23R

Front 1

These activities ivolve the cash effects of transactions that enter the into the determination of net income such cash recipts from sale of goods and services and cash payments to suppliers and employees for acquisitions of inventory expenses

Back 1

operating activities

Front 2

These activites generally involve long term assets and include making and collecting loans and acquiring and disposing of investments and productive long lived assets

Back 2

investing activities

Front 3

these activities involve liability and stockholders equity items and include obtaining cash from creditors and repaying the amounts borrowed and obtaining capital from owners and providing them iwth a return on their investment

Back 3

financing activites

Front 4

These are operating items and they come from the income statement

Back 4

Cash inflows from sale of goods or services and returns on loans (interest) and on equity securities (dividends)
Cash outflows to suppliers for inventory, employees for services, government for taxes, lenders for interet, others for expenses

Front 5

These are Investing items and they ususally are long term asset items

Back 5

Cash inflows from the sale of property plant and equipment, the sale fo debt or equity securities of other entities, the collection of principal on loans to other entities
AND
cash outflows for the purchase of PP&E, the purchase of debt or equity securities and other entities, the making of loans to other entities

Front 6

These are Financing items and they are generally long term liability and equity items

Back 6

cash inflows from equity securities and the issuance of bonds and notes
AND
cash outflows to stockholders as dividends and outflows to redeem long term debt or reacquire captial stock

Front 7

Operating activites involve

Back 7

income statement items

Front 8

Investing activies involve

Back 8

cash flows resulting from changes in investments and long term asset items

Front 9

financing activites involve cash flows resulting from

Back 9

changes in long-term liability and stockholders equity items

Front 10

receipts of investment income and payments of interest to lenders are operating activites when

Back 10

they are reported on the income statement

Front 11

Companies report the cash recieved from the sale of PPE at a gain as an ___ activity

Back 11

investing

Front 12

Companys report a gain or loss on the payment of debt is generally part of the cash flow erlated to the repqyment of the amount borrowed and is classified as a

Back 12

financing activity

Front 13

The order of the Statement of Cash Flows is

Back 13

Operating
Investing
Financing

Front 14

Steps in preparation for the SCF

Back 14

Determine the change in cash
determine the net cash flow from operating activities
Determine the net cash flows from investing and financing activities

Front 15

The information to prepare the statements comes from three sources

Back 15

Balance sheets
current income statement
selected transactional data

Front 16

A company may convert net income to net cash flow from operating activites in two different ways

Back 16

direct method (income statement method) or the indirect method (reconciliation method)

Front 17

the direct method

Back 17

deducts operating cash disburesments from the operating cash reciepts

cash collected from revenues- Cash payments for expenses= IBIT, IBIT - Cash payment for taxes - Net cash provided by operating activities

Front 18

the indirect method

Back 18

starts with net income and converts it to net cash flow from operating activites.
In other words it adjusts net income for tiems that affected reported net income but did not affect cash by netting adjustments in accounts receivable and payable and combining that with Net Income

Front 19

the FASB recommends that the ___ be used when reporting net cash flow from operating activities

Back 19

direct method

Front 20

If a company uses the direct method when reporting casf flows from operating activies FASB requires that the comapny provide in a separted schedule

Back 20

reconcilliation fo net income to net cash flow

Front 21

Increase in stock indicates a

Back 21

financing activity cash inflow

Front 22

the payment of dividends is a

Back 22

financing activity outflow

Front 23

the increase in cash reported should agree with teh increase in the

Back 23

comparative balance sheets as the change in cash accounts

Front 24

a decrease in accounts receivable indicates

how should it be handled

Back 24

cash recipts are higher than revenues reported on an accrual basis. Add the decrease to income.

Front 25

an increase in prepaid expenses indicate

how should it be handled

Back 25

a decrease in cash during the period

that the company must deduct from net income the increase in prepaid expenses.

Front 26

a decrease in accounts payable indicates

how should it be handled

Back 26

that the company incurred a greater amount of expense than the amount of cash it disbursed

add the increase in AP to net income

Front 27

Depreciation expense should be handled how

Back 27

add it back to net income to arrive at net cash flow from operating acitivities

Front 28

An increase in AR means

An increase in accounts receivable is handled how

(indirect method)

Back 28

cash recipts were lower than revenues,

deduct the increase in AR from net income

Front 29

Increase in accounts payable means

should be handled how
(indirect method)

Back 29

becuase business incurred expenses that are not yet paid,

add the increase in AP to net income

Front 30

An increase in land means

should be handled how

Back 30

the company purchased land

report as use of cash

Front 31

increase in building and related accumulated depreciation should be handled how

Back 31

acquired a building

is an investing cash outflow reported in the investing section

the depreciation expense has no effect on the amount of cash

Front 32

Increase in equipment and related accumulated depreciation should be handled how

Back 32

outflow of cash from an investing activity

depreciation expense entry for the period explains the increase in ACC DEP account

Front 33

Increase in bonds Payable

Back 33

inflow of cash from a financing activity

Front 34

increase in retained earnings

Back 34

The company adjusts net income to net cash provided by operating activities in the opreating activites section

