Understanding Cash Flow Statements

What are the three main sections of a cash flow statement?

• Operating activities, Investing activities, Financing activities

• Sales activities, Purchase activities, Dividend activities

• Revenue activities, Expense activities, Tax activities

• Operational activities, Capital activities, Equity activities

Define operating activities in the context of cash flow.

• Cash flows from investing activities

• Operating activities are the cash flows from the core business operations, including cash receipts from sales and cash payments for expenses.

• Cash flows from financing activities

• Cash flows from non-operating income

What is included in investing activities on a cash flow statement?

• Cash flows from short-term loans and interest payments.

• Cash flows from purchasing and selling long-term assets and investments.

• Cash flows from issuing stock and paying dividends.

• Cash flows from operating expenses and liabilities.

Explain financing activities and their significance in cash flow.

• Financing activities focus solely on operational expenses.

• Financing activities only involve cash transactions.

• Financing activities involve transactions related to equity and debt, crucial for providing capital and affecting cash flow.

• Financing activities are unrelated to capital structure.

What is the indirect method of preparing a cash flow statement?

• The indirect method adjusts net income for non-cash items and changes in working capital to calculate cash flows.

• The indirect method calculates cash flows directly from sales revenue.

• The indirect method only considers cash transactions without adjustments.

• The indirect method is used exclusively for budgeting purposes.

How does net income relate to cash flow from operating activities?

• Net income is the same as cash flow from operating activities.

• Net income is the starting point for calculating cash flow from operating activities, but adjustments are made for non-cash items and working capital changes.

• Net income does not affect cash flow from operating activities.

• Cash flow from operating activities is calculated before net income.

What adjustments are made to net income in the indirect method?

• Adjustments to net income include adding back non-cash expenses, subtracting gains, adding losses, and adjusting for changes in working capital.

• Adjusting for fixed asset purchases

• Adding back cash expenses

• Subtracting losses

Why is depreciation added back to net income in the cash flow statement?

• Depreciation is a cash expense that increases net income.

• Depreciation is added back to net income because it is a non-cash expense that reduces net income but does not affect cash flow.

• Depreciation is subtracted from net income to calculate cash flow.

• Depreciation is added to net income to reflect future cash inflows.

What types of transactions are considered cash inflows from operating activities?

• Cash received from customers, cash received from interest and dividends, and other operating cash receipts.

• Cash paid for operating expenses

• Cash received from asset sales

• Cash payments to suppliers

How do changes in working capital affect cash flow from operations?

• Cash flow from operations is solely determined by net income, not working capital changes.

• Changes in working capital directly affect cash flow from operations by altering the liquidity available.

• Increased working capital always leads to higher cash flow from operations.

• Changes in working capital have no impact on cash flow from operations.