You were looking forward to going to CM2 today since it was your last working day as an intern. Tomorrow the group is planning to take you to lunch to celebrate the end of your internship. You figured today would be easy— just wrapping up loose ends.
It was not to be. You walked in and found people with expectant faces, holding sheets of paper, and you could tell that another “issue” had arisen. Conner and Martin started right off: they saw no reason at all for a statement of cash flows. They felt that CM2‘s cash flows were nobody’s business but the banks. Lopez and Knepp clearly were trying to explain that investors like to see where the cash flow was coming from and how the cash was being used.
So once again, you were on the spot. By now, Conner and Martin have learned to put their questions in writing so they were ready with a paper on which they had written:
1. What is the point of the statement of cash flows?
2. Why are there three categories of cash flow information?
3. What can the reader learn from the “Cash flow from investing” section?
4. What can the reader learn from the “Cash flow from financing” section?
5. What is the difference between the direct and indirect methods for preparing the “Cash flow from operations”?
6. We have a copy of a statement of cash flows for another firm. Why is this firm adding back depreciation?
7. Someone told us that you could learn a lot from looking at the accounts receivable adjustment to net income on this statement. We don’t understand this at all. What’s to be learned?
Instructions Prepare responses to their questions.