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88 Cards in this Set

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Some benefits of this statement are:
Assessing future cash flows: Income data when augmented with current cash flow data
provides a better basis for assessing future cash flows.
Assessing quality of income: Some believe that cash flow information is more reliable than income
information because income involves a number of assumptions, estimates and valuations.
Assessing operating capability: Whether an enterprise is able to maintain its operating
capability, provide for future growth, and distribute dividends to the owners depends on whether
adequate cash is being or will be generated.
Assessing financial flexibility and liquidity: Cash flow data indicate whether a company should
be able to survive adverse operating problems and whether a company might have difficulty in
meeting obligations as they become due, paying dividends, or meeting other recurring costs.
Providing information on financial and investing activities: Cash flows are classified by their
effect on balance sheet items; investing activities affect assets while financing activities affect
liabilities and equities.
The main purpose of the statement of cash flows
is to show the change in cash of a company from
one period to the next. The statement of cash flows provides information about a company’s
operating, financing, and investing activities. More precisely, it provides information about the
company’s cash inflows and outflows for the period.
Investing activities involve noncurrent assets and include
(1) lending money and collecting on
those loans and (2) acquiring and disposing of investments and productive long-lived assets.
Financing activities, on the other hand, involve liability and owners’ equity items and include
(1) obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining capital
from owners and providing them with a return on their investment. Operating activities include all
transactions and events that are not investing and financing activities. Operating activities involve
the cash effects of transactions that enter into the determination of net income.
Examples of sources of cash in a statement of cash flows include
Examples of sources of cash in a statement of cash flows include
Examples of uses of cash include
cash used in operating activities, payment of
cash dividends, redemption of debt, purchase of investments, redemption of capital stock, and the
purchase of property, plant, and equipment.
Preparing the statement of cash flows involves three major steps:
1. Determine the change in cash. This is simply the difference between the beginning and ending
cash balances.
2. Determine the net cash flow from operating activities. This involves analyzing the current
year’s income statement, comparative balance sheets and selected transaction data.
3. Determine cash flows from investing and financing activities. All other changes in balance
sheet accounts are analyzed to determine their effect on cash.
Purchase of land—
investing;
Payment of dividends
—financing;
Cash sales—
—operating
Purchase of treasury stock
—financing.
where do you get data necessary for preparation of the statement of cash flows
Comparative balance sheets, a current income statement, and certain transaction data
Comparative balance sheets
indicate
how assets, liabilities, and equities have changed during the period.
A current income
statement
provides information about the amount of cash provided from operating activities.
It is necessary to convert accrual-based net income to a cash basis because
net income includes
items that do not provide or use cash. An example would be an increase in accounts receivable. If
accounts receivable increased during the period, revenues reported on the accrual basis would be
higher than the actual cash revenues received. Thus, accrual basis net income must be adjusted
to reflect the net cash flow from operating activities.
Net cash flow from operating activities under the direct method is
the difference between cash
revenues and cash expenses. The direct method adjusts the revenues and expenses directly to
reflect the cash basis. This results in cash net income, which is equal to “net cash flow from
operating activities.”
The indirect method involves adjusting
accrual net income. This is done by starting with accrual
net income and adding or subtracting noncash items included in net income. Examples of
adjustments include depreciation and other noncash expenses and changes in the balances of
current asset and current liability accounts from one period to the next.
What can cause an increase in cash even though the company reported a loss
(1)
high cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3)
sales of investments, and (4) issuance of debt or capital stock.
To determine cash payments to suppliers, it is first necessary to
find purchases for the year. To
find purchases, cost of goods sold is adjusted for the change in inventory (increased when inventory
increases or decreased when inventory decreases). After purchases are computed, cash
payments to suppliers are determined by adjusting purchases for the change in accounts payable.
An increase (decrease) in accounts payable is deducted from (added to) purchases to determine
cash payments to suppliers.
a) Purchase of equipment is a
Investing activity
Redemption of bonds payable is a
Financing activity
Sale of building is a
investing activity
Cash payments to suppliers are a
operating activity
exchange of equipment for furniture is a
significant noncash investing and financing activities
issuance of preferred stock is a
financing activity
cash received from cusomers is
operating activity
prucahse of treasury stock
financing activity
issuance of bonds for land
significant noncsh investing and financing activity
payment of dividends
financing activity
cash payments to employees
operating activity
cash payments for operating purposes
operating activity
Examples of noncash transactions are:
(1) Issuance of stock for assets, (2) issuance of stock to
liquidate debt, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property,
plant, and equipment.
