Review questions chapter 3

Review questions chapter 3 - Mike Ientile Review Questions...

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Mike Ientile Review Questions Chapter 3 3-2 Describe the overall cash flow through the firm in terms of operating flows, investment flows, and financing flows Operating flows are cash inflows and outflows directly related to the sale and production of the firm’s products and services. Investment Flows are cash flows associated with the purchase and sale of both fixed assets and equity investments in other firms. Financing flows result from debt and equity financing transactions. Incurring either short-term or long-term debt would result in a corresponding cash inflow; repaying debt would result in an outflow. 3-3Explain why a decrease in cash is classified as a cash inflow (source) and why an increase in cash is classified as a cash outflow(uses) in preparing the statement of cash flows A decrease in an asset, such as the firm’s cash balance, is an inflow of cash. Because cash that has been tied up in the asset is released and can be used for some other purpose, such as repaying a loan. On the other hand, an increase in the firm’s cash balance in an outflow of cash, because additional cash is being tied up in the firms cash balance. 3-4Why is depreciation (as well as amortization and depletion) considered a non- cash charge? How do accountants estimate cash flow from operations? Depreciation (like amortization and depletion) is a non-cash charge- an expense that is deducted on the income statement but does not involve the actual outlay of cash during the period. Because it shields the firm from taxes by lowering taxable income, the non- cash charge is considered a cash inflow.
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