Cash Flow Statement: Understanding Cash Inflows and Outflows

Question 1

Which of the following is NOT a primary purpose of creating a cash flow statement?

Accepted Answer

Predict future profitability

Answer

Summarize cash inflows and outflows

Answer

Assess a company's liquidity and financial flexibility

Question 2

Which of the following is not included in a cash flow statement?

Accepted Answer

Profit or loss

Answer

Operating activities

Answer

Investing activities

Answer

Financing activities

Question 3

What is the primary purpose of a cash flow statement?

Accepted Answer

To provide information about the company's sources and uses of cash

Answer

To assess a company's liquidity

Answer

To show a company's profit or loss

Question 4

What does a negative cash flow from investing activities typically indicate?

Accepted Answer

The company is investing more cash than it is generating from investing activities

Answer

The company is generating more cash than it is investing

Answer

The company is not generating enough cash to cover its investments

Question 5

What is the key difference between a direct and an indirect cash flow statement?

Accepted Answer

A direct statement starts with net income and adds and subtracts changes in working capital, while an indirect statement starts with accrual-based net income and adjusts it to reflect cash flows.

Answer

A direct statement is more accurate than an indirect statement.

Question 6

Which of the following is a benefit of analyzing a company's cash flow statement?

Accepted Answer

It helps management make better decisions about how to allocate cash

Answer

It provides information to creditors about the company's profitability

Answer

It is required by law for all businesses

Question 7

What is the relationship between the cash flow statement and the income statement?

Accepted Answer

The cash flow statement shows the company's sources and uses of cash, while the income statement shows the company's revenues and expenses.

Answer

The cash flow statement is more important than the income statement.

Question 8

Which of the following is NOT a category within a Cash Flow Statement?

Accepted Answer

Income Statement

Answer

Operating Activities

Answer

Financing Activities

Answer

Investing Activities

Question 9

Which section of the Cash Flow Statement includes changes in accounts payable and accrued expenses?

Accepted Answer

Operating Activities

Answer

None of the above

Answer

Investing Activities

Answer

Financing Activities

Question 10

What does a positive net cash flow from operating activities generally mean for a company?

Accepted Answer

The company is generating more cash from its core business operations than it is using.

Answer

The company's cash position related to its core operations is unchanged.

Answer

The company is using more cash than it is generating from its core business operations.

Question 11

Which of the following is an example of an investing activity on a Cash Flow Statement?

Accepted Answer

Purchase of new equipment

Answer

Payment of dividends to shareholders

Answer

Payment of employee salaries

Answer

Issuance of new shares

Question 12

A negative net cash flow from financing activities suggests that a company is:

Accepted Answer

Using more cash to repay debt and pay dividends than it is raising from new financing.

Answer

Raising more cash through new financing than it is using to repay debt and pay dividends.

Question 13

What is a key limitation of using Cash Flow Statements for financial analysis?

Accepted Answer

Cash flow figures can be manipulated by companies to present a more favorable picture.

Answer

They provide a complete and comprehensive view of a company's financial performance.

Answer

They are very simple and straightforward to understand and interpret.

Question 14

What is the main purpose of the Indirect Method when preparing a Cash Flow Statement?

Accepted Answer

To adjust net income, which is based on accrual accounting, to arrive at the net cash flow from operating activities.

Answer

To convert net cash flow from operating activities into net income.

Answer

To calculate the company's overall cash position at a specific point in time.

Question 15

Which step is NOT part of preparing a Cash Flow Statement using the Direct Method?

Accepted Answer

Adjusting net income for non-cash items (like depreciation).

Answer

Calculating net cash flow from operating activities.

Answer

Calculating net cash flow from financing activities.

Answer

Calculating net cash flow from investing activities.

Question 16

What is the key difference between accrual basis accounting and cash basis accounting?

Accepted Answer

Accrual basis records revenue when earned and expenses when incurred, while cash basis records revenue when cash is received and expenses when cash is paid.

Answer

Accrual basis is used only by large companies, while cash basis is used only by small businesses.

Question 17

How can Cash Flow Statements be used to support financial forecasting?

Accepted Answer

By analyzing past cash flow trends and making informed assumptions about future cash inflows and outflows.

Answer

Cash Flow Statements are only useful for analyzing past performance, not future predictions.

Answer

Cash Flow Statements cannot be used for financial forecasting.

Question 18

Which activity is considered an operating activity on the cash flow statement?

Accepted Answer

Cash received from customers for goods or services sold

Answer

Cash paid for purchase of new equipment

Answer

Cash received from issuing shares

Answer

Cash paid for repayment of a bank loan

Question 19

Which is NOT a section on the cash flow statement?

Accepted Answer

Cash flow from trading activities

Answer

Cash flow from operating activities

Answer

Cash flow from investing activities

Question 20

How is the purchase of a new delivery van for £20,000 in cash reflected on the cash flow statement?

Accepted Answer

Outflow from investing activities

Answer

Outflow from operating activities

Answer

Inflow from investing activities

Question 21

Which is an example of a cash inflow from financing activities?

Accepted Answer

Proceeds from issuing bonds

Answer

Cash received from the sale of equipment

Answer

Cash paid to suppliers

Question 22

Using the indirect method, which adjustment would be added back to net income to calculate cash flow from operating activities?