(1) Issuance of stock for assets, (2) issuance of stock to
liquidate debt, (3) issuance of bonds or notes for assets, and (4) noncash exchanges of property,
plant, and equipment.
(1) By providing a reconciliation between net income and cash provided by operations, the differences
are highlighted.
(2) The direct method is nothing more than a cash basis income statement which will confuse
and create uncertainty for financial statement users who are familiar with the accrual-based
income statements.
(3) There is some question as to whether the direct method is cost/benefit justified as this
method would probably lead to additional preparation costs because the financial records are
not maintained on a cash basis.
Increase in accounts receivable will affect SCF
Deducted from the net income in the operating section
Decrease in accounts receivable will affect SCF
Added to net income in the operating section
issuance of stock will affect SCF
cash reciept in teh financing section
Depreciation expense will affect SCF
Added to net income in the operating section
Sale of land at book value will will affect SCF
Cash receipt in investing section
Sale of land at a gain will affect SCF
cash receipt in investing section, and Deducted from net income in the operating section
Payment of dividends will affect SCF
cash payment in financing section
Purchase of land and buildings will affect SCF
cash payment in investing section
increase in accounts payable will affect SCF
added to net income in the operting section
Decrease in accounts payable will affect SCF
Deducted from net income in the operating section
Loan from bank by signing note willwill affect SCF
Cash receipt in financing section
purchase of equipment using a note will affect SCF
Noncash investing or financing activity
increase in inventory will affect SCF
Deducted from net income in the operating section
Issuance of bonds will affect SCF
Cash receipt in financing section
Retirment of bonds payable will affect SCF
Cash payment in financing section
Sale of equipment at a loss will affect SCF
Cash receipt in investing section, added to net income in the operating section
Purchase of treasury stock
cash payment in the financing section
Indicate in general journal form how the items below would be entered in a worksheet for the preparation of the statement of cash flows
a) net income is 317,0000
b) cash dividends declared and paid totaled 120,000
c) equipment was purchased for 114,000
d) Equipment that originally cost 40,000 and had accumulated depreciation of 32,000 was sold for 13,000
BRIEF EXERCISE 23-13
(a) Operating—Net Income ........................................ 317,000
Retained Earnings........................................ 317,000
(b) Retained Earnings................................................. 120,000
Financing—Cash Dividends ....................... 120,000
(c) Equipment.............................................................. 114,000
Investing—Purchase of Equipment ........... 114,000
(d) Investing—Sale of Equipment.............................. 13,000
Accumulated Depreciation—Equipment............. 32,000
Equipment..................................................... 40,000
Operating—Gain on Sale of Equipment .... 5,000
t is an objective of the statement of cash flows to
provide information about the operating, investing, and financing activities of an entity
during a period.
The primary purpose of the statement of cash flows is to provide information
about the cash receipts and cash payments of an entity during a period.
Cash equivalents are
treasury bills, commercial paper, and money market funds purchased with excess cash, investments with original maturities of three months or less, readily convertible into known amounts of cash.
An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
deduction from net income in arriving at net cash flow from operating activities.
A statement of cash flows typically would not disclose the effects of
stock dividends declared.
In a statement of cash flows, the cash flows from investing activities section should report

the issuance of common stock in exchange for a factory building, stock dividends received, a major repair to machinery charged to accumulated depreciation, or the assignment of accounts receivable.
a major repair to machinery charged to accumulated depreciation
A company borrows $10,000 and signs a 90-day nontrade note payable. In preparing a
statement of cash flows (indirect method), this event would be reflected as a(n)
cash inflow from financing activities.
When preparing a statement of cash flows (indirect method), which of the following is not
an adjustment to reconcile net income to net cash provided by operating activities?
A change in interest payable, A change in dividends payable, A change in income taxes payable
A change in dividends payable
Declaration of a cash dividend on common stock affects cash flows from operating
activities under the direct method and indirect method as follows:
Direct Method Indirect Method
a. Outflow Inflow
b. Inflow Inflow
c. Outflow Outflow
d. No effect No effect
No effect No effect
When preparing a statement of cash flows (indirect method), an increase in ending
inventory over beginning inventory will result in an adjustment to reported net earnings
because
cost of goods sold on an accrual basis is lower than on a cash basis.
When preparing a statement of cash flows, a decrease in accounts receivable during a
period would cause which one of the following adjustments in determining cash flow from
operating activities?
Direct Method Indirect Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
Increase Increase
In determining net cash flow from operating activities, a decrease in accounts payable
during a period requires an
increase adjustment to cost of goods sold under the direct method.
Riley Company reports its income from investments under the equity method and
recognized income of $25,000 from its investment in Wood Co. during the current year,
even though no dividends were declared or paid by Wood during the year. On Riley's
statement of cash flows (indirect method), the $25,000 should
be shown as a deduction from net income in the cash flows from operating activities
section.
