Accy 304 Chapter 23

Front 1

The primary purpose of the statement of cash flows is to?

Back 1

Provide information about a company's cash receipts and cash payments during a period.

Front 2

A secondary purpose of the statement of cash flows is?

Back 2

To provide cash-basis information (aka summarize) about the company's operating, investing, and financing activities.

Front 3

The statement of cash flows reports?

Back 3

Cash receipts, cash payments, and net change in cash resulting from a company's operating, investing, and financing activities during a period.

Front 4

Is statement of cash flows showing a point in time or a period of time?

Back 4

Period of time.

Front 5

The statement of cash flows format does what?

Back 5

Reconciles the beginning and ending cash balance for the period.

Front 6

The statement of cash flows provides information to help investors, creditors, and others interpret what?

Back 6

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 7

Operating Activities involve...?

Back 7

income statement items

Front 8

Investing Activities generally involve and include what? Give the 3 main examples.

Back 8

They generally involve long-term assets and include (a) obtaining cash from creditors and repaying the amounts borrowed, and (b) acquiring and disposing of investments and productive long-lived assets.

1. Purchase/sale of property, plant, and equipment.

2. Purchase/sale of investments in other entities.

3. Issuance/collection of loans to other entities.

Front 9

Financing Activities generally involve and include what? Give the 3 main examples.

Back 9

They involve liability and stockholders equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed, and (b) obtaining capital from owners and providing them with a return on, and a return of, their investment.

1. Issuance/repayment of long-term debt. (i.e. Bonds)

2. Issuance/repurchase of own stock.

3. Payment of cash dividend.

Front 10

The source of cash from operating activities is generally considered to be the best measure of a company's...?

Back 10

Ability to generate enough cash to continue as a going concern.

Front 11

Companies classify receipts of investment income (interest and dividends) and payments of interest to lenders as?

Back 11

Operating Activities

Front 12

Companies classify the cash received from the sale of property, plant, and equipment at a gain, although reported in the income statement, as?

Back 12

Investing Activities

Front 13

How does a company report individual inflows and outflows from investing and operating activities?

Back 13

They report them seperately, that is companies report them gross, not netted against one another. Thus a cash outflow from the purchase of property is reported separately from the cash inflow from the sale of property.

Front 14

How is the statement of cash flows prepared differently from the other three basic financial statements?

Back 14

1. It is not prepared from an adjusted trial balance.

2. It deals with cash receipts and payments. As a result the company must adjust the effects of the use of accrual accounting to determine cash flows.

Front 15

The information to prepare the statement of cash flows usually comes from what three sources?

Back 15

1. Comparative Balance Sheets

2. Current Income Statement

3. Selected Transaction Data

Front 16

What 3 major steps are involved in preparing the statement of cash flows?

Back 16

1. Determine the change in cash

2. Determine the net cash flow from operating activities

3. Determine net cash flows from investing and operating activities

Front 17

What is the relationship between net income and net cash flow from operating activities?

Back 17

Net cash flow from operating activities is equal to difference between revenues and expenses determined on a cash basis.

Earned Revenues and Incurred Expenses go into Net Income. Then Noncash Revenues and Noncash Expenses are eliminated and that gives you Net Cash Flow From Operating Activities.

Front 18

What are the two methods for converting net income to net cash flow from operating activities? What else can these two methods be called?

Back 18

1. Direct Method (also called the Income Statement Method)

2. Indirect Method (also called the Reconciliation Method)

Front 19

The Direct Method reports...?

Back 19

Cash receipts and cash disbursements from operating activities.

Front 20

The difference between the amounts of cash receipts and cash disbursements from operating activities equals?

Back 20

Net cash flow from operating activities

Front 21

The direct method results in the presentation of a?

Back 21

Condensed cash receipts and cash disbursements statement

Front 22

Net cash provided by operating activities is the equivalent of?

Back 22

Cash basis net income

Front 23

The Indirect method starts with _____ and does what with it?

Back 23

It starts with net income and converts it to net cash flow from operating activities.

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

Front 24

Under the indirect method, to compute net cash flow from operating activities, a company does what?

Back 24

They add back noncash charges in the income statement to net income and deduct noncash credits.

Front 25

Is the total for net cash provided by operating activities the same or different when using the indirect method instead of the direct method?

Back 25

Net cash provided by operating activities is the same whether using the Direct or the Indirect method.

Front 26

The issuance of common stock is reported in the statement of cash flows as a?

Back 26

Receipt of cash from a financing activity.

Front 27

How do companies report paid dividends?

Back 27

As a cash outflow, classified as a financing activity.

Front 28

Which statement of cash flows method does FASB encourage?

Back 28

Direct method

But either method can be used.

Front 29

If a company uses the direct method of reporting net cash flow from operating activities, the FASB requires that the company do what?

