Question

Determine whether each of the following is a Source or Use of cash.

(Remember:

? Asset ? Use

? Liabilities or Owners Equity ? Source

? Asset ? Source

? Liabilities or Owners Equity ? Use)

Net income

Decrease in Accounts Receivable

Decrease in Accrued Wages and Taxes

Increase in Accounts Payable

Decrease in Bonds (long-term debt)

Payment of Dividends

Depreciation and Amortization

Increase in Inventory

Increase in Notes Payable (Repayment of NP)

Acquisition of Fixed Assets

Answer 1

Sources of cash are those which increases the working capital and uses of cash decreases the working capital. Increase in current liabilities and decrease in current assets are sources of cash and decrease in current liabilities and increase in current assets are uses of cash. For other items, if cash outflows then it is uses of cash and if cash inflows then it is sources of cash.

Sources of cash

1. Decrease in accounts receivable (Decrease in current assets)

2. Increase in accounts payable (Increase in Current liabilities)

3. Increase in Notes Payable (Increase in current liabilities)

4. Net Income (Also known as operating cash flow)

Uses of Cash

1. Decrease in Accrued Wages and Taxes (decrease in current liabilities)

2. Decrease in Bonds (cash paid off to repurchase the long term debt)

3. Payment of Dividends (cash used for payment of dividends)

4. Increase in Inventory (increase in current assets)

5. Acquisition of Fixed assets (increase in fixed asset and buying of fixed assets uses cash)

Depreciation and Amortization are non-cash expense and does not affect the cash flows, but it affects the company's net profit, so it is considered while calculating net income of the company.