Accepted Answer

Depreciation expense

Answer

Increase in accounts receivable

Answer

Gain on sale of equipment

Answer

Decrease in accounts payable

Question 23

What does a negative cash flow from investing activities generally indicate?

Accepted Answer

The company is investing more cash in long-term assets than it is generating from divesting them.

Answer

The company is nearing bankruptcy.

Answer

The company is struggling to generate cash.

Answer

The company is taking on too much debt.

Question 24

The cash flow statement can be used to determine:

Accepted Answer

All of the above

Answer

How a company is financing its operations and investments

Answer

How a company is investing its available cash

Answer

A company's ability to generate cash from its operations

Question 25

Which statement accurately describes the direct method of preparing the cash flow statement?

Accepted Answer

It directly lists cash inflows and outflows by operating activities.

Answer

It is the most common method used by companies.

Answer

It is easier to prepare than the indirect method.

Question 26

A company reports positive cash flow from operations, negative cash flow from investing activities, and positive cash flow from financing activities. What can you conclude about the company?

Accepted Answer

The company may be investing in growth opportunities.

Answer

The company is struggling to generate cash from its core business.

Answer

The company is heavily reliant on debt financing.

Question 27

Which of the following is NOT a typical section found on a Cash Flow Statement?

Accepted Answer

Operating Expenses

Answer

Cash Flow from Operations

Answer

Investing Activities

Answer

Financing Activities

Question 28

A company buys a new delivery truck for £50,000 in cash. How is this shown on the Cash Flow Statement?

Accepted Answer

A cash outflow in the Investing Activities section

Answer

A cash outflow in the Financing Activities section

Answer

A cash inflow in the Investing Activities section

Question 29

Which of these would be included in the Operating Activities section of a Cash Flow Statement?

Accepted Answer

Payment for salaries

Answer

Proceeds from the sale of land

Answer

Repayment of a bank loan

Question 30

What is the main purpose of a Cash Flow Statement?

Accepted Answer

To show how much cash a company has earned and spent over a period.

Answer

To assess a company's long-term solvency.

Answer

To show a company's profitability.

Question 31

Which method is most commonly used to prepare a Cash Flow Statement in the UK?

Accepted Answer

Indirect method

Answer

Income Statement method

Answer

Direct method

Answer

Balance Sheet method

Question 32

A company receives £10,000 in cash from a customer for a previous sale. How would this be shown on the Cash Flow Statement?

Accepted Answer

A cash inflow in the Operating Activities section

Answer

A cash outflow in the Operating Activities section

Answer

A cash outflow in the Financing Activities section

Answer

A cash inflow in the Investing Activities section

Question 33

Which of these is NOT a limitation of the Cash Flow Statement?

Accepted Answer

It provides information about a company's financial position.

Answer

It doesn't show non-cash transactions.

Answer

It can be manipulated by management.

Question 34

A company issues new shares to raise money. How would this be reflected on the Cash Flow Statement?

Accepted Answer

A cash inflow in the Financing Activities section

Answer

A cash outflow in the Financing Activities section

Answer

A cash inflow in the Investing Activities section

Answer

A cash outflow in the Operating Activities section

Question 35

Why is analyzing a company's Cash Flow Statement important for investors?

Accepted Answer

It helps understand how well the company generates cash and pays back its debts.

Answer

It provides information about the company's accounting policies.

Answer

It shows the company's profitability.

Question 36

Which of the following is NOT a section of a cash flow statement?

Accepted Answer

Retained Earnings

Answer

Investing Activities

Answer

Financing Activities

Answer

Operating Activities

Question 37

What does the Operating Activities section of a cash flow statement show?

Accepted Answer

Cash generated or used in the core business operations.

Answer

Cash invested in long-term assets.

Answer

Cash used to pay dividends to shareholders.

Question 38

Which of the following transactions would be classified as an Investing Activity in a cash flow statement?

Accepted Answer

Purchase of a new building

Answer

Payment of salaries to employees

Answer

Sale of inventory

Answer

Issuance of dividends

Question 39

What does a negative net cash flow indicate?

Accepted Answer

More cash was used than was generated during the period.

Answer

The company is in a stable financial position.

Answer

More cash was generated than was used during the period.

Question 40

What is the primary purpose of analyzing a cash flow statement?

Accepted Answer

To evaluate a company's ability to generate and use cash effectively.

Answer

To determine the company's profitability.

Answer

To identify potential financial risks.

Question 41

Which of the following is NOT an advantage of using cash flow statements?

Accepted Answer

They are forward-looking statements.

Answer

They can help identify trends in cash flow.

Answer

They provide insights into a company's liquidity.

Question 42

What is the difference between net income and net cash flow?

Accepted Answer

Net cash flow considers actual cash receipts and payments, while net income is based on accounting principles.

Answer

Net cash flow is a more reliable measure of a company's financial performance.

Question 43

Which of the following methods can be used to prepare a cash flow statement?

Accepted Answer

Indirect method and direct method

Answer

Cash flow method only

Answer

Balance sheet method only

Answer

Income statement method only

Question 44

What is the importance of cash flow management for a business?

Accepted Answer

It helps ensure the availability of funds to meet obligations and pursue growth opportunities.

Answer

It improves the company's credit rating.

Answer

It minimizes the risk of bankruptcy.