MUHASEBE II

The statement of cash flows reports: • Where cash came from (receipts) and how cash was spent (payments) • Why cash increased or decreased during period • Covers a span of time and is dated the same as the income statement. The correct answer is C.

Cash flows statement takes into account the transactions that require cash, related to the activities whether or not they provide income.Income statement takes into account expenses or revenues whether or not they create cash movements. The correct answer is A.

Cash inflows from operating activities are either from  customers for the sales of merchandise inventory and services or interest and dividend income. The correct answer is E.

The cash outflows from financing activities are for payment of dividends and buying treasury share  and for repayments of loans. The correct answer is D.

Depreciation Expenses: As you can remember from previous chapters, depreciation has no effect on cash, but like all other expenses decreases net income. So in order to reconcile net income to net cash flows from operations we have to add depreciation back to net income.The correct answer is B.

1. Cash collections from customers

3. Payments to suppliers

2. Payments for operating expenses

5. Payments to employes

4. Payments of interests and income taxes

To calculate operating cash flows for the direct method you can follow the steps in the given order above. The correct answer is C.

Payments to suppliers is the sum of payments for inventory and payments for operating expenses. The correct answer is A.

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. Indirect method relies on necessary additions and subtractions from net profit to find operating cash flows. Indirect method starts with net income and reconciles to net cash provided by operating activities. The direct method shows each major class of gross cash receipts and gross cash payments. The direct method shows all cash receipts and cash payments from operating activities. It shows cash inflows and outflows more clearly, and it is more comprehensible than indirect method. The correct answer is C.

Cash flows from investing activities are as follows:

Cash inflows

From the sale of property, plant, equipment, and investments 

From the collection of long term notes receivable

Cash outflows

To purchase property, plant, equipment, and investments

For loans made to borrowers

Therefore, the correct answer is A.

Financing activities are the activities that increase or decrease long term liabilities and equity. So in the cash flow statement, financing activities include cash inflows and outflows involved in long term liabilities and equity such as issuing shares, paying dividends and buying and selling treasury shares, borrowing money and paying off long term liabilities such as notes payable, bonds payable. The correct answer is B.

In the statement of cash flows, there are three basic types of cash flow activities. These activities have a separate section which reports cash inflows and cash outflows in the statement of cash flows. These activities are:

• Operating activities
• Investing activities
• Financing activities

Cash Flows from Operating Activities (CFO) contains:

Cash Flows from Investing Activities (CFI) contains:

Cash Flows from Financing Activities (CFF) contains:

The most important part of the statement of cash flows is operating cash flows as they reflect the basis of the business.

Investing activities are the activities that increase or decrease long term assets such as property, plant, equipment, notes receivable and investments. This section of statement of cash flows shows cash inflows from selling long term assets and collecting of long term notes receivable and cash outflows for the purchase of long term assets and loaning long term notes receivable.

Financing activities are the activities that increase or decrease long term liabilities and equity. So in the cash flow statement, financing activities
include cash inflows and outflows involved in long term liabilities and equity such as issuing shares, paying dividends and buying and selling treasury shares, borrowing money and paying off long term liabilities such as notes payable, bonds payable.

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. Indirect method relies on necessary additions and subtractions from net profit to find operating cash flows. Indirect method starts with net income and reconciles to net cash provided by operating activities.

The direct method shows each major class of gross cash receipts and gross cash payments. The direct method shows all cash receipts and cash payments from operating activities.

Two different methods can be used for reporting operating cash flows. These are;

• Indirect Method
• Direct Method

Indirect or direct methods are only used in the operating cash flows section. These methods use different computations but produce the same amount of cash from operating activities.