3.2 The Statement of Cash Flows (SCF)—
Overview and “The Myth”
Assessment Section 1
1
1/1
Cash flow from operations (CFO) cannot be managed.
True
Correct
False
CFO can be dramatically impacted by managerial discretion in the financial
reporting process.
2
1/1
The statement of cash flows categorizes cash flows into cash flow from
operations, cash flow from production, and cash flow from financing.
True
Correct
False
Cash flow from production is not a category. The three cash flow areas
are operations, investing, and financing.
3
1/1
Unlike net income, cash flow from operations (CFO) is not subject to managerial
discretion or manipulation.
True
Correct
False
,While gross cash flows are difficult to manage/manipulate, it is relatively easy to
shift cash flows between the activity categories (e.g., shifting between CFO and
CFI). Hence, the analyst must still be careful to understand the
assumptions/estimates/decisions made in the reported data.
4
1/1
Which activity would be classified under cash flow from investing (CFI)?
Sales generated by the firm
Payment of dividends
Correct
Purchase of long-term assets
Issuance of equity or debt
CFI reflects the net cash used in or provided by the company’s investing
activities, such as the purchase or sale of long-term assets.
5
1/1
Which types of transactions are typically reported under cash flow from
financing (CFF) on the statement of cash flows?
Sales revenue, returns, and discounts
Correct
Issuance of debt, equity transactions, and paying dividends
Acquisition and disposal of fixed assets
Purchase of inventory and payment to suppliers
CFF includes cash transactions related to financing activities, such as borrowing
money (issuance of debt), issuing stock (equity transactions), and returning value
to shareholders (paying dividends).
6
1/1
What does cash flow from financing (CFF) measure?
, Cash utilized in purchasing fixed assets
Net cash impact of sales transactions
Cash spent on operational expenses
Correct
Net cash impact of financing decisions
CFF captures the net cash flow involved in financing activities, including the
issuance and repayment of debt, equity transactions, and dividend payments.
3.3 CFO vs. Net Income
Assessment Section 1
1
0/1
Which of the following is NOT a reason for the difference between cash flow
from operations (CFO) and net income?
Correct
Net income doesn’t account for the change in cash.
Revenue is not equal to cash collected.
Net income includes non-cash expenses.
You Selected
Net income includes gains and losses from the sale of assets.
While it is technically true that net income doesn’t account for the change in
cash, this is not a reason for the difference in CFO and net income. Neither net
income nor CFO “accounts” for the change in cash.
2
1/1
Suppose a firm shows an increase in accounts receivable of $100 during a
period. Considered in isolation, what will be the impact of this change on the
statement of cash flows?
The change will increase CFO by $100 times the tax rate ($100 × t).
Correct
, The change will decrease CFO by $100.
The change will increase CFI by $100.
The change will increase CFO by $100.
An increase in an asset account indicates an outflow of cash. Since accounts
receivable is an operating account, the $100 increase will decrease CFO by $100.
3
1/1
How does an increase in accounts receivable affect the cash flow from
operations (CFO)?
It increases the CFO by the amount of sales made.
It does not affect the CFO, as it is a non-cash transaction.
Correct
It decreases the CFO, as it represents revenue recognized but not cash
collected.
It increases the CFO by the amount of accounts receivable sold.
An increase in accounts receivable implies that sales have been made and
revenue recognized, but the cash has not been received, thus decreasing the
cash flow from operations.
4
1/1
Why is the gain or loss from the sale of property, plant, and equipment (PP&E)
not included in cash flow from operations (CFO)?
Because it is typically offset by an equivalent cash outflow.
Because it is only included in the net income calculation.
Correct
Because it is related to investing activities, not operations.
Because it represents a cash inflow from financing activities.
Gains or losses on the sale of PP&E are associated with investing activities (CFI)
rather than the company's operational activities (CFO).
5
Overview and “The Myth”
Assessment Section 1
1
1/1
Cash flow from operations (CFO) cannot be managed.
True
Correct
False
CFO can be dramatically impacted by managerial discretion in the financial
reporting process.
2
1/1
The statement of cash flows categorizes cash flows into cash flow from
operations, cash flow from production, and cash flow from financing.
True
Correct
False
Cash flow from production is not a category. The three cash flow areas
are operations, investing, and financing.
3
1/1
Unlike net income, cash flow from operations (CFO) is not subject to managerial
discretion or manipulation.
True
Correct
False
,While gross cash flows are difficult to manage/manipulate, it is relatively easy to
shift cash flows between the activity categories (e.g., shifting between CFO and
CFI). Hence, the analyst must still be careful to understand the
assumptions/estimates/decisions made in the reported data.
4
1/1
Which activity would be classified under cash flow from investing (CFI)?
Sales generated by the firm
Payment of dividends
Correct
Purchase of long-term assets
Issuance of equity or debt
CFI reflects the net cash used in or provided by the company’s investing
activities, such as the purchase or sale of long-term assets.
5
1/1
Which types of transactions are typically reported under cash flow from
financing (CFF) on the statement of cash flows?
Sales revenue, returns, and discounts
Correct
Issuance of debt, equity transactions, and paying dividends
Acquisition and disposal of fixed assets
Purchase of inventory and payment to suppliers
CFF includes cash transactions related to financing activities, such as borrowing
money (issuance of debt), issuing stock (equity transactions), and returning value
to shareholders (paying dividends).
6
1/1
What does cash flow from financing (CFF) measure?
, Cash utilized in purchasing fixed assets
Net cash impact of sales transactions
Cash spent on operational expenses
Correct
Net cash impact of financing decisions
CFF captures the net cash flow involved in financing activities, including the
issuance and repayment of debt, equity transactions, and dividend payments.
3.3 CFO vs. Net Income
Assessment Section 1
1
0/1
Which of the following is NOT a reason for the difference between cash flow
from operations (CFO) and net income?
Correct
Net income doesn’t account for the change in cash.
Revenue is not equal to cash collected.
Net income includes non-cash expenses.
You Selected
Net income includes gains and losses from the sale of assets.
While it is technically true that net income doesn’t account for the change in
cash, this is not a reason for the difference in CFO and net income. Neither net
income nor CFO “accounts” for the change in cash.
2
1/1
Suppose a firm shows an increase in accounts receivable of $100 during a
period. Considered in isolation, what will be the impact of this change on the
statement of cash flows?
The change will increase CFO by $100 times the tax rate ($100 × t).
Correct
, The change will decrease CFO by $100.
The change will increase CFI by $100.
The change will increase CFO by $100.
An increase in an asset account indicates an outflow of cash. Since accounts
receivable is an operating account, the $100 increase will decrease CFO by $100.
3
1/1
How does an increase in accounts receivable affect the cash flow from
operations (CFO)?
It increases the CFO by the amount of sales made.
It does not affect the CFO, as it is a non-cash transaction.
Correct
It decreases the CFO, as it represents revenue recognized but not cash
collected.
It increases the CFO by the amount of accounts receivable sold.
An increase in accounts receivable implies that sales have been made and
revenue recognized, but the cash has not been received, thus decreasing the
cash flow from operations.
4
1/1
Why is the gain or loss from the sale of property, plant, and equipment (PP&E)
not included in cash flow from operations (CFO)?
Because it is typically offset by an equivalent cash outflow.
Because it is only included in the net income calculation.
Correct
Because it is related to investing activities, not operations.
Because it represents a cash inflow from financing activities.
Gains or losses on the sale of PP&E are associated with investing activities (CFI)
rather than the company's operational activities (CFO).
5