Back 29

Provide in a separate schedule a reconciliation of net income to net cash flow from operating activites.

Front 30

If a company uses the indirect method, it can report what?

Back 30

It can either report the reconciliation within the statement of cash flows or it can provide it in a separate schedule, with the statement of cash flows reporting only the NET cash flows from operating activities.

Front 31

The amount of the increase in cash reported in the statement of cash flows will be the same as what?

Back 31

The amount of the increase shown in the comparative balance sheets as the change in the cash account.

Front 32

An increase in prepaid expenses results in a(n) _________ in cash during the period.

Back 32

decrease

Front 33

How is cash affected by depreciation expense, write-downs, and amortization charges?

Back 33

These are all noncash charges that you adjust by INCREASING CASH.

Front 34

If you had equipment with a book value of $36,000 and sold it for $34,000, how would that $2,000 loss affect cash? Under which category would it go under?

Back 34

It would increase cash by $2,000, and it is an operating activity.

Front 35

How do you calculate Retained Earnings?

Back 35

RE = Net Income - Dividends Paid

Front 36

Net cash flow provided by operating activities is equal to?

Back 36

Cash Basis net income

Front 37

What are the 3 sources of information for a Statement of Cash Flows?

Back 37

1. Current years’ income statement.

2. Comparative balance sheets.

3. Additional information from accounting records

Front 38

What are the steps to prepare an statement of cash flows using the Indirect method?

Back 38

1. Step 1: Determine the change in cash.

a. Compare the cash balance from last year to the cash balance this year as shown in the
comparative balance sheets.


2. Step 2: Determine net cash flow from operating activities—indirect method.

3. Step 3: Determine net cash flows from investing and financing activities

Front 39

What are the steps to prepare an statement of cash flows using the Direct method?

Back 39

1. Compute net cash from operating activities by adjusting each item on the income statement
from the accrual basis to the cash basis.

a. Compute cash receipts from customers, interest, and dividends.

b. Compute cash payments to suppliers, employees, operating expenses, interest, and
taxes.



2. Compute cash flows from investing and financing activities

Front 40

What is the principle advantage of the Direct Method? What is its main problem?

Back 40

It shows operating cash receipts and payments. Thus, it is more consistent with the objective of a statement of cash flows than the indirect method, which does not report operating cash receipts and payments.

Main problem is: Many companies do not collect information in a manner that allows them to determine cash received from customers or paid to suppliers.

Front 41

What is the principal advantage of the Indirect Method?

Back 41

It focuses on the differences between net income and net cash flow from operating activities. That is, it provides a useful link between the statement of cash flows and the income statement and balance sheet.

Front 42

Companies that use the direct method are required, at a minimum, to report what?

Back 42

a. Receipts.

(1) Cash collected from customers.

(2) Interest and dividends received.

(3) Other operating cash receipts, if any.

b. Payments.

(1) Cash paid to employees and suppliers.

(2) Interest paid.

(3) Income taxes paid.

(4) Other operating cash payments, if any.

Front 43

Companies that use the indirect method are required, at a minimum, to report what?

Back 43

a. Companies must disclose separately changes in:

(1) Inventories.

(2) Receivables.

(3) Payables.

b. Companies must also disclose in the financial statements or accompanying notes:

(1) Interest paid.

(2) Income taxes paid.

Front 44

How do companies adjust amortization of both bond discounts and premiums? What category do these adjustments go under?

Back 44

1. Add back discount amortization to income

2. Subtract premium amortization from income

They go under OPERATING ACTIVITES

Front 45

How are pension plans adjusted?

Back 45

Pension expense will be higher than cash used when there is an unfunded liability. (Add)

Pension expense will be lower than cash used when there is a prepaid pension expense. (Subtract)

Companies must adjust net income by the difference between cash paid and the expense reported.

This is an Operating Activity

Front 46

How do Deferred Tax Liabilities get adjusted? What about Deferred Tax Assets?

Back 46

You add back increases in deferred tax liabilities.

You subtract out increases in deferred tax assets.

You adjust them to the Income Tax Expense account.

Front 47

How does you adjust for a change related to an investment in common stock under the equity method?

Back 47

A company must deduct from net increase from net income to arrive at cash flow from operating activities.

I.E. A company owns 40% of another company. They report net income at $100,000 and dividends paid at $30,000. You report the deduction as: "Equity in earning of *insert company*, net of dividends, $28,000" [(100,000-30,000) x 40%]

Front 48

How do you adjust Realized Losses and Gains?

Back 48

Losses: Add back the amount of the loss.

Gains: Subtract out the amount of the gain.

Front 49

How do you adjust Unrealized Losses and Gains? Generally what are the 2 types of investments Unrealized gains or Losses occur from and how are they treated differently?

Back 49

They generally occur from either Debt Investments (i.e. Trading) or Equity Investments (i.e. Available-for-sale).

