Question

5. Cash flows "Cash Is King" for all businesses 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. If a firm has a lot of net cash flow, does that mean the firm's cash account (as reported on its balance sheet) must be high? No Yes 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.

Answer 1

Solution:-

Part 1:

- Yes

The net cash flow refers to the addition in company's cash balances after accounting for all the operating, investing and financing activities. The net cash flow is always reflected in the bank account. Therefore, if the net cash flow is high, it means that the firm's cash account must be high.

Part 2:

Situation	Type of activity
1- Royalty receipts	Operating activity
2- Intangible assets bought (marketing rights)	Investing activity
3- IPO	Financing activity
4- Reduction in working capital (Increase in payables)	Operating activity

Part 3:

Cash received from sales= Sales-increase in receivables = 5,000,000-290,000= $4,710,000