When preparing a statement of cash flows, an increase in accounts payable during a
period would require which of the following adjustments in determining cash flows from
operating activities?
Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
Increase Decrease
When preparing a statement of cash flows, a decrease in prepaid insurance during a
period would require which of the following adjustments in determining cash flows from
operating activities?
Indirect Method Direct Method
a. Increase Decrease
b. Decrease Increase
c. Increase Increase
d. Decrease Decrease
Increase Decrease
When preparing a statement of cash flows, the following are used for which method in
determining cash flows from operating activities?
Gross Accounts Receivable Net Accounts Receivable
a. Indirect Direct
b. Direct Indirect
c. Direct Direct
d. Neither Indirect
Direct Indirect
Which of the following statements is correct?
a. The indirect method starts with income before extraordinary items.
b. The direct method is known as the reconciliation method.
c. The direct method is more consistent with the primary purpose of the statement of
cash flows.
d. All of these.
The direct method is more consistent with the primary purpose of the statement of
cash flows.
In reporting extraordinary transactions on a statement of cash flows (indirect method), the
a. gross amount of an extraordinary gain should be deducted from net income.
b. net of tax amount of an extraordinary gain should be added to net income.
c. net of tax amount of an extraordinary gain should be deducted from net income.
d. gross amount of an extraordinary gain should be added to net income.
gross amount of an extraordinary gain should be deducted from net income.
Which of the following is shown on a statement of cash flows?
a. A stock dividend
b. A stock split
c. An appropriation of retained earnings
d. None of these
d. None of these
The net cash provided by operating activities in Moon Company's statement of cash flows
for 2004 was $154,000. For 2004, depreciation on plant assets was $60,000, amortization
of goodwill was $10,000, and cash dividends paid on common stock was $72,000. Based
only on the information given above, Moon’s net income for 2004 was
$84,000.
During 2004, Garber Corporation, which uses the allowance method of accounting for
doubtful accounts, recorded a provision for bad debt expense of $15,000 and in addition it
wrote off, as uncollectible, accounts receivable of $6,000. As a result of these
transactions, net cash flows from operating activities would be calculated (indirect
method) by adjusting net income with a
$15,000 increase.
Stark Company sold some of its plant assets during 2004. The original cost of the plant
assets was $450,000 and the accumulated depreciation at date of sale was $420,000.
The proceeds from the sale of the plant assets were $63,000. The information concerning
the sale of the plant assets should be shown on Stark's statement of cash flows (indirect
method) for the year ended December 31, 2004, as a(n)
a. subtraction from net income of $33,000 and a $30,000 increase
subtraction from net income of $33,000 and a $63,000 increase in cash flows from
investing activities.
An analysis of the machinery accounts of Colyer Company for 2004 is as follows:
Machinery, Net of
Accumulated Accumulated
Machinery Depreciation Depreciation
Balance at January 1, 2004 $600,000 $150,000 $450,000
Purchases of new machinery in 2004
for cash 240,000 — 240,000
Depreciation in 2004 — 120,000 (120,000)
Balance at Dec. 31, 2004 $840,000 $270,000 $570,000
The information concerning Colyer's machinery accounts should be shown in Colyer's
statement of cash flows (indirect method) for the year ended December 31, 2004, as a(n)
addition to net income of $120,000 and a $240,000 decrease in cash flows from
investing activities.
Equipment which cost $138,000 and had accumulated depreciation of $74,000 was sold
for $72,000. This transaction should be shown on the statement of cash flows (indirect
method) as a(n)
deduction from net income of $8,000 and a $72,000 cash inflow from investing
activities.
During 2004, equipment was sold for $195,000. The equipment cost $315,000 and had a
book value of $180,000. Accumulated Depreciation—Equipment was $860,000 at
12/31/03 and $920,000 at 12/31/04. Depreciation expense for 2004 was
$195,000.
The following information on selected cash transactions for 2004 has been provided by
Raymond Company:
Proceeds from sale of land $ 400,000
Proceeds from long-term borrowings 1,000,000
Purchases of plant assets 360,000
Purchases of inventories 1,700,000
Proceeds from sale of Raymond common stock 600,000
What is the cash provided (used) by investing activities for the year ended December 31,
2004, as a result of the above information?
$40,000
Selected information from Benton Company's 2004 accounting records is as follows:
Proceeds from issuance of common stock $ 500,000
Proceeds from issuance of bonds 1,500,000
Cash dividends on common stock paid 200,000
Cash dividends on preferred stock paid 75,000
Purchases of treasury stock 150,000
Sale of stock to officers and employees not included above 125,000
Benton's statement of cash flows for the year ended December 31, 2004, would show net
cash provided (used) by financing activities of
$1,700,000.
