Question

The statement of cash flows:

a. Must be prepared on a daily basis.

b. Summarize the operating, investing, and financing activities of an entity.

c. Is another name for the income statement.

d. Is a special section of the income statement.

e. None of the above.

Answer 1

Answer:- The statement of cash flows: Summarize the operating, investing, and financing activities of an entity (Option b).

Explanation:- Cash flows are classified as operating, investing, or financing activities on the statement of cash flows, depending on the nature of the transaction. Each of these three classifications is defined as follows.

1)-Operating activities include cash activities related to net income. For example, cash generated from the sale of goods (revenue) and cash paid for merchandise (expense) are operating activities because revenues and expenses are included in net income.

2)-Investing activities include cash activities related to noncurrent assets. Noncurrent assets include (a) long-term investments; (b) property, plant, and equipment; and (c) the principal amount of loans made to other entities. For example, cash generated from the sale of land and cash paid for an investment in another company are included in this category. (Note that interest received from loans is included in operating activities.)

3)-Financing activities include cash activities related to noncurrent liabilities and owners’ equity. Noncurrent liabilities and owners’ equity items include (a) the principal amount of long-term debt, (b) stock sales and repurchases, and (c) dividend payments. (Note that interest paid on long-term debt is included in operating activities.)