Finance 5

Jheannie Jenly Mia V.
Sabulbero
Grade 12 ABM-Pascal
Finance Chapter V
Review Questions and Exercises

I. Conceptual Questions
1. What does the term “funds” mean in the modern business context?
In business, the word funds refer to a pool of financial resources that are ready to be used
immediately now. Cash on hand, which may be utilized right away, as well as other liquid assets
that can be converted to cash in the near future if needed, make up the organization's funds.
2. Describe the Statement of Cash Flows.

One of a firm's financial accounts, the statement of cash flows, describes how money moves
in and out of the company. It focuses on activities that generate and consume cash, such as
operations, investments, and finance.
3. What is the primary purpose of the Statement of Cash Flow?

The statement of cash flows' purpose is to show the reader of the report the cash inflows and
outflows for a certain reporting period. Operating, investing, and financing are the three types of
inflows and outflows. The information is utilized by the investment community to assess a
company's ability to earn cash and how it spends that income.
4. Explain the difference between net cash flow from operating activities, net cash flow from
investing activities and net cash flow from financing activities?
 Cash Flow from Operating Activities: This section contains information on cash flows
generated from various sources from the day-to-day operations of a corporation Proceeds from
the sale of inventory, as well as proceeds from the provision of services or other non-financial
or non-investment activities, are examples of these cash flows.
 Cash Flow from Investing Activities: The cash flows created by the purchase and sale of long-
term assets and other investments are detailed in this section.
 Cash Flow from Financing Activities: This section contains information on cash flows
acquisition by the acquisition or repayment of capital. The issuance of stock or bonds, as well
as borrowing, would result in cash inflows, while stock repurchases and bond or other
borrowing repayments would result in cash outflows.
5. Give at least 3 examples each of Cash Inflows from

 Operating Activities
Sales of Goods
Returns on equity securities (dividends)
Receipts from contracts held for dealing and trading purposes
 Investing Activities
Sale of long-lived assets such as property, plant and equipment, intangibles and other long-
term assets
Sale of debt or equity securities of other entities
Collection of loans (principal) to others (other than advances and financial institution).
 Financing Activities
Proceeds from borrowing (short-term and long-term)
Proceeds from issuing the firm’s own equity securities
6. Give at least 3 examples each of cash outflows from.
 Operating Activities
Payment for purchases from suppliers other than merchandise inventory
Payment of interest to lenders
Payment of taxes unless identified with financial and investing activities
 Investing Activities
Acquisition of long-lived assets such as property, plant and equipment, intangibles
and other long-term assets
Purchases of debt or equity securities
Loans (principal) to others (other than advances and loans made by a financial Institution)
 Financing Activities
Repayment of debt principal
Repurchase of a firm’s own shares
Payment of dividends
7. What does “free cash flow” mean?

Free cash flow (FCF) is a measure of how much cash a company generates after deducting
capital expenditures such as buildings and equipment. This money can be used for business growth,
dividends, debt reduction, and other purposes.
8. What does it mean when a firm’s free cash flow is negative?

Negative free cash flow. A business that has negative free cash flow is unable to generate
enough cash to support its operations. Free cash flow is the amount of money left over after a
company's operating expenses have been paid.
II. Exercises, show your complete solution.
1.(Statement of Cash Flows)

Luis Shop had cash flows from investing activities of P 2,567,000 cash flows from financing
activities of P 3,459,000. The balance in the firm’s cash account was P 950,000 at the beginning of
2015 and P 1,025,000 at the end of the year. Calculate Luis Shop’s cash flow from operations for
2015.
Net income in cash = Ending cash balance - Beginning cash balance

= P 1,025,000 - P 950,000 = P 75,000
Net income in cash = Cash flow from operation + Cash flow from investing + Cash flow
from financing
- P 75,000 = Cash flow from operation + P 2,567,000 + P 3, 459,000
- Cash flow from operation = P 75,000 - P 6,026,000 = P 5,951,000
 Cash flow from operation is negative, that means cash outflow occurs from the operation.
 Depreciation is a non - financial expense that reduces the taxable income of a business. As
taxable income decreases, so does the company's tax liability. Currently, depreciation is being
used to reduce tax expense and cash outflow for tax expenses. A depreciation tax shield
generates cash inflow by reducing cash outflow for tax payments. Depreciation provides a tax
offset against the company's reported estimate of income, resulting in actual cash flows.
2.(Statement of Cash Flows)

Janice Company has net cash flow from financing activities for the last year P 20 million. The
company paid P 105 million in dividends last year. During the year, the change in notes payable
(balance) was 23 million and the change in ordinary equity and preferred stock was 0. The end year
balance for long-term debt was P 185 million. Calculate the beginning of year balance for long-term
debt.
Change in working capital = Increase in current assets - Increase in current liabilities

= P 20,000,000 - P 12,000,000 = P 8,000,000
Free cash flow = EBIT - Taxes + Depreciation expense - Increase in current assets + Increase in
current liabilities
= P 62,000,000 - P 17,000,000 + P 5,000,000 + P 8,000,000 - P 32,000,000 = P 42,000,000
Investment in operating capital = Net operating profit after taxes - Free cash flow
EBIT - Taxes = free cash flow
= P 62,000,000 + P 17,000,000 + P 26,000,000 = P 19,000,000
 In the cash flow statement, cash-generating activities are classified as operating activities,
financing activities, and investing activities. Net cash from operating activities refers to the cash
generated by a company's basic business operations or revenue-generating activity. It includes
cash-generating activities such as sales and purchases, as well as expense and tax payments.
3.(Free Cash Flow)

Tiffany Corporation reported free cash flows for 2015 of P 23 million and investment in operating
capital of P 13 million. The firm listed P 8 million in depreciation expense and P 17 million in taxes
on its 2015 income statement. Calculate Tiffany Corporation’s 2013 EBIT.
Free cash flow = P 23,000,000

Investment in operating capital = P 13,000,000
Investment in operating capital = EBIT - Taxes - Free cash flow
EBIT = Investment in operating capital + Taxes + Free cash flow
= P 13,000,000 + P 17,000,000 + P 23,000,000 = P 53,000,000
 Business activities that involve making investments or capital expenditures generate cash from
investing activities. They are especially relevant to the non-current assets or fixed assets section
of the balance sheet. Asset purchases and sales are examples of investing activities.

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Jheannie Jenly Mia V.

Review Questions and Exercises

2. Describe the Statement of Cash Flows.

3. What is the primary purpose of the Statement of Cash Flow?

5. Give at least 3 examples each of Cash Inflows from

7. What does “free cash flow” mean?

8. What does it mean when a firm’s free cash flow is negative?

II. Exercises, show your complete solution.

1.(Statement of Cash Flows)

Net income in cash = Ending cash balance - Beginning cash balance

2.(Statement of Cash Flows)

Change in working capital = Increase in current assets - Increase in current liabilities

3.(Free Cash Flow)

Free cash flow = P 23,000,000

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