1. What does it mean when investing activities are reported on the Statement of

Question

1. What does it mean when investing activities are reported on the Statement of Cash Flows? Provide three examples of investing activities 2. What does it mean when financing activities that are reported on the Statement of Cash Flows? Provide three examples. 3. Both the Direct and Indirect Methods are used to prepare the Cash Flow Statement. What is the difference between these two methods? 4. How do you determine a company's cash flow from their operating activities using the Indirect Method? 5. What are the four (4) building blocks of financial statement analysis? Explain the purpose of each one. 6. What is the purpose of each of the following ratios and how are they computed? a. Working capital b. Acid-test ratio c. Current ratio 7. What do these ratios tell us about a company Who are the intended users of these ratios? 8. Which type of analysis... a. Measures key relationships between financial statement items? b. Compares a company's financial condition across time? c. Compares a company's financial condition to a base amount? 9. What is the difference between comparative financial statements and common size comparative financial statements? 10. What is the criteria for cash flows to be classified as a cash equivalent?

Explanation / Answer

Solution 1:

When investing activities are reported in statement of cash flows, it represents cash generated from or cash used by the company in investing activities. The example of investing activities are capital expenditures, Sale of invesment, sale of fixed asset, purchase of investment, purchase of fixed assets etc

Solution 2:

When financing activities are reported in statement of cash flows, it represents cash generated from or cash used by the company in financing activities. The example of financing activities are long term borrowing, proceeds from issue of common stock / preferred stock, repayment of loan, buy back of shares, dividend payments etc.

Solution 3:

using the direct method, cash flows is listed in the operating section of the cash flow statement. Cash flows from operations arise from customer collections and cash paid to suppliers, employees and others. The section also reports cash paid for income tax and interest.

In the indirect method, net income is converted from an accrual to a cash basis.

Solution 4:

In the indirect method, net income is converted from an accrual to a cash basis. for this purpose we add back non-cash expenses such as depreciation, amortization, loss provision for accounts receivable and any losses on the sale of a fixed asset. We also adjust net income for changes between the starting and ending account balances in current assets -- excluding cash -- and current liabilities for the period. These accounts include accounts receivable, inventory, supplies, prepaid assets, payable liabilities and unearned revenues.

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