Question

Cash Is King” for all businesses

You can determine a company’s cash situation by analyzing the 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 balance sheet cash account must be high?

Yes

No

Three categories of activities (operating, investing, and financing) generate or use the cash flow in a company. In the following table, identify which type of activity is described by each statement.

	Operating Activity	Investing Activity	Financing Activity
The Yum chain of restaurants conducts an initial public offering to raise funds for expansion.
Fitzi Chemical Co. earns revenue from its cash receipts from royalties.
A company records a decrease in its total raw materials inventory from the previous year.
A pharmaceutical company buys marketing rights to sell a drug exclusively in East Asian markets.

Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year’s accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?

$149.00 million

$437.25 million

$583.00 million

$291.50 million

Answer 1

Net cash flow can be defined as the amount of cash flows into and out of the business organization in the given period of time. Positive cash flow indicates profitability, ability to generate value for its investors or shareholders etc.

It is not necessarily required that the cash account shown in the balance sheet of the business organization is always high under a situation where the firm has lot of cash flows. This is due to the reason that the account shown in the balance sheet named as cash account shows the amount of cash at the given point of time. But the net cash describes the inflow and outflow of cash within and outside the organization throughout the period.

The table given describes under which activity the given statements are covered:

	Operating Activity	Investing Activity	Financing Activity
The Yum chain of restaurants conducts an initial public offering to raise funds for expansion			This is financing activity as it raises fund for expansion
Fitzi Chemical Co. earns revenue from its cash receipts from royalties.	This is Operating Activity because the cash is received from royalties, commission etc are covered under operating activity as other revenue.
A company records a decrease in its total raw materials inventory from the previous year.	This is covered under Operating activity of Indirect method of preparing cash flow statement.
A pharmaceuticals company buys marketing rights to sell a drug exclusively in East Asian markets.		This is covered under Investing Activity as the rights are purchased to sell drug exclusively. Hence, the amount are invested in it by the firm.

Now, calculate the maximum amount of cash received from sales (C) last year by using the equation given below:

C = NetSales – Amountof Accounts Receivable =(600 million-17 mil- lion) =583million

Hence, the maximum amount of cash received from sales last year comes out to be $ 583 million.