1. Describe the cash flow production cycle. What is the inner circle? Outer circle?
a.
2. What is depreciation?
a. Depreciation is a noncash expense, doesn’t affect cash flow, that allocates the diminishing returns of a
long term/fixed asset over time. There is the straight line method where the residual value is subtracted
from the asset price and divided by the useful life to get the expense. The accelerated method is twice
as much as straight.
3. What are two important principles regarding the cash-flow production cycle?
a. Financial statements are an important window on reality
b. Profits do not equal cash flow
4. What time frame does the balance sheet cover?
a. The balance sheet covers a particular point in time, or day, of the financial position of the firm.
5. What three questions does the balance sheet answer?
a. Is the company solvent (more assets than liabilities)
b. Can the company pay its bills
c. Has owners’ equity grown over time
6. What time frame does an income statement cover?
a. It covers the company’s performance over an entire cycle or accounting period.
7. How do the income statement and cash flow statement tie in with the balance sheet?
a. The income statement describes how the assets and liabilities were used in the stated accounting
period. The cash flow statement explains cash inflows and outflows, and it will ultimately reveal the
amount of cash the company has on hand, which is also reported in the balance sheet. By themselves,
each financial statement only provides a portion of the story of a company’s financial condition;
together, they provide a more complete picture.
8. How is the income statement deficient with regard to cash flow?
a. The income statement does not show actual cash just net income which includes estimates, allocations,
and approximations. Profitability cannot be solely determined on net income, we need the cash flow.
9. What are the three broad categories that make up a statement of cash flow?
