40 Lecture - Cash Flow Statement (contd.)

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40 Lecture

MGT401

Midterm & Final Term Short Notes

Cash Flow Statement (contd.)

In continuation of the previous description, the cash flow statement is divided into three sections: operating activities, investing activities, and financing activities. The operating activities section reports the cash inflows and outflows tha


Important Mcq's
Midterm & Finalterm Prepration
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  1. Which of the following is not a cash flow from operating activities under the indirect method of preparing cash flow statement? a) Depreciation expense b) Interest expense c) Increase in accounts payable d) Dividends paid Answer: d) Dividends paid

  2. Which section of the cash flow statement shows the change in cash balance due to investing activities? a) Operating activities b) Financing activities c) Investing activities d) None of the above Answer: c) Investing activities

  3. Which method of preparing the cash flow statement is preferred by IFRS? a) Direct method b) Indirect method c) Either method can be used d) None of the above Answer: c) Either method can be used

  4. A decrease in accounts receivable would result in which of the following adjustments in the operating activities section of the cash flow statement? a) Add back b) Deduct c) No adjustment required d) None of the above Answer: a) Add back

  5. Which of the following is not a cash outflow from financing activities? a) Dividends paid b) Issuance of bonds payable c) Repurchase of common stock d) Proceeds from the sale of equipment Answer: d) Proceeds from the sale of equipment

  6. Which of the following is not considered an investing activity? a) Purchase of long-term investments b) Issuance of bonds payable c) Purchase of equipment d) Proceeds from the sale of land Answer: b) Issuance of bonds payable

  7. A decrease in accounts payable would result in which of the following adjustments in the operating activities section of the cash flow statement? a) Add back b) Deduct c) No adjustment required d) None of the above Answer: b) Deduct

  8. In the direct method of preparing the cash flow statement, which of the following items is included in the operating activities section? a) Depreciation expense b) Interest expense c) Gain on sale of equipment d) None of the above Answer: d) None of the above

  9. Which of the following is a cash inflow from financing activities? a) Payment of dividends b) Repurchase of common stock c) Proceeds from the issuance of long-term debt d) All of the above Answer: c) Proceeds from the issuance of long-term debt

  10. Which section of the cash flow statement shows the change in cash balance due to financing activities? a) Operating activities b) Financing activities c) Investing activities d) None of the above Answer: b) Financing activities



Subjective Short Notes
Midterm & Finalterm Prepration
Past papers included

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  1. Explain the significance of the Cash Flow Statement in financial reporting. Answer: The Cash Flow Statement provides information about the cash inflows and outflows of a company during a particular period. It helps in assessing a company's liquidity and ability to generate cash. The statement also assists investors in determining the extent to which a company's operations are generating cash flows and whether it has the potential to meet its financial obligations.

  2. What is the difference between operating, investing, and financing activities in the Cash Flow Statement? Answer: Operating activities involve cash inflows and outflows that arise from a company's primary business activities, such as sales and purchases of goods and services. Investing activities refer to cash inflows and outflows related to the acquisition or disposal of long-term assets. Financing activities comprise cash inflows and outflows resulting from the issuance and repayment of long-term liabilities and equity.

  3. How does depreciation impact the Cash Flow Statement? Answer: Depreciation is a non-cash expense, meaning that it does not involve the actual outflow of cash. However, it does reduce the value of a company's assets over time, which is reflected in the Cash Flow Statement. Depreciation is added back to net income when calculating operating cash flows.

  4. What are the advantages of the direct method for preparing the Cash Flow Statement? Answer: The direct method provides a more detailed and transparent picture of a company's cash inflows and outflows. It also allows for a better understanding of the company's operating activities and how they generate cash. Additionally, it facilitates the identification of cash flow issues and helps in developing strategies to address them.

  5. What is the purpose of the reconciliation of net income to cash flows from operating activities in the Cash Flow Statement? Answer: The reconciliation of net income to cash flows from operating activities adjusts net income for non-cash items such as depreciation and amortization and also takes into account changes in current assets and liabilities that impact cash flows. The purpose is to arrive at the actual cash generated or used by the company's operations during a particular period.

  6. Explain the importance of the Cash Flow Statement in assessing a company's solvency. Answer: The Cash Flow Statement provides information about a company's cash inflows and outflows, which helps in assessing its ability to meet its financial obligations. By analyzing a company's cash flows, investors and creditors can determine whether the company has sufficient cash reserves to pay its debts and meet its other financial obligations.

  7. How does a change in accounts receivable impact the Cash Flow Statement? Answer: A decrease in accounts receivable represents a cash inflow, while an increase in accounts receivable represents a cash outflow. This is because a decrease in accounts receivable means that the company has collected cash from its customers, while an increase in accounts receivable means that the company has extended credit to its customers and has not yet received payment.

  8. What is the significance of the free cash flow metric? Answer: Free cash flow is a metric that indicates the cash generated by a company after taking into account all capital expenditures required to maintain and grow the business. It is a useful metric for assessing a company's ability to generate cash and reinvest in its operations. A positive free cash flow indicates that a company is generating more cash than it requires to maintain its operations, while a negative free cash flow suggests that the company may need to raise additional capital.

  9. How can the Cash Flow Statement be used to identify potential financial problems in a company? Answer: By analyzing the Cash Flow Statement, investors and creditors can identify potential financial problems in a company, such as a negative operating cash flow, a high level of investing cash outflows, or a low level of free cash flow. These issues could indicate that the company is not generating sufficient

The cash flow statement is a critical financial statement that provides information about the cash inflows and outflows of an entity during a specific period. The statement helps in understanding the liquidity and solvency position of the company, and it helps investors make informed decisions. The indirect method of preparing a cash flow statement is widely used in practice. The indirect method begins with the net income from the income statement and then adjusts for non-cash transactions, such as depreciation and amortization. The changes in current assets and current liabilities are then adjusted for the impact on cash flows. The cash flow statement is divided into three main sections: operating activities, investing activities, and financing activities. Operating activities involve the cash flows that arise from the primary activities of the business, such as the sale of goods and services. Investing activities involve the acquisition and disposal of long-term assets, such as property, plant, and equipment. Financing activities involve the inflows and outflows of cash associated with long-term liabilities and equity, such as the repayment of loans, the issuance of shares, and the payment of dividends. The cash flow statement is also used to compute various financial ratios, such as the cash flow coverage ratio and the cash return on investment ratio. These ratios are essential for understanding the financial health of the company and for making informed investment decisions. Overall, the cash flow statement is a crucial financial statement that provides valuable insights into the cash flows of the company and helps investors make informed decisions.

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