Chapter 17 Statement of Cash Flows exam questions with 100% correct answers

Definition: Financial statement that shows the sources and uses of cash for the accounting period. Statement of Cash Flows (SCF) True or False: The SCF shows the effects on cash of a business's operating, investing, and financial activities for the accounting period. True What is cash defined as in relation to the statement of cash flows? Cash and cash equivalents True of False: Cash and cash equivalents are considered cash receipts or cash disbursements for SCF purposes. False. They are not considered either of these because they are seen as identical and interchangeable. What is the major purpose of the SCF? To provide information regarding the cash receipts and disbursements of a business that will help users (investors, creditors, managers, etc.) assess the business. What are the 4 purposes that users use the SCF for? 1) Assess the firm's ability to generate positive future net cash flow 2) Assess the firm's ability to meet obligations (pay bills) 3) Assess the difference between net income and cash receipts/disbursements 4) Assess both cash and non-cash investing and financing activities What are the three major user groups of the SCF? 1) Management (Internal) 2) Investors (External) 3) Creditors (External) What 4 things does management use the SCF for? 1) to assess the firm's liquidity 2) to assess its financial flexibility 3) to determine its dividend policy 4) to plan investing and financing needs What 2 things do investors use the SCF for? 1) Ability to pay dividends 2) Need for additional financing What 2 things do creditors use the SCF for? 1) Ability to pay bills 2) Need for additional financing What are the 3 classifications of cash flows for the SCF? Operating, Investing, and Financing activities Definition: This SCF cash flow classification includes cash transactions related to revenues and expenses. Revenues are cash inflows and expenses are cash outflows. Also includes interest payments. Operating Activities Definition: This SCF cash flow classification includes activities related primarily to cash flows from the acquisition and disposal of noncurrent assets, especially property, equipment, and investments. Also included are cash flows from the purchase and disposal of short-term investments (marketable securities). Investing Activities Definition: This SCF cash flow classification includes activities related to cash flows form the issuance and retirement of debt and the issuance and repurchase of capital stock Also includes dividends. Financing Activities True or False: A supplementary schedule of non-cash investing and financing activities must be included with the SCF. True Definition: This method of reporting net cash flows from operations shows cash receipts from sales and cash disbursements for expenses. This method requires that each item on the income statement be converted from an accrual basis to a cash basis. Direct method