Questions

LO 16.1What function does the statement of cash flows serve, as one of the four basic financial statements?

LO 16.1Is it possible for a company to have significant net income in the same time period that net cash flows are negative? Explain.

LO 16.2What categories of activities are reported on the statement of cash flows? Does it matter in what order these sections are presented?

LO 16.2Describe three examples of operating activities, and identify whether each of them represents cash collected or cash spent.

LO 16.2Describe three examples of investing activities, and identify whether each of them represents cash collected or cash spent.

LO 16.2Describe three examples of financing activities, and identify whether each of them represents cash collected or cash spent.

LO 16.3Explain the difference between the two methods used to prepare the operating section of the statement of cash flows. How do the results of these two approaches compare?

LO 16.3Why is depreciation an addition in the operating section of the statement of cash flows, when prepared by the indirect method?

LO 16.3When preparing the operating section of the statement of cash flows, using the indirect method, how must gains and losses be handled? Why?

10.

LO 16.3If a company reports a gain/(loss) from the sale of assets, as part of the net income on the income statement, and the net book value of those assets on the date of the sale is known, can the amount of the cash proceeds from the sale be determined? If so, how?

11.

LO 16.3Note payments reduce cash and are related to long-term debt. Do these facts automatically lead to their inclusion as elements of the financing section of the statement of cash flows? Explain.

12.

LO 16.4Is there any significance that can be attributed to whether net cash flows are generated from operating activities, versus investing and/or financing activities? Explain.

13.

LO 16.4Would there ever be activities that relate to operating, investing, or financing activities that would not be reported in their respective sections of the statement of cash flows? Explain. If a company had any such activities, how would they be reported in the financial statements, if at all?

14.

LO 16.5What insight does the calculation of free cash flow provide about the company’s cash flow position?

15.

LO 16.6Why is using the direct method to prepare the operating section of the statement of cash flows more challenging for accountants than preparing the balance sheet, income statement, and retained earnings statement?