Accounting-Statement of Cash flows exam questions with 100% correct answers

investing activities section of the statement of cash flows includes the cash inflows and outflows related to the purchase and sale of long-term assets and investments. statement of cash flows shows the changes in cash for the same period of time as that covered by the income statement. The cash flow statement shows all sources (i.e., receipts) of cash and all of the uses (nts) of cash. It provides information about: • Cash receipts (inflows) • Cash payments (outflows) Question: How does the statement of cash flows differ from the other major financial statements? Answer: The other financial statements (i.e., the income statement and balance sheet) are based on ACCRUAL ACCOUNTING (the realization principle and the matching concept) whereas the cash flow statement simply shows all of the increases and decreases in CASH. Three cash flow categories -operating activities -financing activities -investing activities The cash flow statement helps users assess: 1. Ability to generate future cash flows. 2. Ability to pay dividends and meet obligations. 3. Why net income is different from operating cash flows. 4. Cash investing and financing transactions. operating activities section is the cash effect of all items appearing on the income statement (the cash effect of transactions that create revenues and expenses and thus enter into the determination of net Income) Question: If the income statement reports sales revenue of $1 million, does that mean the company collected $1 million dollars from customers? Answer: No!!! Sales could have been made on account. • Cash inflows: - From sale of goods or services - From return on loans (interest received) and on equity securities (dividends received • Cash outflows: - To suppliers for inventory - To employees for services - To government for taxes - To lenders for interest - To others for expenses The major purpose of the operating activities section of the cash flow statement is to Convert net income from an accrual basis to a cash basis • The net cash provided (used) by operating activities represents what the net income of the company would have been had the company used a cash accounting basis rather than accrual accounting. • This conversion can be done by two methods: 1. Direct method 2. Indirect method The operating activities section of the statement of cash flows can be presented in two different ways: 1. Direct Method 2. Indirect Method • Both methods arrive at the same total amount for 'net cash provided (used) by operating activities'. • The methods differ in disclosing the items that make up the total amount. • The choice of methods affects only the operating activities section; the investing and financing activities sections are the same. Direct Method details: • The FASB prefers the direct method but allows the use of either method. • When the direct method is used, the net cash flow from operating activities as computed using the indirect method must also be reported in a separate schedule. • The direct method involves listing each specific cash flow. An example is shown on the next slide. The indirect method details • The indirect method is used extensively in practice. • Most companies favor the indirect method for the following reasons: • It is easier to prepare. • It focuses on the differences between net income and net cash flow from operating activities. • It tends to reveal less company information to competitors. • The indirect method starts with net income and makes a