow statement?
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What does the net cash provided (used) by operating activities represent?
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What is the Direct Method (Operating) in the context of cash flow reporting?
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What is the Indirect Method (Operating) in cash flow reporting?
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Study Notes
Statement of Cash Flows
- Displays changes in cash during the same period as the income statement.
- Shows sources of cash inflows and uses of cash outflows.
- Essential for understanding cash receipts and payments.
Differences from Other Financial Statements
- Other financial statements rely on accrual accounting principles.
- Cash flow statement emphasizes actual increases and decreases in cash.
Operating Activities
- Includes cash flows from regular business operations, affecting revenues and expenses.
- Reflects transactions related to net income on the income statement.
Investing Activities
- Covers cash transactions for purchasing and selling long-term assets and investments.
Financing Activities
- Represents cash transactions with owners and creditors.
- Involves interest-bearing liabilities and stockholders' equity items.
Cash Flow Statement Reporting
- Summarizes cash receipts and payments across operating, financing, and investing activities.
Assessment Through Cash Flow Statement
- Evaluates the ability to generate future cash flows.
- Assesses capacity to pay dividends and fulfill obligations.
- Clarifies differences between net income and operating cash flows.
- Analyzes cash investing and financing transactions.
Income Statement and Cash Collection
- Sales revenue may not equate to cash received, as sales can occur on credit.
Non-Cash Expense
- Depreciation does not impact cash flow and is classified as a non-cash expense.
Operating Cash Inflows
- Generated from selling goods and services.
- Includes interest received and dividends from equity securities.
Operating Cash Outflows
- Payments are made to suppliers for inventory, employees for services, government for taxes, and lenders for interest.
Long-term Assets
- Composed of Property, Plant, and Equipment (PPE) and intangible assets.
Investments
- Include ownership of stocks, bonds, and loans made to customers.
Investing Cash Inflows
- Includes cash from sales of PPE and investments, plus loan repayments (excluding interest).
Investing Cash Outflows
- Cash used to purchase PPE, other investments, or make loans.
Financing Cash Inflows
- Cash received from issuing stock and borrowing funds.
Financing Cash Outflows
- Cash payments made to stockholders as dividends and for repaying borrowed funds.
Major Purpose of Operating Activities Section
- Converts net income from an accrual basis to a cash basis.
Net Cash Provided (Used) by Operating Activities
- Represents what net income would have been on a cash accounting basis.
Direct Method (Operating)
- Preferred by FASB; specifies that both direct and indirect methods should be reported.
- Displays each cash flow individually.
Indirect Method (Operating)
- Widely used due to ease of preparation.
- Focuses on reconciling net income with operating cash flow, revealing less information to competitors.
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Description
Test your knowledge on the Statement of Cash Flows with these flashcards. Learn about its components, differences from other financial statements, and more. Perfect for finance students looking to enhance their understanding of cash flow management.
