Acc 319 Chapter 23

Front 1

What is the primary purpose of the statement of cash flows?

Back 1

to provide info about an entity's cash receipts and cash payments during a period.

Front 2

What is a secondary objective of the statement of cash flows?

Back 2

to provide information on a cash basis about its operating, investing, and financing activities.

Front 3

What 4 things ahould the statement of cash flows help investors, creditors, and others assess?

Back 3

1. The entity's ability to generate future cash flows.
2. The entity's ability to pay dividends and meet obligations
3. The reasons for the difference between net income and net cash flow from operating activities.
4. The cash and noncash investing and financing transactions during the period.

Front 4

What is an primary objective of financial reporting?

Back 4

to provide info that makes its possible to predict the amounts, timing, and uncertainty of future cash flows.

Front 5

What are the three classifications of cash flows?

Back 5

1. Operating activities
2. Investing activities
3. Financing activities

Front 6

define cash equivalents?

Back 6

short term highly liquid investments that are both:
a. readily conv to cash
b. so near their maturity that they present insignificant risk of changes in interest rates.

Front 7

Operating activities involve...

Back 7

the CASH effects of transactions that enter into the determination of net income.

Front 8

Investing activities involve...

Back 8

long-term assets and include
a.making and collecting loans
b.acquiring and disposing of investmentsand productive long-lived assets

Front 9

financing activities involve...

Back 9

liability and stockholder's equity items
a.obtaining cash from creditors and repaying the amounts borrowed
b.obtaining capital from ownersand providing them with a return on their investment

Front 10

Operating Cash Inflows..

Back 10

Cash Inflows
From sale of Goods or Service
From returns on loans(interest) and on equity securities (dividends)

Front 11

Operating Cash Outflows....

Back 11

Cash Outflows
To suppliers for inventory
To employees for services
To govt for taxes
To lenders for interest
To others for expenses

Front 12

Investing Cash inflows....

Back 12

Cash Inflows
From sale of PP&E
From sale of debt or equity securities
From collection on principal on loans to other entities

Front 13

Investing Cash outflows...

Back 13

Cash Outflows
To purchase PP&E
To purchase debt or equity securities of other entities
To make loans to other entities

Front 14

Financing Cash inflows....

Back 14

Cash Inflows
From sale of securities
From issuance of debt (bonds & Notes)

Front 15

Financing cash outflows...

Back 15

Cash Outflows
To stockholders as dividends
To redeem long term debt or reacquire capital stock

Front 16

Is a negative operating cash flow bad (in terms of product life cycle)?

Back 16

Not always, in the introductory and growth stages of a product the product is likely not generating much revenue.

Front 17

What is the order of the three sections of the statement of cash flows?

Back 17

Operating, Investing, and than Financing.

Front 18

Where does the information come from for the statement of cash flows?

Back 18

1.Comparative Balance sheets
2.Current income Statement
3.Selected Transaction Data

Front 19

3 major steps in preparing the statement of cash flows?

Back 19

1. Determine the change in cash
2. Determine the net cash flow from operating activities
3. Determine net cash flows from investing and financing activities

Front 20

Step 1. determine the change in cash....

Back 20

difference in beg cash and ending cash

Front 21

Net cash provided by operating activities means

Back 21

operations increase cash

Front 22

net cash used by operating activities means...

Back 22

operations decrease cash

Front 23

Why must net income be converted to net cash flow from operating activities?

Back 23

because most companies use the accrual basis of accounting

Front 24

Under the accrual basis of accounting, net income will not indicate the net cash flow from operating activities......explain....

Back 24

Net income may include
1.credit sales that have not been collected in cash
2.expenses incurred that may not have been paid in cash.

Front 25

To arrive at net cash flow from operating activities, you must report rev & exp on a cash basis, how is this done?

Back 25

eliminate the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.

Front 26

What are the two methods called that are used for converting net income to net cash flow from operating activities?

Back 26

Direct method (I/S Method)
Indirect Method (reconciliation method)

Front 27

Explain the direct method...

