Which of the following statements is correct?
A) The statement of cash flows should include changes in summary accounts,such as current assets and current liabilities,as well as changes in all individual accounts.
B) If a firm sells equity to reduce long-term bonds,this is a capital financing transaction and does not appear on the statement of cash flows.However,if the firm sells equity in order to purchase assets,this transaction would be included in the statement of cash flows.
C) Net income is normally the firm's primary operating cash flow,but changes in accounts payable,accounts receivable,inventories and accruals are also classified as operating cash flows.
D) Each change on the balance sheet results from one of two types of transactions,either financing activities,such as issuing or retiring new stock or debt,or long-term investment,such as buying and selling assets.
E) The change in the firm's liquidity position is measured by how much greater a firm's sources of funds are than its uses of funds.

Question

Quizplus · Accepted Answer

Net income is a component of operating cash flows, but changes in other accounts such as accounts payable, accounts receivable, inventories, and accruals must also be included in the operating cash flow section of the statement of cash flows. The option A is incorrect because the statement of cash flows should include changes in all individual accounts, not just summary accounts. Option B is incorrect because any sale of equity must be shown in the financing section regardless of whether the proceeds from the sale are used to retire debt or to purchase assets. The option D is incorrect because changes in the balance sheet may arise from operating, investing, or financing activities. The option E is incorrect because changes in the firm's liquidity position are measured by comparing its sources of funds to its uses of funds, not just by how much greater its sources are than its uses.

Which of the Following Statements Is Correct