Statement of cash flows

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Nov 24, 2024

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Statement of cash flows 1. Which section of the Statement of Cash Flows is the best measure of an entity's ability to generate cash? a. Cash flows from financing activities b. All activites give equal measure of ability to generate cash c. Cash flows from operating activities d. Cash flows from investing activities The section of the Statement of Cash Flows that is generally considered the best measure of an entity's ability to generate cash is: c. Cash flows from operating activities Cash flows from operating activities represent the cash generated or used by a company's core operating activities, such as sales and expenses. This section provides insights into the company's ability to generate cash from its day-to-day operations, which is a critical measure of its financial health and sustainability. Positive cash flows from operating activities indicate that the company is generating cash from its primary business operations, which is a positive sign for investors and creditors. 2. A toy manufacturing business purchase equipment for $50,000 to be used in their manufacturing process. What type of activity would this transaction be classified as in the Statement of Cash Flows? a. Investing b. Non-Current c. Financing d. Operating The purchase of equipment for $50,000 to be used in the manufacturing process would be classified as: a. Investing

This transaction falls under the investing activities section of the Statement of Cash Flows because it involves the acquisition of long-term assets (equipment) that are not intended for resale. Investing activities typically include the purchase or sale of assets like property, plant, equipment, and investments in other companies. 3. A business purchases equipment for $25,000 cash to be used in manufacturing components to sell. In which segment of the statement of cash flows would this purchase be classified? a. Non-Current Assets b. Investing c. Operating d. Financing The purchase of equipment for $25,000 cash to be used in manufacturing components to sell would typically be classified as: b. Investing This transaction falls under the investing activities section of the Statement of Cash Flows because it involves the acquisition of a non-current asset (equipment) that is expected to generate income over a period of time and is not intended for resale. Investing activities typically include the purchase or sale of assets like property, plant, equipment, and investments in other companies. 4. Proceeds from the sale of motor vehicles will be included in the statement of cash flows as: Proceeds from the sale of motor vehicles would generally be included in the statement of cash flows as a cash inflow in the "Investing Activities" section. This is because the sale of motor

vehicles is considered an investing activity since it involves the disposal of a non-current asset (the vehicles). In the investing activities section, you would report the cash received from the sale of these assets. This cash inflow is considered a positive impact on the company's cash flow as it represents the cash generated from the sale of assets. 5. Which of the following would not be classified as an operating activity? a. Loan repayments b. Cash received as payment for the sale of goods on credit c. Payment of interest expense d. Payment of income tax a. Loan repayments Loan repayments would not be classified as an operating activity. Loan repayments typically fall under financing activities on the statement of cash flows. Financing activities involve transactions related to the company's capital structure, such as borrowing and repaying loans, issuing or repurchasing company stock, and paying dividends. Loan repayments represent a reduction in the company's debt and are not related to its core operating activities, so they do not belong in the operating activities section. 6. Which of the following represents an operating activity on the statement of cash flows? a. Collecting cash on loans previously made to other entities b. Repayment of money previously borrowed c. Collecting cash from Debtors d. Obtaining cash from a share issue

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c. Collecting cash from Debtors Collecting cash from Debtors represents an operating activity on the statement of cash flows. This is because it involves the collection of cash from customers or entities to whom the company has previously sold goods or provided services on credit. It is a part of the company's core operating activities related to its revenue generation and accounts receivable management. The other options: a. Collecting cash on loans previously made to other entities - This represents an investing activity. b. Repayment of money previously borrowed - This represents a financing activity. d. Obtaining cash from a share issue - This represents a financing activity. 7. Which of the following represents an investing activity on the statement of cash flows ? a. Interest paid on car loan b. Interest received from Bank c. Proceeds received from sale of Land d. Gain on Sale of Equipment c. Proceeds received from the sale of Land Proceeds received from the sale of Land represents an investing activity on the statement of cash flows. Investing activities involve transactions related to the acquisition and disposal of non- current assets like land, property, equipment, and investments in other entities. When you receive cash from the sale of land, it's considered a cash inflow from investing activities. The other options: a. Interest paid on a car loan - This represents a financing activity.

b. Interest received from the bank - This could be classified as an operating activity or an investing activity, depending on the nature of the business and the source of the interest income. d. Gain on Sale of Equipment - The gain on the sale of equipment is typically included in the operating activities section as it represents an aspect of the company's core operations. The actual cash received from the sale of the equipment would be considered an investing activity. 8. Which of the following statements is true for an entity to survive? a. The entity's cash position at the end of the accounting period should be positive b. The net cash from financing activities should be positive c. The net cash flow from operating activities should be positive d. The net cash flow from investing activities should be positive c. The net cash flow from operating activities should be positive For an entity to survive and operate sustainably, it is crucial that the net cash flow from operating activities is positive. This indicates that the company is generating more cash from its core operating activities (such as sales and services) than it is spending on operating expenses. Positive cash flow from operations helps cover day-to-day expenses, debt obligations, and other financial commitments, which is essential for the ongoing viability of the entity. While having a positive cash position at the end of the accounting period (option a) is desirable, it alone does not guarantee survival if the company's operating activities are not generating sufficient cash to sustain operations. Options b and d, which relate to financing and investing activities, are not as directly related to the entity's ability to survive in the short term; they are more about the company's long-term financial structure and investment decisions.

9. When reconciling operating profit after tax with net cash flow from operating activities, which of the following adjustments is NOT correct? a. Add an increase in a current liability b. Deduct a loss on sale of an asset c. Deduct an increase in a current asset d. Add back depreciation b. Deduct a loss on the sale of an asset Deducting a loss on the sale of an asset is not a correct adjustment when reconciling operating profit after tax with net cash flow from operating activities. When reconciling these two figures, you typically add back depreciation (option d) because depreciation is a non-cash expense, and it reduces net income but doesn't impact cash flow. However, a loss on the sale of an asset represents an actual cash outflow, and it should not be deducted. Instead, it would be added back if you want to reconcile net income with cash flow, as it is a non-operating activity. So, the correct adjustment would be to add back a loss on the sale of an asset, not deduct it. 10. Which of the following represents a financing activity on the statement of cash flows? a. Purchases inventory on credit b. Payment to trade creditors c. Owner withdraws cash for personal use d. Receives cash from Debtors c. Owner withdraws cash for personal use The owner's withdrawal of cash for personal use represents a financing activity on the statement of cash flows. In this case, it reflects a cash outflow from the business to the owner, which is

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typically categorized as a financing activity because it relates to the owner's equity in the company. The other options: a. Purchases inventory on credit - This represents an operating activity, as it involves the acquisition of inventory for the company's normal operations. b. Payment to trade creditors - This also represents an operating activity, as it involves paying off trade payables related to the company's normal business operations. d. Receives cash from Debtors - This represents an operating activity, as it involves collecting cash from customers (debtors) for goods or services provided as part of the company's core operations.

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