SM_CH05-1 - CHAPTER 5 5-1 No All public companies report it...

CHAPTER 5
5-1 No. All public companies report it because the statement of cash
flows is a required statement with a required format.
5-2 A cash flow statement shows the sources of changes in cash
balances and:
a) aids in predicting future cash flows and evaluating how
management's decisions generate and use of cash;
b) aids in determining a company's ability to pay dividends
and interest and to pay debts when due;
c) aids in understanding and identifying changes in the mix of
productive assets.
5-3 Cash equivalents are highly-liquid, short-term investments that
can be converted easily to cash with little delay. Examples
include money market funds and treasury bills.
5-4 Operating activities, investing activities, and financing activities
are the three major types of activities summarized in the
statement of cash flows.
5-5 Major operating activities include:
Collections Payments
from customers (for sales) to suppliers (for inventory)
from investees (interest & dividends) to employees (for wages)
to creditors (interest)
to government (taxes)
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5-6 Major investing activities include:
a) sales and purchases of property,
b) sales and purchases of securities that are long-term
investments,
c) making and collecting long-term loans .
5-7 Major financing activities include:
a) borrowing from (nontrade) creditors,
b) repaying (nontrade) creditors,
c) issuing equity securities,
d) repurchasing equity securities, and
e) paying dividends.
5-8 Interest paid or received appears in the operating activities
section. Some commentators favor showing interest paid
elsewhere since it is associated with financing.
5-9 Only increasing long-term debt increases cash. Both
repurchasing common shares and paying dividends decrease
cash.
5-10 Selling fixed assets for cash and collecting a loan increase cash.
Purchasing equipment decreases cash. Purchasing fixed
assets by issuing debt does not affect cash, but it should be
shown in a schedule of noncash investing and financing
activities that is part of the statement of cash flows.
5-11 When liabilities increase, the firm has either raised cash and
promised to pay it back later or it has preserved cash rather
than paying it out to reduce growing accounts payable. So
more liabilities lead to more cash. Likewise, increases in
noncash assets require cash. Either cash is spent to get the
asset or an asset is recorded instead of receiving cash.
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5-12 Noncash investing and financing activities generally could have
been accomplished identically in substance (though not in
form) by cash transactions. For example, issuing debt to
purchase an asset could have been accomplished by issuing
debt for cash and then using the cash to purchase the asset.
Companies should not be able to prevent disclosure of such a
transaction to readers of the statement of cash flows simply by
using a noncash form of transaction.