Introduction to the Statement of Cash Flows quiz #1 Flashcards
Introduction to the Statement of Cash Flows quiz #1
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What is the primary purpose of the statement of cash flows?
The primary purpose of the statement of cash flows is to track the changes in a company's cash balance from the beginning to the end of a period by summarizing all cash inflows and outflows. How does the statement of cash flows provide predictive value to investors?
It provides predictive value by showing current cash flows, which help investors estimate a company's ability to generate future cash flows. What are the three main sections of the statement of cash flows?
The three main sections are operating activities, investing activities, and financing activities. Which section of the statement of cash flows focuses on the core business operations?
The operating activities section focuses on the core business operations. What types of transactions are included in the operating activities section?
Operating activities include transactions involving current assets and current liabilities, such as accounts receivable, inventory, prepaid expenses, accounts payable, and accrued expenses. Why is it important for a business to have positive cash flows from operating activities?
Positive cash flows from operating activities indicate that the core business is generating enough cash to sustain operations, which is essential for long-term success. What does the investing activities section of the statement of cash flows report?
The investing activities section reports cash flows from the purchase and sale of long-term assets, such as equipment and long-term investments. Which section of the statement of cash flows deals with long-term liabilities and stockholders' equity?
The financing activities section deals with long-term liabilities and stockholders' equity. How does the statement of cash flows help evaluate management's effectiveness?
It helps evaluate management's effectiveness by showing how well management generates and uses cash within the business. What is the relationship between net income and cash flow as shown in the statement of cash flows?
The statement of cash flows clarifies that net income is not always equal to cash flow, as net income includes non-cash items and accruals, while cash flow reflects actual cash movements. Why might a company have high net income but low cash flow from operations?
A company might have high net income but low cash flow from operations if it has significant non-cash revenues or increases in accounts receivable, meaning cash has not yet been received. What part of the balance sheet is primarily associated with operating activities in the statement of cash flows?
Operating activities are primarily associated with current assets and current liabilities on the balance sheet. What types of cash flows are reported under investing activities?
Investing activities report cash flows from buying and selling long-term assets and investments. How are financing activities reflected in the statement of cash flows?
Financing activities are reflected by cash flows from transactions with investors and creditors, such as issuing stock, borrowing, or repaying debt. How does the statement of cash flows relate to the balance sheet?
The statement of cash flows correlates with all parts of the balance sheet by showing how cash is affected by changes in current assets, current liabilities, long-term assets, long-term liabilities, and equity. What information does the statement of cash flows provide about a company's ability to pay dividends and interest?
It shows whether the company generates enough cash to pay dividends and interest, indicating its financial health and liquidity. Why is the operating activities section considered the most important part of the statement of cash flows?
It is considered most important because it reflects the cash generated or used by the company's core business operations, which is vital for sustainability. What is the significance of separating cash flows into operating, investing, and financing activities?
Separating cash flows helps users understand the sources and uses of cash in different areas of the business, providing a clearer picture of financial health. How can the statement of cash flows help identify potential financial problems?
It can reveal issues such as negative operating cash flows or reliance on financing, which may indicate underlying financial problems. What is the main focus of the statement of cash flows compared to the income statement?
The statement of cash flows focuses on actual cash movements, while the income statement focuses on revenues and expenses, which may not always involve cash. How does the statement of cash flows assist in assessing a company's operational efficiency?
By showing how much cash is generated from operations, it helps assess whether the company efficiently turns its activities into cash. What role do current assets and current liabilities play in the operating activities section?
Current assets and current liabilities are adjusted to reconcile net income to cash provided by operating activities, reflecting changes in working capital. Why is it problematic if a company consistently has negative cash flow from operating activities?
Consistently negative operating cash flow suggests the company may not be able to sustain its operations or meet its financial obligations. What types of cash transactions are included in the financing activities section?
Financing activities include cash transactions such as issuing or repurchasing stock, borrowing or repaying loans, and paying dividends. How does the statement of cash flows help clarify the difference between accrual accounting and cash accounting?
It shows the adjustments needed to convert net income (accrual basis) to actual cash flow, highlighting the impact of non-cash items and timing differences. What is the starting point for the statement of cash flows?
The starting point is the beginning cash balance for the period. What is the ending point for the statement of cash flows?
The ending point is the ending cash balance for the period. How does the statement of cash flows provide a comprehensive view of a company's cash movements?
It summarizes all cash inflows and outflows from operating, investing, and financing activities, covering all aspects of the business. What is the importance of cash flow information for creditors?
Creditors use cash flow information to assess a company's ability to repay loans and meet other financial obligations. How can the statement of cash flows be used to evaluate a company's dividend policy?
It shows whether the company generates enough cash to support its dividend payments, indicating the sustainability of its dividend policy. What is the relationship between the statement of cash flows and the other financial statements?
The statement of cash flows complements the balance sheet and income statement by providing information about cash movements that are not apparent from accrual-based figures. Why do investors focus on cash flows rather than just net income?
Investors focus on cash flows because they represent actual liquidity and the company's ability to fund operations, pay debts, and return value to shareholders. What are examples of cash inflows from operating activities?
Examples include cash received from customers and cash collected from accounts receivable. What are examples of cash outflows from operating activities?
Examples include cash paid to suppliers, employees, and for operating expenses. What are examples of cash inflows from investing activities?
Examples include cash received from the sale of equipment or long-term investments. What are examples of cash outflows from investing activities?
Examples include cash paid to purchase equipment or long-term investments. What are examples of cash inflows from financing activities?
Examples include cash received from issuing stock or borrowing money. What are examples of cash outflows from financing activities?
Examples include cash paid to repay loans, repurchase stock, or pay dividends. How does the statement of cash flows help in understanding a company's liquidity?
It shows the actual cash available to meet short-term obligations, providing insight into the company's liquidity position. What is the significance of reconciling net income to cash flow from operating activities?
Reconciling net income to cash flow from operations helps identify non-cash items and changes in working capital that affect cash flow.
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