CASH FLOW SAQ

 CASH FLOW 

Question 1: What is the primary purpose of a Cash Flow Statement in financial reporting?

Answer: The primary purpose of a Cash Flow Statement is to provide information about a company's cash inflows and outflows during a specific period, helping stakeholders assess its liquidity, solvency, and ability to generate cash.

Question 2: Differentiate between cash flow from operating activities and cash flow from investing activities.

Answer: Cash flow from operating activities represents cash flows generated or used in a company's core business operations, while cash flow from investing activities includes cash flows related to the buying or selling of long-term assets like property, plant, and equipment.

Question 3: Why is the Cash Flow Statement considered a complementary statement to the Income Statement and Balance Sheet?

Answer: The Cash Flow Statement complements the Income Statement by showing how net income affects a company's cash position, and it complements the Balance Sheet by explaining changes in cash and cash equivalents over time.

Question 4: Explain the indirect method of preparing a Cash Flow Statement.

Answer: The indirect method starts with net income and adjusts for non-cash items (like depreciation and amortization) and changes in working capital (such as changes in accounts receivable or accounts payable) to determine the net cash provided by operating activities.

Question 5: What does a positive cash flow from financing activities indicate?

Answer: A positive cash flow from financing activities suggests that a company is raising more cash through financing activities like issuing bonds or taking out loans than it is repaying, which can indicate financial flexibility or expansion.

Question 6: Why is it important for investors and creditors to analyze a company's Cash Flow Statement in addition to the Income Statement and Balance Sheet?

Answer: Investors and creditors analyze the Cash Flow Statement to assess a company's cash management, its ability to meet short-term obligations, and its capacity to fund future growth, which provides a more comprehensive view of its financial health.

Question 7.: What are the three main categories of cash flows presented in a Cash Flow Statement?

Answer: The three main categories of cash flows in a Cash Flow Statement are:

Operating Activities

Investing Activities

Financing Activities

Question 8.: How does the Cash Flow Statement help assess a company's liquidity?

Answer: The Cash Flow Statement helps assess liquidity by showing the cash generated or used by operating activities, which indicates a company's ability to meet its short-term obligations and cover day-to-day expenses.

Question 9.: What is the purpose of the reconciliation of net income to net cash provided by operating activities in the Cash Flow Statement?

Answer: This reconciliation adjusts net income for non-cash expenses and changes in working capital to show how net income translates into actual cash generated by a company's core operations.

Question 10.: When would you typically find a negative cash flow from investing activities on a Cash Flow Statement?

Answer: A negative cash flow from investing activities often occurs when a company is investing heavily in long-term assets, such as purchasing new equipment or acquiring other businesses.

Question 11.: How can a company's financing activities impact its Cash Flow Statement?

Answer: Financing activities, such as issuing bonds or repurchasing shares, can impact the Cash Flow Statement by either increasing or decreasing a company's cash position depending on whether it's raising or repaying capital.

Question 12.: What does a significant increase in cash and cash equivalents from one period to another suggest?

Answer: A significant increase in cash and cash equivalents indicates that a company has generated more cash inflows than outflows during the period, potentially improving its financial stability.

Question 13.: Explain the concept of free cash flow and why it's important for investors.

Answer: Free cash flow is the cash left over after a company covers its operating expenses and capital expenditures. It's important for investors because it represents funds available for dividends, debt reduction, or future investments in the business.

Question 14.: How can a negative cash flow from financing activities impact a company's financial health?

Answer: A negative cash flow from financing activities may indicate that a company is repaying more debt or distributing more dividends than it's generating from its financing sources, which could raise concerns about its financial stability..