Ch 23 Ques & BE

Ch 23 Ques & BE - CHAPTER 23 Statement of Cash...

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CHAPTER 23 Statement of Cash Flows ANSWERS TO QUESTIONS 1. The main purpose of the statement of cash flows is to show the change in cash of a company from one period to the next. The statement of cash flows provides information about a company’s operating, financing, and investing activities. More precisely, it provides information about the company’s cash inflows and outflows for the period. 2. Some uses of this statement are: Assessing future cash flows: Income data when augmented with current cash flow data provides a better basis for assessing future cash flows. Assessing quality of income: Some believe that cash flow information is more reliable than income information because income involves a number of assumptions, estimates and valuations. Assessing operating capability: Whether an enterprise is able to maintain its operating capability, provide for future growth, and distribute dividends to the owners depends on whether adequate cash is being or will be generated. Assessing financial flexibility and liquidity: Cash flow data indicate whether a company should be able to survive adverse operating problems and whether a company might have difficulty in meeting obligations as they become due, paying dividends, or meeting other recurring costs. Providing information on financing and investing activities: Cash flows are classified by their effect on balance sheet items; investing activities affect assets while financing activities affect liabilities and stockholders’ equity. 3. Investing activities involve noncurrent assets and include (1) lending money and collecting on those loans and (2) acquiring and disposing of investments and productive long-lived assets. Financing activities, on the other hand, involve liability and owners’ equity items and include (1) obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining capital from owners and providing them with a return on their investment. Operating activities include all transactions and events that are not investing and financing activities. Operating activities involve the cash effects of transactions that enter into the determination of net income. 4. Examples of sources of cash in a statement of cash flows include cash from operating activities, issuance of debt, issuance of capital stock, sale of investments, and the sale of property, plant, and equipment. Examples of uses of cash include cash used in operating activities, payment of cash dividends, redemption of debt, purchase of investments, redemption of capital stock, and the purchase of property, plant, and equipment. 5. Preparing the statement of cash flows involves three major steps: 1. Determine the change in cash. This is simply the difference between the beginning and ending cash balances. 2.
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Ch 23 Ques & BE - CHAPTER 23 Statement of Cash...

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