Understanding Cash Flow Statements

Why is a cash flow statement necessary when an income statement already exists?

• Because the income statement does not provide information about liquidity.

• Because it replaces the balance sheet.

• Because it is easier to read than the income statement.

• Because the income statement does not list expenses.

What are the three main categories of cash flows?

• Operating, investing, and financing activities.

• Revenues, expenses, and reserves.

• Short-term, medium-term, and long-term payments.

• Active, passive, and neutral activities.

What is the main difference between the direct and indirect methods of presenting operating cash flows?

• The direct method shows cash inflows and outflows directly; the indirect method starts with net income.

• The indirect method is only used for investments.

• The direct method is legally required.

• There is no difference between the two methods.

How do you calculate the net change in cash between two balance sheet dates using the cash flow statement?

• Add all inflows and outflows.

• Sum up the cash flows from the three main categories.

• Compare income statement figures.

• Subtract investments from revenues.

Which three non-cash expenses are added back to net income in the indirect method?

• Depreciation, amortization, and loss on sale of assets.

• Depreciation, cost of goods sold, and income taxes.

• Amortization, dividends paid, and accrued expenses.

• Loss on sale of assets, prepaid insurance, and inventory changes.

How do T-accounts assist in preparing a cash flow statement?

• By tracking changes in account balances to identify cash inflows and outflows.

• By eliminating the need for an income statement.

• By simplifying operating cash flow calculations.

• By automatically classifying transactions into activities.

Which transactions are typically included under 'Investing Activities' in a cash flow statement?

• Purchase of equipment, sale of investments, and purchase of land.

• Paying suppliers, collecting customer payments, and repaying loans.

• Issuing shares, borrowing money, and paying dividends.

• Adjusting depreciation, taxes, and prepaid expenses.

How do financing activities differ from operating and investing activities?

• Financing activities involve raising or repaying funds from shareholders and creditors.

• They only relate to cash inflows.

• They represent non-operating, non-investing expenses.

• They are not included in the cash flow statement.

How do changes in working capital affect operating cash flows?

• Increases in current assets decrease cash flow; increases in current liabilities increase cash flow.

• Decreases in current assets always increase profits.

• Changes in working capital do not impact operating cash flow.

• Only inventory changes affect operating cash flow.

What is the operating cash flow?

• $97,000

• $100,000

• $105,000

• $95,000