ACCY130 Chapter 9: The Cash Flow Statement exam questions with 100% correct answers

Cash Flow Statement A Cash Flow Statement shows the changes in a business' cash during an accounting period by listing the cash inflows and outflows from operating, investing and financing activities during the period. Why is the Cash Flow Statement important? The Cash Flow Statement provides information about a business' ability to remain solvent (meet its obligations) and to grow. What does the Cash Flow Statement show? The Cash Flow Statement summarises the 'flow' of cash activities during an accounting period and provides information that cannot be obtained by studying the business' income statement or balance sheet. → Shows the inflows (receipts) and outflows (payments) of cash during an accounting period. → Explains how its beginning cash balance changed to its ending cash balance of transactions that resulted in increases and decreases in cash. Why do internal and external users study a business' cash flow statement in conjunction with its income statement and balance sheet? To evaluate the business' liquidity and solvency, its ability to purchase property and equipment, and its cash flow returns. Beginning Cash Balance The amount of cash listed on its balance sheet at the end of the last accounting period. Ending Cash Balance The amount of cash listed on its balance sheet at the end of the current accounting period. → Ending Cash Balance = Beginning Cash Balance + (Cash Inflows - Cash Outflows) Cash Inflows Transactions that result in increases in cash (Receipts). e.g. When a business receives cash from selling inventory or from issuing a note or when the owner invests cash in the business. → Decrease in assets (other than cash), increase in liabilities and increase in owner's equity. Cash Outflows Transactions that result in decreases in cash (Payments). e.g. When a business pays cash to purchase inventory or pays cash to reduce a note payable or when owner withdraws cash. → Increase in assets (other than cash, such as inventory), decrease in liabilities and decrease in owner's equity. Organisation of the Cash Flow Statement Three sections according to the type of activity that caused the increase or decrease in cash. 1. Operating Activities 2. Investing Activities 3. Financing Activities Operating Activities Primary activities of buying, selling and delivering goods for sale, as well as providing services. They also include activities that support the primary activities, such as administrative activities. Investing Activities Activities such as lending money and collecting on loans, investing in other companies, and buying and selling property and equipment. Financing Activities Activities such as obtaining capital from the owner and providing the owner with a return on investment, as well as obtaining capital from creditors and repaying amounts borrowed. Net Cash Flow Net Cash Flow = Cash Inflows - Cash Outflows Two Methods of calculating/reporting Business's Net Cash Flows from operating activities Direct Method: Subtracts operating cash outflows from operating cash inflows. Indirect Method: Business adjusts its net income to calculate the net cash flow. Reporting Cash Flows from operating activities under the Direct Method Consists of operating cash inflows and outflows. → For operating cash inflows a business may report as many as 3 categories. e.g. collections from customers, collections of interest. → For operating cash outflows, a business may report as many as 4 categories. e.g. payments to suppliers, payments to employees Cash Flows from Operating Activities Provides financial users with information about the business' ability to obtain cash from its day-to-day activities. Operating Cycle The average time required to pay for inventory, sell the inventory and collect on the sales Accrual Accounting Recording revenues and related expense transactions in the same accounting period that goods or services are provided, regardless o