A household functions like a small business. In both the household and business settings, the importance of stable cash flow cannot be emphasized enough. Households and businesses must maintain good cash flow to meet their continued obligations should something happen or if there is an economic downturn. Planning for both short- and long-term cash needs is important to both the household entity and the business entity.

1. Identify the three categories that appear on a Statement of Cash Flows and give two examples of items that are shown under each particular category. (9 points)

2. Of the four primary financial statements used in accounting, managers often indicate that the Statement of Cash Flows is the most beneficial statement, in their opinion. Why do you suppose they believe this particular statement to be so important? (5 points)

3. In your opinion, what are three factors that should determine how much money should be set aside in an emergency fund for both a household and a business? (6 points)

Cash is something we are all tamilar with because t is the primary medium of exchange for goods and services. You put your money into a cash account at the bank and monitor your cash infows and outflows to make sure you have enough money to meet your obligations. When you look at the bank balance for your personal cash aocount, you can delermine how much money you have available at any one point in time Businesses have a smlar ?5h account on the balance sheot and track the infiows and oulows using the cash flow staterments Therelore, the cash flow stalement is simiar to a personal bank statement The cash flow statement ilustrates the fiow of cash through the varous transactions of the business. The basic equation represented by this statement is: The cash flow statement shows the detailed results of activities for a particular period of tine, typicaly a year. Readers of this statement can evaluate the effective uses of cash and if the romaining cash balance is appropriato for the company The cash flow story revolves around three main activities operating financing and investing Readers of this financal statement desobe how effective the business is at tese activities by the monitoring cash rfows and outows when you reviewing this statement, you may be saying to yourself the infamous line from the Jerry Maguire movie, "Show me the moneyf Where did it go or where did it come from? The throe basic catogories describe the cash fow story Cash flows from operating activities: cash obtained and used from the seling and subsequent collection of payments) of goods or services, minus the cash paid for expenses incurred to obtain revenues Examples include cash infows from sales or services and cash outflows for operating items such as inventory purchases, salaries, insurance, and supplies Cash flows from investing activities: cash cbtained for used) from the long-term investments of the business Examples include cash infows from the sale of property, facilties, equipment or investments and cash outflows for the purchase of property facilities, equipment or investments. Cash flows from financing activities: cash obtained (or used) from the financial activities such as payments to the owners (drawings) and borowing of money Examples include cash infows from acquining loans or stock ssuances and cash outflows to satisty debt obligations, repurchase treasury stock, or for dividends to stockhoilders Lets take a look at the statement of cash ows for Red Apple Cinic, Inc. to interpret its cash fow story. When reviewing the statement of cash ows for Red Apple, Inc. you can see that there is a net increase in cash of $13,120 This is also the remaining balanoe in cash at the end of the year since it is the first year of operations Since this value is greater than zero, there are more cash inflows than outflows. This is particularly favorable in the first year of operations when the costs of staring a business can be high. The highest dollar value of inlows and outlows is from the operations of the business. Since the infiows exceeded the outflows from operations the operations of the business were successtul Now, lot's look at the cash flows from investing activitios. There were no inflows of cash from mestments during the fir year ofoperatons, but this is quite common for a start-up business, The outlows from investments may be favorable because the business is acquiring assets for future growth possbilities The last calegory is the financing activities. The business increased cash by obtaining aloan and dispersed cash to owners for ther invest ert nthe busness. The loan amount (infow) exceeded the owners drawings (ouow) While there are more cash infiows than outtows from financing acivities, it is important to note that the business's debts or obligations to repay the loan have increased, which may put the business at a higher risk to pay its obligations on ime Overal, the cash infows have exceeded the cash outtows and there is a net increase to the cash account. This remaining cash balance is reffected on the balance sheet in the cash account. So, the cash flow statement provides tiedetaled information and tels the story to Show me the money