3) What is the difference between cash flow and free cash flow?

A corporation’s cash flow from operations is available from the first section of the statement of cash flows. Usually the calculation begins with the accrual accounting net income followed by adding back depreciation expense and then adjusting for the changes in the balances of current assets and current liabilities.

Free cash flow is often defined as the cash flow from operations (or net cash flows from operating activities) minus the cash necessary for capital expenditures. Occasionally, dividends to stockholders are also deducted.

4) How can a company have a profit but not have cash?

A company can have a profit but not have cash because profit is computed using revenues and expenses, which are different from the company’s cash receipts and cash disbursements. In other words, there is a difference between revenues and receipts. There is also a difference between expenses and expenditures.

To illustrate, let’s assume that a new company uses the accrual method of accounting. It provides $10,000 of services to its clients in its first month and the clients are allowed to pay in 30 days. The company will have $10,000 of revenues in its first month, but the cash will not be received until the second month. If the company’s expenses are $7,000 in the first month, the company will report a profit of $3,000 but will not have received any cash from its clients.

Another company might have a profit of $60,000 in its first year, but during its first year it uses $65,000 of cash to acquire equipment that will be put into service at the beginning of the second year. This company will have a profit, but will not have the cash.

Other examples where cash is paid out, but the profits are not reduced at the time of the payment, include prepayments of insurance, payments to increase the inventory of merchandise on hand, and payments to reduce liabilities.

2. Complete the following sentences

1. The first section of the statement of cash flows reports the cash flows from ___________ activities.

2. The second section of the statement of cash flows reports the cash flows from __________ activities.

3. The third section of the statement of cash flows reports the cash flows from ___________ activities.

4. Under the indirect method, an increase in __________ assets other than cash will cause a decrease in cash from operating activities.

5. Under the indirect method, a decrease in current ____________ will cause a decrease in cash from operating activities.

6. The cash __________ from the sale of a long-term asset will be reported in the investing activities section of the statement of cash flows.

7. A corporation's ___________ on its stock will appear as a deduction in the financing activities section of the statement of cash flows.

8. Capital _______________ are a significant deduction in the investing activities section of the statement of cash flows.

9. The purchase of ____________ stock will cause a negative amount in the financing activities section of the statement of cash flows.

10. The __________ of bonds payable will be reported as a negative amount in the financing activities section of the statement of cash flows.

3. For each of the following items, indicate which part will be affected: Operating, Investing, Financing, Supplemental

1.	Depreciation Expense
2.	Proceeds from the sale of equipment used in the business
3.	The Loss on the Sale of Equipment in Question #2.
4.	Declaration and payment of dividends on company's stock
5.	Gain on the Sale of Automobile formerly used in the business
6.	The proceeds from the sale of the automobile in Item #5.
7.	An increase in the balance in a retailer's Merchandise Inventory
8.	An increase in the balance in Accounts Payable
9.	Retirement of long-term Bonds Payable
10.	Purchase of Treasury Stock (company's own stock)
11.	The purchase of a new delivery truck to be used in the business
12.	A decrease in the balance of Accounts Receivable
13.	An increase in Bonds Payable (a long-term liability)
14.	A decrease in the current asset account Prepaid Insuranc
15.	A decrease in the current liability Income Taxes Payable
16.	The proceeds from issuing additional Common Stock
17.	The amortization of the cost of an intangible asset
18.	The exchange/conversion of long-term bonds into common stock