1. Why was the statement of cash flows created by the Financial Accounting Standards Board (FASB)?

2. Describe the three classifications of cash flows, and provide examples of activities that would appear in each classification.

3. Which section of the statement of cash flows is widely regarded as the most important? Why?

4. Briefly describe the four steps required to prepare the statement of cash flows using the indirect method.

5. Refer to the Why is the indirect method used by most companies?

6. Describe the three adjustments necessary to convert net income to a cash basis using

the indirect method. Provide an example for each adjustment.

7. Why is depreciation expense added back to net income using the indirect method of preparing the statement of cash flows?

8. Assume you are using the indirect method to prepare the operating activities section of the statement of cash flows. Describe the adjustment rules for current assets and

current liabilities, and provide one example for each rule.

9. You have just completed the statement of cash flows for a company, and the bottom of the statement shows a net increase in cash of $250,000. Describe where this

increase should be shown elsewhere in the financial statements.

10. Provide an example of a noncash investing or financing activity. Describe how these transactions are disclosed in the financial statements.

11. How is the operating cash flow ratio calculated, and what does it tell the user?

12. How is the capital expenditure ratio calculated, and what does it tell the user?

13. How is free cash flow calculated, and what does it tell the user?

14. Appendix. Describe how the indirect method differs from the direct method.

15. Appendix. Assume you are using the direct method to prepare the operating activities section of the statement of cash flows. Describe the adjustment rule used to

convert sales revenue to cash receipts from customers.

16. Appendix. Assume you are using the direct method to prepare the operating activities section of the statement of cash flows. Describe the adjustment rules used to

convert cost of goods sold to cash payments to suppliers.

17. Evaluating Cash Flows at Home Store, Inc. Refer to the dialogue at Home Store, Inc., presented at the beginning of the chapter and the follow-up dialogue after .

Required:

17a. Why was the CEO concerned about the companys cash flow?

17b. Why did the CEO state, We probably should have financed the equipment rather than having paid for it all at once?