Avatar Company Uses the Direct Method to Prepare Its Cash

question 7

Multiple Choice

Avatar Company uses the direct method to prepare its cash flow statement.Please refer to the following information:
• Repayments on long-term bills payable: $40 000
• New borrowing on long-term bills payable: $34 000
Which of the following statements is accurate regarding the cash flow statement?

• A)$40 000 will be shown as a positive cash flow in the financing section.
• B)$34 000 will be shown as a positive cash flow in the investing section.
• C)$40 000 will be shown as a negative cash flow in the investing section.
• D)$34 000 will be shown as a positive cash flow in the financing section.

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Definitions:

Maturities

The dates when the principal amount of a debt or investment is due to be paid back or reaches its expiration.

Default Risk

Default risk is the likelihood that a borrower will be unable to make principal and interest payments on a debt, potentially leading to financial loss for the lender.

Marketability

The ease with which an asset or security can be sold or bought in the market without affecting its price.

Target Cash Balance

The ideal amount of cash that a business aims to maintain to handle day-to-day operations and contingencies.