Chapter 12 concepts

Question 1

Statement of cash flows

Answer 1

A basic financial statement that provides information about the cash receipts and cash payments of an entity during a period, classified as operating, investing, and financing activities, in a format that reconciles the beginning and ending cash balances.

Question 2

The information in a statement of cash flows helps investors, creditors, and others assess the following.

Answer 2

1. The entity’s ability to generate future cash flows.
2. The entity’s ability to pay dividends and meet obligations.
3. The reasons for the difference between net income and net cash provided (used) by operating activities.
4. The cash investing and financing transactions during the period.

Question 3

Operating activities

Answer 3

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

Question 4

Investing activities

Answer 4

Cash flow activities that include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash, and (b) lending money and collecting the loans.

Question 5

Financing activities

Answer 5

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

Question 6

The information to prepare statement of cash flows usually comes from three sources:

Answer 6

• Comparative balance sheets. Information in the comparative balance sheets indicates the amount of the changes in asset, liability, and stockholders’ equity accounts from the beginning to the end of the period.
• Current income statement. Information in this statement helps determine the amount of net cash provided or used by operating activities during the period.
• Additional information. Such information includes transaction data that are needed to determine how cash was provided or used during the period.

Question 7

Indirect method

Answer 7

A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities.

Question 8

Direct method

Answer 8

A method of determining net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. The direct method shows operating cash receipts and payments.

Question 9

Product life cycle

Answer 9

A series of phases in a product’s sales and cash flows over time. These phases, in order of occurrence, are introductory, growth, maturity, and decline.

Question 10

Free cash flow

Answer 10

Net cash provided by operating activities after adjusting for capital expenditures and cash dividends paid.