"Cash Is King" for all businesses You can determine a company’s cash situation by analyzing its cash flow statement. The cash flow statement also helps determine whether the company (1) is generating enough cash from its operations to make new investments and pay dividends or (2) will need to generate cash by issuing new debt or selling its assets.

If a firm has a lot of net cash flow, does that mean the firm’s cash account (as reported on its balance sheet) must be high?

No

Yes

The statement of cash flows reports a company’s cash inflows and outflows for a given accounting period by categorizing the company’s sources (inflows) and uses (outflows) of cash as either operating, investing, or financing activities.

Determine whether the activities described in the following table should be categorized as operating, investing, or financing activities in the statement of cash flows.

Activity

OperatingActivity

InvestingActivity

FinancingActivity

D & W Company sells its last season’s inventory to a discount store.
A pharmaceutical company buys marketing rights to sell a drug exclusively in East Asian markets.
HappySnacks Inc. uses cash to repurchase 10% of its common shares.
A company records a decrease in its total raw materials inventory from the previous year.
Blue Hamster Manufacturing Inc. reported net sales of $5,500,000 last year and generated a net income of $1,375,000. Last year’s accounts receivable increased by $230,000. What is the maximum amount of cash that Blue Hamster received from sales last year?

$3,952,500

$5,270,000

$2,635,000

$1,605,000