Question

Which of the following statements is correct?

a. The statement of cash flows should include changes in summary accounts, such as current assets and current liabilities, as well as changes in all individual accounts.

b. If a firm sells equity to reduce long-term bonds, this is a capital financing transaction and does not appear on the statement of cash flows. However, if the firm sells equity in order to purchase assets, this transaction would be included in the statement of cash flows.

c. Net income is normally the firm's primary operating cash flow, but changes in accounts payable, accounts receivable, inventories and accruals are also classified as operating cash flows.

d. Each change on the balance sheet results from one of two types of transactions, either financing activities, such as issuing or retiring new stock or debt, or long-term investment, such as buying and selling assets.

e. The change in the firm's liquidity position is measured by how much greater a firm's sources of funds are than its uses of funds.

Answer 1

According to the given options, option c is correct as the net income refers to an income in which all the expenses that are incurred are deducted from the revenues earned and for computing the operating cash flow, the net income is the first step.

The operating cash flow recorded the day to day activities so that the company could know how much the company generated the cash

The formula to compute the operating cash flow is shown below:

Operating Cash Flow = Operating Income + Depreciation – Taxes paid + Change in Working Capital

The other options are wrong as the cash flow statements record only cash transactions also the liquidity position coudl be got by determining the current ratios, quick ratios, etc

Therefore option c is correct