Quiz 15: Statement of Cash Flows


Cash Equivalents: Cash equivalents are short term, highly liquid investments that are readily convertible into known cash and which are subject to an insignificant risk of change in value. Examples of cash equivalents are Treasury bills, money market funds, and commercial paper. Treatment of Cash equivalents in preparing a statement of cash flows: Cash equivalents are treated as cash for the purpose of preparing statement of cash flows. Cash equivalents are to be added to the cash for getting the total cash.

The correct answer is (c) collection of sales revenue. Because, sales revenue is an operating activity and it is also an inflow. The other choices are not correct and are not relevant because, (a) Payment for raw materials is although an operating activity but it involves cash out flow but not inflow. (b) Gain on sale of operating equipment is not an operating activity but it is an investing activity. (d) Issuing capital stock is a financing activity though it involves a cash inflow. (e) Issuing bonds is a financing activity though it involves a cash inflow. Thus the correct option is (c)

The statement of cash flows should report the following three categories of activities during the period. • Operating Activities • Investing Activities • Financing Activities Operating Activities: Operating Activities are the principal revenue-producing activities of the enterprise and other activities are not investing and financing activities. Operating activities may increase or decrease the current assets or current liabilities. Examples of cash flows from operating activities are: a. Cash receipts from the sale of goods and the rendering of services b. Cash receipts from royalties, fees, commissions, and other revenue c. Cash payments to suppliers for goods and services d. Cash payments to and on behalf of employees Investing Activities: Investing activities include transactions and events that include the purchase and sale of long term productive assets and not held for resale and other investments. Examples of cash flows arising from investing activities are: a. Cash payments to acquire fixed assets b. Cash receipts from disposal of fixed assets c. Cash payments to acquire shares, warrants etc. Financing Activities: Financing Activities are activities that result changes in the size and composition of owners capital and borrowing of the enterprise. Examples of cash flows arising from financing activities are: a. Cash proceeds from issuing shares or other similar instruments b. Cash proceeds from issuing debentures, loans, notes etc. c. Cash repayments of amounts borrowed.