Snow Incorporated, had net income for 2004 of $7,000,000. Additional information is as
follows:
Amortization of patents $ 60,000
Depreciation on plant assets 2,200,000
Long-term debt:
Bond premium amortization 90,000
Interest paid 1,200,000
Provision for doubtful accounts:
Current receivables 110,000
Long-term nontrade receivables 40,000
What should be the net cash provided by operating activities in the statement of cash
flows for the year ended December 31, 2004, based solely on the above information?
$9,320,000.
The net income for the year ended December 31, 2004, for Unger Company was
$900,000. Additional information is as follows:
Depreciation on plant assets $450,000
Amortization of leasehold improvements 255,000
Provision for doubtful accounts on short-term receivables 90,000
Provision for doubtful accounts on long-term receivables 75,000
Interest paid on short-term borrowings 60,000
Interest paid on long-term borrowings 45,000
Based solely on the information given above, what should be the net cash provided by
operating activities in the statement of cash flows for the year ended December 31, 2004?
$1,770,000.
Bell Corp.'s comparative balance sheet at December 31, 2004 and 2003 reported
accumulated depreciation balances of $1,280,000 and $960,000, respectively. Property
with a cost of $80,000 and a carrying amount of $60,000 was the only property sold in
2004. Depreciation charged to operations in 2004 was
$336,000.
Vance Co.'s prepaid insurance was $30,000 at December 31, 2004 and $15,000 at December 31, 2003. Insurance expense was $12,000 for 2004 and $9,000 for 2003. What amount of cash disbursements for insurance would be reported in Vance's 2004 net cash provided by operating activities presented on a direct basis?
$27,000.
A company acquired a building, paying a portion of the purchase price in cash and issuing a
mortgage note payable to the seller for the balance.
In a statement of cash flows, what amount is included in investing activities for the above
transaction?
a. Cash payment
b. Acquisition price
c. Zero
d. Mortgage amount
Cash payment
A company acquired a building, paying a portion of the purchase price in cash and issuing a
mortgage note payable to the seller for the balance. In a statement of cash flows, what amount is included in financing activities
Zero
Marcum Corp.'s transactions for the year ended December 31, 2004 included the following:
• Purchased real estate for $220,000 cash which was borrowed from a bank.
• Sold available-for-sale securities for $200,000.
• Paid dividends of $240,000.
• Issued 500 shares of common stock for $100,000.
• Purchased machinery and equipment for $50,000 cash.
• Paid $180,000 toward a bank loan.
• Reduced accounts receivable by $40,000.
• Increased accounts payable $80,000.
Marcum's net cash used in investing activities for 2004 was
$70,000.
Marcum Corp.'s transactions for the year ended December 31, 2004 included the following:
• Purchased real estate for $220,000 cash which was borrowed from a bank.
• Sold available-for-sale securities for $200,000.
• Paid dividends of $240,000.
• Issued 500 shares of common stock for $100,000.
• Purchased machinery and equipment for $50,000 cash.
• Paid $180,000 toward a bank loan.
• Reduced accounts receivable by $40,000.
• Increased accounts payable $80,000.
Marcum's net cash used in financing activities for 2004 was
$100,000.
Silas Corp.'s transactions for the year ended December 31, 2004 included the following:
• Acquired 50% of Gant Corp.'s common stock for $225,000 cash which was borrowed from a
bank.
• Issued 5,000 shares of its preferred stock for land having a fair value of $400,000.
• Issued 500 of its 11% debenture bonds, due 2009, for $490,000 cash.
• Purchased a patent for $275,000 cash.
• Paid $150,000 toward a bank loan.
• Sold available-for-sale securities for $995,000.
• Had a net increase in returnable customer deposits (long-term) of $110,000.
Silas' net cash provided by investing activities for 2004 was
$495,000.
Silas Corp.'s transactions for the year ended December 31, 2004 included the following:
• Acquired 50% of Gant Corp.'s common stock for $225,000 cash which was borrowed from a
bank.
• Issued 5,000 shares of its preferred stock for land having a fair value of $400,000.
• Issued 500 of its 11% debenture bonds, due 2009, for $490,000 cash.
• Purchased a patent for $275,000 cash.
• Paid $150,000 toward a bank loan.
• Sold available-for-sale securities for $995,000.
• Had a net increase in returnable customer deposits (long-term) of $110,000.
Silas' net cash provided by financing activities for 2004 was
$675,000.