Question

Wuson 2 3 points Save Answer has reported on the balance sheet decreased. Which of the following factors could explain this situation? Relative to the previous year, a company's net cash provided from operations increased yet The company cut its dividend. The company made large investments in fixed assets The company sold a division and received cash in return The company issued new common stock The company issued new long-term debt.

Answer 1

Answer: Option-(b): The company made large investments in fixed assets. Reason: Statement of cash flows is prepared for a reporting period for analyzing reasons for change in cash balance between two reporting periods. It is broadly categorised into operating activities, investing activities and financing activities. Out of the three, operating activities specifically helps to analyze reason for change in cash balance due to operating activities of the business. There are two methods to prepare operating activities block such as direct and indirect method. Under direct method, operating activities block contains data of cash received from sale of goods or services and cash paid to suppliers, vendors for services, interest expense and income taxes. It means that non-cash incomes or expenses and net income reported for the period are not considered under direct method while preparing statement of cash flows.

Similarly, cash flow from investing activities contain data related to cash received from sale of assets and cash paid to purchase assets. Other data in terms beginning or ending balance of assets, etc. are not considered in the statement of cash flows, unless they are required to calculate cash receipt or cash paid for assets. Cash flow from financing activities contain data related to cash received from issuing fresh common stock or preferred stock or debt instruments, etc. and cash paid to discharge debt instruments or firm's treasury stock or cash dividends. Other data in terms beginning or ending balance of common stock, etc. are not considered in the statement of cash flows, unless they are required to calculate cash receipt or cash paid for as mentioned above. Therefore, Option-(a), (c), (d) & (e) are incorrect because those transactions will increase cash inflow and as a result there will be positive net cassh flow when firm cut its dividends or received cash by selling a division or issued new common stock or issued new long-term debt. Option-(b) is correct because it will decrease firm's cash balance when the company made large investments in fixed assets.