Chapter 7: Funds Analysis, Cash Flow Analysis, and Financial PlanningJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. Show
1.According to the accounting profession, which of the following would be considered a cash-flow item from an "investing" activity?cash inflow from interest income. cash inflow from dividend income. cash outflow to acquire fixed assets. all of the above. 2.According to the Financial Accounting Standards Board (FASB), which of the following is a cash flow from a "financing" activity?cash outflow to the government for taxes. cash outflow to shareholders as dividends. cash outflow to lenders as interest. cash outflow to purchase bonds issued by another company. 3.If the following are balance sheet changes: $5,005 decrease in accounts receivable $7,000 decrease in cash $12,012 decrease in notes payable $10,001 increase in accounts payable a "use" of funds would be the:$7,000 decrease in cash. $5,005 decrease in accounts receivable. $10,001 increase in accounts payable. $12,012 decrease in notes payable. 4.On an accounting statement of cash flows an "increase(decrease) in cash and cash equivalents" appears asa cash flow from operating activities. a cash flow from investing activities. a cash flow from financing activities. none of the above. 5.Uses of funds include a (an):decrease in cash. increase in any liability. increase in fixed assets. tax refund. 6.Which of the following would be included in a cash budget?depreciation charges. dividends. goodwill. patent amortization. 7.An examination of the sources and uses of funds statement is part of:a forecasting technique. a funds flow analysis. a ratio analysis. calculations for preparing the balance sheet. 8.Which of the following is NOT a cash outflow for the firm?depreciation. dividends. interest payments. taxes. 9.Which of the following would be considered a use of funds?a decrease in accounts receivable. a decrease in cash. an increase in account payable. an increase in cash. 10.The cash flow statement in the United States is most likely to appear usinga "supplementary method." a "direct method." an "indirect method." a "flow of funds method." 11.For a profitable firm, total sources of funds will always total uses of funds.be equal to be greater than be less than have no consistent relationship to Retake Quiz Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved. Previous Quiz | Back to Main Index | Next QuizWhat Is Cash Flow From Financing Activities?Cash flow from financing activities (CFF) is a section of a company’s cash flow statement, which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends. Cash flow from financing activities provides investors with insight into a company’s financial strength and how well a company's capital structure is managed. Formula and Calculation for CFFInvestors and analyst will use the following formula and calculation to determine if a business is on sound financial footing. CFF = CED − (CD + RP) where: CED = Cash in flows from issuing equity or debt CD = Cash paid as dividends RP = Repurchase of debt and equity \begin{aligned} &\text{CFF = CED }-\text{ (CD + RP)}\\ &\textbf{where:}\\ &\text{CED = Cash in flows from issuing equity or debt}\\ &\text{CD = Cash paid as dividends}\\ &\text{RP = Repurchase of debt and equity}\\ \end{aligned} CFF = CED − (CD + RP)where:CED = Cash in flows from issuing equity or debtCD = Cash paid as dividendsRP = Repurchase of debt and equity
As an example, let's say a company has the following information in the financing activities section of its cash flow statement:
Thus, CFF would be as follows:
Key Takeaways
Cash Flow in the Financial StatementThe cash flow statement is one of the three main financial statements that show the state of a company's financial health. The other two important statements are the balance sheet and income statement. The balance sheet shows the assets and liabilities as well as shareholder equity at a particular date. Also known as the profit and loss statement, the income statement focuses on business income and expenses. The cash flow statement measures the cash generated or used by a company during a given period. The cash flow statement has three sections:
Investors can also get information about CFF activities from the balance sheet’s equity and long-term debt sections and possibly the footnotes. Capital From Debt or EquityCFF indicates the means through which a company raises cash to maintain or grow its operations. A company's source of capital can be from either debt or equity. When a company takes on debt, it typically does so by issuing bonds or taking a loan from the bank. Either way, it must make interest payments to its bondholders and creditors to compensate them for loaning their money. When a company goes through the equity route, it issues stock to investors who purchase the stock for a share in the company. Some companies make dividend payments to shareholders, which represents a cost of equity for the firm. Positive and Negative CFFDebt and equity financing are reflected in the cash flow from financing section, which varies with the different capital structures, dividend policies, or debt terms that companies may have. Transactions That Cause Positive Cash Flow From Financing Activities
A positive number for cash flow from financing activities means more money is flowing into the company than flowing out, which increases the company’s assets. Transactions That Cause Negative Cash Flow From Financing Activities
Negative CFF numbers can mean the company is servicing debt, but can also mean the company is retiring debt or making dividend payments and stock repurchases, which investors might be glad to see. Investor Warnings From CFFA company that frequently turns to new debt or equity for cash might show positive cash flow from financing activities. However, it might be a sign that the company is not generating enough earnings. Also, as interest rates rise, debt servicing costs rise as well. It is important that investors dig deeper into the numbers because a positive cash flow might not be a good thing for a company already saddled with a large amount of debt. Conversely, if a company is repurchasing stock and issuing dividends while the company's earnings are underperforming, it may be a warning sign. The company's management might be attempting to prop up its stock price, keeping investors happy, but their actions may not be in the long-term best interest of the company. Any significant changes in cash flow from financing activities should prompt investors to investigate the transactions. When analyzing a company's cash flow statement, it is important to consider each of the various sections that contribute to the overall change in its cash position. Real-World ExampleCompanies report cash flow from financing activities in their annual 10-K reports to shareholders. For example, for the fiscal year ended Jan. 31, 2022, Walmart's cash flow from financing activities resulted in a net cash flow of -$22.83 billion. The components of its financing activities for the year are listed in the table below.
We can see that the majority of Walmart's cash outflows were due to repayments of long-term debt of $13.010 billion, the purchase of company stock for $9.787 billion, and dividends paid for $6.152 billion. Although the net cash flow total is negative for the period, the transactions would be viewed as positive by investors and the market. Which of the following would be classified as a financing activity on the statement of cash flows?Answer and Explanation: Both a) interest paid to a lender and b) dividends paid to the company's common stockholders would be classified as financing activity on the statement of cash flows. Both of these activities are cash outflows that maintain financing from loans or the issuance of stocks.
Which of the following would be classified as a financing activity on the statement of cash flows payment of interest to a creditor?Answer and Explanation: The correct option is B) Payment of a bond payable.
What counts as financing activities in cash flow?Cash Flow from Financing Activities is the net amount of funding a company generates in a given time period. Finance activities include the issuance and repayment of equity, payment of dividends, issuance and repayment of debt, and capital lease obligations.
Which of the following is an example of a financing activity on the cash flow statement under US GAAP payment of dividends receipt of dividends payment of interest?Option C is correct.
As per U.S. GAAP, the payment of dividends is a financing activity on the cash flow statement.
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