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Statement of Cash Flow Review Questions
Introduction to Finance (FIN2303)
Algonquin College
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Statement of Cash Flow
REVIEW QUESTIONs
- Why is it important for managers to analyze changes in the flow of cash between two consecutive accounting periods?
Managers should have an appreciation about where cash will be required (investing activities) and where it will come from (operating activities and financing activities). 2. Differentiate between cash inflows and cash outflows.
Cash inflows are obtained from different sources (e., loans, selling assets). Cash outflows are disbursed or expended for buying or paying something (e., paying a mortgage, buying a car). 3. What are internal sources of financing?
Internal sources of financing are cash that will be generated by managers (operating activities) in order to buy non-current assets (investing activities). The two main sources of internal financing are profit for the year and depreciation. Working capital can also be a source of cash if managers are able to reduce inventories and trade
receivables, and increase their trade and other payables, and borrowings. 4. What are external sources of financing?
External sources of financing are cash that will be obtained from investors (financing activities) such as shareholders and long-term lenders in order to purchase non- current assets (investing activities). 5. Identify some of the key cash inflows and cash outflows.
Cash inflows include profit for the year, the sale of a non-current asset, the sale of investment securities, and obtaining a new loan or new equity. Cash outflows take place when there is a loss from operations, the purchase of a non- current asset, the purchase of investment securities, and the payment of a loan. 6. Why is depreciation/amortization considered a cash inflow?
Depreciation/amortization is not a cash expense. It is considered an accounting entry. Since it is not considered a cash expense like salaries or advertising, it is added back to profit for the year.
- Why are working capital accounts part of the operating activities shown on the statement of cash flows?
Managers are responsible for working capital accounts such as trade receivables and
flows provided (or used) by working capital accounts such as trade receivables, inventories, and trade and other payables. 11. Comment on the important accounts usually shown under the operating activities section in the statement of cash flows.
They are profit for the year and depreciation/amortization. However, working capital can also be a source of cash if managers are able to reduce inventories, trade receivables, and increase their trade and other payables, and short- term borrowings. 12. What financial statements are used to prepare the statement of cash flows?
They are the statement of income, the statement of changes in equity, and the statement of financial position. The statement of income provides the profit for the year and the depreciation/amortization expense. The statement of changes in equity provides the dividends paid and other infusion of cash provided by the shareholders. Two consecutive statements of financial position provide the increase or decrease of the asset, equity, and liability accounts.
- What important accounts are usually shown under the financing activities section in the statement of cash flows?
They are the funds provided by shareholders and long-term lenders. However, this section can also show a cash outflow such as the payment of dividends and of a mortgage or bond. 14. Comment on the important accounts usually shown under the investing activities section in the statement of cash flows.
They are the purchase of non-current assets (i., land, buildings, equipment) and acquisition of another business. The section can also show cash inflow if a business sells one of its non-current assets. 15. How does the statement of cash flows complement the statement of income and the statement of financial position?
The statement of income is like a movie in that it shows the amount of revenue earned and expenses incurred between two dates or during a given time period. The statement of financial position, like a snapshot, gives a picture of what a business owns, and what the business owes to creditors and to the owner(s) at a given point in time. These two financial statements have a specific purpose, giving important information about the financial performance and financial condition of a business. However, they do not show the funds flow or cash flows that take place between two
the year while the not-for-profit organization will call it excess of revenue over
Statement of Cash Flow Review Questions
Course: Introduction to Finance (FIN2303)
University: Algonquin College
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