Back 27

reports cah recepits and cash dispersements from op activities. The diff is the net cash flow.

Front 28

Format of the direct method...

Back 28

Cash from Rev XXX
Cash for Exp XXX
Income b4 Inc Tax XXX
Cash Pmt 4 Inc Tax XXX
Net cash flow op. XXX

Front 29

Explain the Indirect Method...

Back 29

the indirect method adjusts net income for items that affected reported net income but did not affect cash.

Front 30

How do you compute net cash flow with the indirect method...

Back 30

noncash charges in the income statement are added back
and noncash credits are deducted..

Front 31

Show the indirect method with a increase in A/R and a increase in A?P?

Back 31

Net Income XXX
Adj to reconcile NI to net cash provided by operating activities:
Increase in A/R (XXX)
Increase in A/P XXX (XXX)
Net Cash prov by OP XXX

Front 32

Step 3 - determine NCF's from Investing and Financing activities....

Back 32

determine whether any changes in balance sheet accounts caused an increase or decrease in cash.

Front 33

What does the FASB encourage and require regarding the statement of cash flows?

Back 33

They encourage the use of the direct method and if the direct method is used they require areconciliation of net income to net cash flow from operating activities

Front 34

Depreciation expense

Back 34

addition to net income to arrive at net cash flow.

Front 35

Ammortization (Intangibles,deferred charges, & Bond discount)

Back 35

addition to net income to arrive at net cash flow.

Front 36

Increase in deferred income tax liability

Back 36

addition to net income to arrive at net cash flow.

Front 37

Loss on investment in Common Stock using equity method

Back 37

addition to net income to arrive at net cash flow.

Front 38

Loss on sale of Plant Assets

Back 38

addition to net income to arrive at net cash flow.

Front 39

Loss on a writedown of Assets

Back 39

addition to net income to arrive at net cash flow.

Front 40

Decrease in receivables

Back 40

addition to net income to arrive at net cash flow.

Front 41

decrease in inventories

Back 41

addition to net income to arrive at net cash flow.

Front 42

decrease in prepaid expense

Back 42

addition to net income to arrive at net cash flow.

Front 43

increase in account payable

Back 43

addition to net income to arrive at net cash flow.

Front 44

Ammortization of Bond Premium

Back 44

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 45

Decrease in deferred income tax liability

Back 45

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 46

Income on investment in common stock using equity method

Back 46

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 47

Gain on sale of plant assets

Back 47

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 48

Increase in Receivables

Back 48

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 49

Increase in Inventories

Back 49

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 50

Increase in Prepaid Expense

Back 50

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 51

Decrease in Accounts Payable

Back 51

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 52

Decrease in accrued Liabilities

Back 52

deduction from net income to arrive at Net Cash Flow from Operating Activities

Front 53

Why are only major classes of operating cash receipts and cash payments reported in the direct method?

Back 53

to simplify and condense the operating activities section.

Front 54

What is the format?

Back 54

cash receipts-cash payments = net cash provided by operating activities

Front 55

What are the 2 cash receipts with the direct method?

Back 55

1.From the sale of goods and services
2.from receipts of interest and dividends on loans and investments

Front 56

What are the cash payments?

Back 56

to suppliers
to employees
for operating expenses
for interest
for taxes

Front 57

cash receipts from customers formula?

Back 57

cash receipts= rev from sales (+decrease in A/R or -increase in A/R)

Front 58

Cash payments to suppliers formula?

Back 58

COGS +/-(+increase in inventory or -decrease in inventory) +/- (+decrease in A/P or -increase in A/P)

Front 59

Cash Payments for operating expenses?

Back 59

Operating expenses +/- (+increase in prepaid expense or -decrease in prepaid expense) +/- (+decrease in accrued expenses payable or -increase in accrued expenses payable

Front 60

Show the format of the direct method....

Back 60

Cash Flows from Oper Act
Cash receiv from customers
Cash Pmts:
To Suppliers
For Operating Exp
For Income Taxes
Net Cash Provided by Operating Activities