Question

11.13 The statement of cash flows should not be used to evaluate an entity’s ability to: LO5 a. earn profit. b. generate future cash flows. c. pay dividends. d. meet obligations.

11.14 Free cash flow provides an indication of a company’s ability to: LO5 a. generate profit. b. generate cash to pay dividends. c. generate cash to expand investment. d. both (b) and (c).

11.15 Which of the following provides a useful comparison with the profit margin? LO5 a. Capital expenditure ratio. b. Cash return on sales ratio. c. Cash debt coverage. d. Current cash debt coverage.

Answer 1

11.13 OPTION A----- Earn profit

Since cash flow statement is prepared on cash basis and adjusted for non cash items and does not considers accrual aspect of revenues and expenses, hence can't be uses to evaluate the entity's ability to earn profit.

11.14 OPTION D---- both B and C

Since Free cash flow is the amount generated through  normal business operations of company after providing for CAPEX. Which indicates the company's ability to generate cash to pay dividends and expand investment

11.15 OPTION B ----Cash return on sales ratio

Return on sales ratio =operating profit/net sales which is very close to profit margin. Hence it provides useful comparison.