LiquidAssets10

The only section of the statement of cash flows that must be adjusted to convert a statement of cash flows from the indirect to the direct method is:

A) cash flows from operations.

B) cash flows from investing.

C) cash flows from financing.

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The cash flows from investing activities and cash flows from financing activities sections of the statement of cash flows are the same for both the indirect and direct methods. Only the cash flows from operations section must be adjusted to convert the statement of cash flows from the indirect to the direct method.

LiquidAssets10

How does decreasing accounts payable turnover affect a company’s cash flow from financing activities and is this source of cash sustainable?

Financing cash flow

Sustainable source

A) No impact No

B) Increase No

C) No impact Yes

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Decreasing accounts payable turnover saves cash by delaying payments to suppliers. The result is an operating source of cash, not a financing source. Decreasing accounts payable turnover is not a sustainable source of cash flow because suppliers will refuse to extend credit, at some point, if payment is slower and slower.

LiquidAssets10

Consider the following:

Statement #1:	One approach to presenting a common-size cash flow statement is to express each inflow of cash as a percentage of total cash inflows and each outflow of cash as a percentage of total cash outflows.
Statement #2:	Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows.

Which of these statements regarding a common-size cash flow statement is (are) CORRECT?

A) Only statement #1 is correct.

B) Both statements are correct.

C) Only statement #2 is correct.

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A cash flow statement can be presented in common-size format by expressing each line item as a percentage of total revenue or by expressing each inflow of cash as a percentage of total cash inflows and each outflow as a percentage of total cash outflows. Expressing each line item of the cash flow statement as a percentage of revenue is useful in forecasting future cash flows since revenue usually drives the forecast.

LiquidAssets10

Which of the following best describes a ratio that measures a firm’s ability to acquire long-term assets with cash flows from operations, and a performance ratio, respectively?

Acquire assets with CFO

Performance ratio

A) Investing and financing ratio Cash-to-income ratio

B) Reinvestment ratio Cash-to-income ratio

C) Reinvestment ratio Debt payment ratio

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The reinvestment ratio measures a firm’s ability to acquire long-term assets with cash flows from operations. In contrast, the investing and financing ratio, which is more comprehensive, measures the firm’s ability to purchase assets, satisfy debts, and pay dividends.
The cash-to-income ratio measures the ability to generate cash from a firm’s operations and is a performance ratio for cash flow analysis purposes. The debt payment ratio measures the firm’s ability to satisfy long-term debt with cash flow from operations but it is more of a coverage ratio than a performance ratio.

LiquidAssets10

Selected information from the most recent cash flow statement of Thibault Company appears below:

Cash collections	€8,900
Cash paid to suppliers	(€3,700)
Cash operating expenses	(€1,500)
Cash taxes paid	(€2,400)
Cash from operating activities	€1,300
Cash paid for plant and equipment	(€2,600)
Cash interest received	€700
Cash dividends received	€600
Cash from investing activities	(€1,300)
Cash received from debt issuance	€2,000
Cash interest paid	(€400)
Cash dividends paid	(€600)
Cash from financing activities	€1,000
Total change in cash	€1,000

Thibault’s reinvestment ratio for this period is closest to:

A) 0.50.

B) 0.75.

C) 1.00.

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The reinvestment ratio is CFO divided by cash paid for long-term assets: €1,300 / €2,600 = 0.5. (Note that on this cash flow statement, CFI includes interest and dividends received and CFF includes interest paid, which is acceptable under IFRS.)

LiquidAssets10

The RR Corporation had cash flow from operations of $20 million. RR purchased $5 million in equipment and sold $3 million of equipment during the period. What is RR's free cash flow to equity for the period?

A) $15 million.

B) $18 million.

C) $22 million.

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Free cash flow to equity (FCFE) is generally defined as cash flow from operations (CFO) less net fixed capital expenditures plus net borrowing. No information on borrowing is given here, so FCFE = 20 − (5 − 3) = $18 million.

LiquidAssets10

Which balance sheet accounts are most closely related to the operating activities on a firm’s cash flow statement?

A) Non-current assets.

B) Working capital.

C) Equity and non-current liabilities.

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Typically, operating activities on the cash flow statement are most closely related to the working capital accounts (current assets and current liabilities) on the balance sheet. Investing activities are typically related to non-current assets. Financing activities are typically related to non-current liabilities for transactions with creditors, or equity for transactions with shareholders.

terpsichorefan

thanks for sharing