Payment of dividends is a financing activity that involves cash outflow

Front 35

Format of the Statement of Cash Flows

Back 35

Net Income
ADJUSTMENTS
depreciation expense
decrease in accounts receivable
increase in prepaid expense
increase in accounts payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of land
purchase of building, equipment
Net cash used by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of bonds
Payment of cash dividends
Net cash provided by financing activities

Front 36

Increase in accounts receivable should be handled how

Back 36

deduct the inrease from net income to convert to cash basis

Front 37

Increase in inventories

Back 37

represents an operating use of cash, not an expense THEREFORE deduct this amount from net income

Front 38

Decrease in prepaid expenses

Back 38

add the decrease back to net income to arrive at net cash flow from operating activities

Front 39

Decrease in accounts payable

Back 39

deduct the decrease in accounts payable from net income

Front 40

Increase in accumulated depreciation

Back 40

add back to net income the total depreciation charged to the income statement

Front 41

Loss on sale of equipment

Back 41

add back to net incoem the loss on the sale of equipment

The loss does not reduce cash but it does reduce net income

Front 42

Land sale

Back 42

investing activity, reported as source of cash

Front 43

equipment purchase

Back 43

investing activity cash outflow

Front 44

equipment purchase

Back 44

investing activity cash inflow

Front 45

decrease in bonds payable

Back 45

financing decrease in cash

Front 46

increase in common stock account

Back 46

financing increase in cash

Front 47

increase in retained earnings

Back 47

from net income (operations)

Front 48

decrease in retained earnings

Back 48

payment of dividends (financing activity decrease in cash)

Front 49

Important points to remember

Back 49

Comparative balance sheets provide basic information from which to prepare the report

an analysis of the retained earnings account is necessary.

The statement includes all changes that have passed through cash or resulted in an increase or decrease in cash

writedowns, ammortization charges, depreciation are not inflows OR outflows of cash they must be added or subtracted from net income to arrive at cash provided by operating activities

Front 50

The _______ method is the most widely used

Back 50

indirect

Front 51

The indirect method consists of

Back 51

adding back or deducting from net income those items that had no effect on cash.

Front 52

Under the direct method the statement of csh flows reports net cash flow from operating activites as major classes

Back 52

operating cash receipts
cash disbursements

Front 53

under the direct method companies compute net cash provided by operating activies by adjusting each item in the income statemetn from the __________ to the ______ basis. On

Back 53

accrual
cash

Front 54

An efficient way to apply the direct method would be to

Back 54

analyze the revenues and expense reported in the income statement in the order in which they are listed.

Front 55

Cash receipts from custoers is calculated by finding the ____ and ___

Back 55

revenues from sales and deducting the accounts receivable

Front 56

CASH PAYMENTS TO SUPPLIERS

Back 56

adjust cost of goods sold for the change in inventory, add the increase in inventory to cost of goods sold to arrive at purchaes, determine the cash payments to suppliers by adjusting purchases for the change in accounts payable.

Front 57

Cash payments for operating expenses

Back 57

adjust the operating expenses for any changes in prepaid expenses and accrued expenses payable

deduct from operating expenses the increase in accrued expenses payable, and add to operating expenses a decrease in accrued expenses payable

Front 58

The principal advantage of the direct method is that it

Back 58

shows operating cash receipts and payments

Front 59

The direct method gives useful information because it reveals

Back 59

the company's ability to generate sufficient cash from operating activities to pay its debts

to reinvest in its opeations

make distributions to its owners

Front 60

The advantage of the indirect method is that it

Back 60

focuses on teh differences between net income and net cash flow from operating activites

Front 61

Companies that use the direct method are required to report the following classes fo operating cash receipts and payments

Back 61

cash collected from customers
interest and dividends received
other operating cash receipts

cash paid to employees and suppliers
interest paid
income taxes paid
other operating cash payments

Front 62

Companies using indirect method must disclose separately the

Back 62

changes in inventory, receivables, and payables, interest paid, and income taxes paid.

Front 63

Items that must be added back to net income are

Back 63

ammortization of limited life intangibles
amortization of deferred costs such as bond issue costs
Ammortization of bond discount or premium

Front 64

Changes in deferred income taxes affect net income but have no effect on cash so it must be

Back 64

added back to net income

Front 65

An allowance for doubtful expense results in a change of bad debt expense, and it should be (indirect method)

Back 65

added back to net income to arrive at net cash flow from opearing activities

Front 66

Using the direct method a company should handle the allowance for doubtful accounts how

Back 66

do not net against accounts receivable

Front 67

THe purchase of short term available for sale securites affects net income_____ and cash ______

Back 67

does not affect net income
decreases cash

Front 68

trading securities should be handled how

Back 68

classify as cash flows from operaing activities

Front 69

cash dividends payable are reported how

Back 69

not reported until paid

Front 70

losses are

Back 70

noncash charges to the income statement add to net income

Front 71

gains are

Back 71

deducted from net income to avoid double counting because it was alredy counted as cash porceeds form the sale

Front 72

The company must _____ net income by the amount of compensation expense from stock options incomputing net cash flow from operating activies

Back 72

increase

Front 73

pension expenses must be recorded

Back 73

by adjusitng net inome by the differnce between cash paid and the expense recorded

Front 74

FASB requires tnat all income taxes are classified

Back 74

operating cash outflows