Question

You can determine a company’s cash situation by analyzing its cash flow statement. The cash flow statement also helps determine whether the company (1) is generating enough cash from its operations to make new investments and pay dividends or (2) will need to generate cash by issuing new debt or selling its assets.

A firm has $20 million in revenues. Does that mean it has generated a cash flow of $20 million?

Yes

No

The statement of cash flows reports a company’s cash inflows and outflows for a given accounting period by categorizing the company’s sources (inflows) and uses (outflows) of cash as either operating, investing, or financing activities.

Determine whether the activities described in the following table should be categorized as operating, investing, or financing activities in the statement of cash flows.

Activity	OperatingActivity	InvestingActivity	FinancingActivity
Ruth Enterprises distributes a holiday bonus to all its employees.
A company buys some common stock in its supplier’s firm with its extra cash.
HappySnacks Inc. distributes dividends to its common shareholders for the first time.
A company reports a 10% increase in its accounts payable from the last month.

Cold Goose Metal Works Inc. reported net sales of $6,000,000 last year and generated a net income of $1,500,000. Last year’s accounts receivable increased by $170,000. What is the maximum amount of cash that Cold Goose received from sales last year?

$2,915,000

$5,830,000

$4,372,500

$1,670,000

Answer 1

Requirement 1

A firm has $20 million in revenues. Does that mean it has generated a cash flow of $20 million?

Answer : No

If revenues realised in cash, then it is called cash flow generated.

Requirement 2

Activity	operating activity	investing activity	financing activity
Ruth enterprises distributes a holiday bonus to all its employees	Yes
A company buys some common stock in its supplier's firm with its extra cash		Yes
Happy snacks distributes dividends to its common shareholders for the first time			Yes
A company reports a 10% increase in its accounts payable from the last month.	Yes

Requirement 3

The maximum amount of cash that Cold Goose received from sales last year

=Net sales - increase in Accounts receivable

= 6,000,000-170,000

=5,830,000