Question

In: Accounting

A new, fast growing company may typically have which of the following patterns of cash flows?...

A new, fast growing company may typically have which of the following patterns of cash flows?
A. Negative cash flows from operations, cash outflows from financing and cash inflows from investing
B. Negative cash flows from operations, cash inflows from financing and cash outflows from investing
C. Positive cash flows from operations, cash outflows from financing and cash inflows from investing
D. Positive cash flows from operations, cash inflows from financing and cash outflows from investing

The information in the statement of cash flows should help investors and creditors evaluate:
A. the investing and financing transactions during the period
B. the company's ability to generate past cash flows
C. the reasons for the difference between net liabilities and net cash provided or used by operating activities
D. the company's ability to receive dividends and meet shareholder obligations

Solutions

Expert Solution

1

Ans - Positive cash flows from operations, cash inflow from financing and cash outflows from investing (Option D)
Positive cash flow from operating activities shows that company is able to meet its short term obligations easily. Negative cash flow from investing activities shows that company is making investments on long term assets needed for running the business. Positive cash flow from financing activities shows that company is able to raise necessary funds from issuance of equity and debt in order to run the business. All these shows that company is growing.

2

Ans - The investing and financing transactions during the period (Option A)

-Investors and creditors are concerned with future cash flows and not past (Option B is incorrect)
-they are concerned with difference between net income and net cash provided or used by operating activities instead of net liabilities (Option C is incorrect)
-Investors are concerned with company's ability to pay dividends not receive (Option D is incorrect)

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