Statement of Cash Flows: Questions

Good Essays
Chapter 14
Statement of Cash Flows
Solutions to Questions
14-1 The statement of cash flows highlights the major activities that impact cash flows and hence affect the overall cash balance.
14-2 Cash equivalents are short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds. They are included with cash because investments of this type are made solely for the purpose of generating a return on temporarily idle funds and they can be easily converted to cash.
14-3 (1) Operating activities: Include cash inflows and outflows related to revenue and expense transactions that affect net income. (2) Investing activities: Include cash inflows and outflows related to acquiring or disposing of noncurrent assets. (3) Financing activities: Include cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company’s owners.
14-4 The company’s specific circumstances should be considered when interpreting the statement of cash flows. The relationships among numbers should also be considered rather than evaluating each number in isolation.
14-5 Since the entire proceeds from a sale of an asset (including any gain) appear as a cash inflow from investing activities, the gain must be deducted from net income to avoid double counting.
14-6 Transactions involving accounts payable are not considered to be financing activities because such transactions relate to a company’s day-to-day operating activities rather than to its financing activities.
14-7 The repayment of $300,000 and the borrowing of $500,000 must both be shown “gross” on the statement of cash flows. That is, the company would show $500,000 of cash provided by financing activities and then show $300,000 of cash used by financing activities.
14-8 The direct method reconstructs the income statement on a cash basis by restating revenues and expenses in terms of cash inflows and outflows. The indirect method

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