Debt Investments:

Gains = deduct
Losses = add

Equity Investments:

No change, because they dont affect net income or cash flows.

Front 50

How do you adjust Stock Options?

Back 50

If you grant stock options you add back their fair value to net income. When you grant stock options and there is a tax rate, a deferred tax asset occurs, that you must also subtract separately from net income.

Example: $100,000 worth of stock options granted, 35% tax rate. You add back $100,000 under "share-based compensation expense" and you deduct $35,000 under "Increase in deferred tax asset".

If the options are exercised, you deduct the amount of cash exercised under "Cash provided by exercise of stock options" in the FINANCING section.

Front 51

How do you adjust Extraordinary Items?

Back 51

Companies should report either as INVESTING activities or as FINANCING activities cash flows from extraordinary transactions and other events whose effects are included in net income, but which are not related to operations.

You deduct a gain (i.e. having land worth $200,000 condemned by the government for $205,000, creating a gain of $5,000). You do NOT report the gain net of tax. This gain ($5,000) and cash received ($205,000) go under INVESTING activities.

The FASB requires companies to classify all income taxes paid as operating cash outflows.

Front 52

How do you adjust Accounts Receivable (NET)... i.e. A/R minus Allowance for Doubtful Accounts... under the indirect method?

Back 52

You add back increases in allowance for doubtful accounts (because it results from a charge to bad debt expense) to net income to arrive at net cash flows from operating activities.

Example:

Increase in A/R = $(15,000)
Increase in ADA = $6,000
Increase in Accounts Receivable (net) = $(9,000)

Instead of showing each account, a short cut is to net the allowance for doubt accounts against the receivable balance and compare the change in accounts receivable on a net basis.

If the change in the ADA account results from a write-off of accounts receivable, both A/R and ADA are reduced. You also use the net approach for this.

Front 53

What must you watch out for with some working capital changes (CA and CL accounts). List the main 3 examples.

Back 53

You must be careful because some changes in working capital, although they affect cash, not not affect net income (i.e. decrease cash but increase CA; or increase CL but also increases cash) Generally, these are investing or financing activities of a current nature.

1. Short-term available for sale securities:
Purchase of these for $50,000 cash does not effect net income, but it does reduce cash by $50,000. You report these as a cash flow from investing activities as "purchase of short-term available for sale securities $(50,000)". WHEN DEALING WITH TRADING SECURITIES, NOT AVAILABLE-FOR-SALE, A COMPANY CLASSIFIES THE CASH FLOW FROM PURCHASES AND SALES OF TRADING SECURITIES AS CASH FLOWS FROM *OPERATING* ACTIVITIES.


2. Issuance of Short-term nontrade note payable for cash:
This change in a working capital item has no effect on income from operations but it increases cash by the amount of the note payable. For example, a company reports the issuance of a $10,000 short-term note payable for cash in the statement of cash flows as "issuance of short-term note $10,000" under Cash Flows from Financing Activities.

3. Cash Dividend Payable:
A company does not report the declared but unpaid dividend on the statement of cash flows.

Front 54

How do you account for a Net Loss (instead of Net Income)?

Back 54

It must adjust the net loss for those items that do not result in a cash inflow or outflow. The net loss, after adjusting for the charges or credits not affecting cash, may result in a negative or a positive cash flow from operating activities.

Example:

Net Loss = $(60,000)
Depreciation of Plant Assets = $55,000
Amortization of Patents = $5,000
Net Cash Provided by Op Activities = $10,000

Front 55

Can a negative cash flow result even if the company reports a net income?

Back 55

Yes

Front 56

How do you treat Significant Noncash Transactions?

Back 56

They are excluded from the body of the statement of cash flows.

a. If material in amount, may be disclosed in a narrative or schedule at the bottom of the
statement, or

b. As a separate note or schedule to the financial statements.

Front 57

What is the basic format of a worksheet? Explain each part of the worksheet?

Back 57

a. In the balance sheet accounts section, debit balance accounts are listed separately
from credit balance accounts.

b. In the statement of cash flows effects sections, cash inflows are entered as debits and
outflows as credits.

c. Reconciling items are not entered in any journal or account.

Front 58

The bottom portion of the worksheet provides?

Back 58

The information necessary to prepare the
statement of cash flows.

Front 59

The full formula for Cash Flows from Operating Activities using the Indirect Method is?

Back 59

Net Income
+Depreciation/Amortization
-Gains
+Losses
-Increase in CA
+Decrease in CA
+Increase in CL
-Decrease in CL
=Cash Flow from Operating Activities

Front 60

Classic formula to get Net Income (Income Statement)

Back 60

Sales
-Cost of Goods Sold
=Gross Profit
-Selling, General, and Administrative Expenses
=Net Income before Taxes
-Income Tax Expense
=Net Income