4.2 Define the following terms as they relate to the statement of cash flows: ca

Question

4.2 Define the following terms as they relate to the statement of cash flows: cash, operating activities, investing activities, and financing activities.

4.3 How does the direct method differ from the indirect method?

4.8 Indicate whether each of the following events would cause an inflow or an outflow of cash and whether it would affect the investing (I) or financing (F) activities on the statement of cash flows.

a. Repayments of long-term debt

b. Sales of marketable securities

c. Repurchase of company’s common stock

d. Sales of common stock to investors

e. Purchase of equipment

f. Payment of dividends

g. Purchase of marketable securities

h. Borrowing from bank

i. Sale of building

j. Acquisition of company

Explanation / Answer

Cash Flow Statement: Cash Flow statement is the statement of showing changes incurred in the cash flow from various activity.

Cash : This statement shows the movement of cash between the reporting period.

Operating Activity : This activity will show how much the cash flow from the business in operating . This included net profit and changes in assets and liabilities and amortization expenses .

Investing Activities: This part is shows the where the money is invested or investment is sold.

Financing Activities: This activities will show the cash flow from financing activities between the reporting period example. Raising or payment of the fund through the common stock , preference and bonds etc.

Difference Between Direct and indirect method of cash Flow Statement.

The main difference between the direct method and the indirect method is in the difference in cash flow from operating activities only. There is no difference in investing and financing activities in the both method.

Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers but this is not shown in indirect method. Direct method also provided the reconciliation of operating activity which are not provided in indirect method.

Bifurcation of activities in Operating, investing and Financing

a. Repayments of long-term debt = Financing Activity= Cash Outflow

b. Sales of marketable securities: = Financing Activity = Cash Inflow

c. Repurchase of company’s common stock: = Financing Activity = Cash Outflow

d. Sales of common stock to investors = Financing Activity = Cash inflow

e. Purchase of equipment:= Investing Activity = Cash Outflow

f. Payment of dividends = Financing Activity = Cash Outflow

g. Purchase of marketable securities: = Financing Activity = Cash Outflow

h. Borrowing from bank : Financing Activity = Cash Inflow

i. Sale of building : = Investing Activities = Cash Inflow

j. Acquisition of company : Investing Activities = Cash Outflow

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