ACCT 2010 - Chapter 13 Test Questions and Correct Answers

What does positive cash flow allow a company to do? 1. Pay dividends to its owners. 2. Replace worn assets. 3. Expand its operations. 4. Take advantage of new investment opportunities. Cash flow statement focuses on? 1. Firm's ability to generate cash internally 2. Its management of current assets and current liabilities 3. Details of its investments and its external financing Definition of cash (two terms) 1. Cash 2. Cash equivalents Cash equivalents - Short term, highly liquid investments 1. Readily convertible to known amounts of cash 2. So, near maturity there is little risk that their value will change if interest rates change - generally only investments with original maturities of 3 months or less qualify as cash equivalents Examples of cash equivalents (list 3) 1. Treasury bills (short term US government debt) 2. Money market funds 3. Commercial paper (short term notes payable issued by large corporations) What are the 3 categories for cash flows? 1. Investing activities 2. Operating activities 3. Financing activities Define cash flows from Operating Activities Cash inflows and outflow that relate directly to earning revenues and expenses reported on the income statement. List examples of cash inflows and outflows from Operating Activities Inflows: - Sales revenue - Dividends and interest on investments Outflows: - Purchase of goods for resale and services - Salaries and wages