(7.4) The statement of cash flows organizes sources and uses of cash into three categories: operating, investing, and financing activities. Depreciation reduces the firm's tax liability, it appears as a of cash, while dividends paid are a of cash. (7.5) Activities that bring in cash are called of cash, and activities that involve spending cash are called of cash. Loosely speaking, an increase in an asset account means a of cash. If an asset account went down, then, on a net basis, the firm sold some assets. This would be a net of cash. Similary, if a liability account goes down, then the firm has made a net payment-a of cash. (7.6) The DuPont identity tells us that ROE is affected by three things: and (7.7) Basic policy elements that must be established by management to develop a financial plan are: 1. The firm's needed investment in new assets. 2. The degree of financial leverage the firm elects to employ. 3. The amount of cash the firm thinks is necessary and appropriate to pay shareholders. 4. The amount of liquidity and working capital the firm needs on an ongoing basis. policy, These four areas represent the firm's policy, and decisions, decisions