Question

In: Accounting

Question 1: Explain how cash flows from operating activities differ from net income. Question 2: Explain...

Question 1:

Explain how cash flows from operating activities differ from net income.

Question 2:

Explain why it is important to a company's financial health to have a positive cash flow from operations.

Question 3 -Effects on Cash flow Transactions

Required:

Classify each of the following transactions as increasing, decreasing, or having no effect on cash flows:

a. Purchasing inventory from a supplier on account

b. Purchasing office supplies and writing a cheque to cover the amount

c. Selling inventory to a customer on account

d. Buying a building by making a down payment and taking out a mortgage for the balance of the amount owed

e. Depreciating capital assets

f. Making a payment on a bank loan, where the amount paid includes interest and a portion of the principal

g. Issuing common shares

h. Declaring and paying dividends to shareholders

i. Paying wages owed to employees

j. Receiving interest owed from a customer

Solutions

Expert Solution

Question 1.

Net Income is the income available to the shareholders after deducting all the cash as well non-cash expenses such as depreciation, income tax expenses etc.

Cash flow from operating expenses is the figures which contains only cash items that is cash received and cash paid.

Question 2.

It is very important to have a positive cash flow from operations for any company because they have creditors to be paid, debts to be paid from the cash available. So, if they have a positive cash flow, they can pay off their creditiors and debts. If they do not have positive cash flows, they will not be able to timely pay off debts and will lose reputation in the market.

Question 3.

Effects on cash flow from operations

a. Decreases the cash flow from operations.

Since it increases the creditors balance. An we have to pay the creditors and so it will decrease the cash flow.

b. Decreases the cash flow from operations.

Since we also consider the bank available in banks to calculate the final cash flow figure.

c. Increases the cash flow from operations.

Since it increases the debtors balance. An we have to take from the debtors and so it will increase the cash flow.

d. No effect on cash flow from operations. Decreases the cash flow from investing activities.

Investing activity

e. No effect on cash flow from operations.

Non-cash item.

f. No effect on cash flow from operations. Decreases the cash frow from financing activities.

Financing item.

g. No effect on cash flow from operations. Increases the cash frow from financing activities.

Financing item.

h. No effect on cash flow from operations. Increases the cash frow from financing activities.

Financing item.

i. Decreases the cash flow from operations.

This is because employees take part in the operating activties and so if we pay them, it decreases the operating activties.

j. No effect on cash flow from operations. Increases the cash flow from investing activities.

Interest received from investment is investing activity.

ekkarill92 answered 1 year ago

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