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18 Cards in this Set
- Front
- Back
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How can a firm have net income and also have an overdrwn bank account?
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The combination of: 1) credit sales with slow collection of accounts receivable(usually over 30 days), and 2) purchases COD (cash on delivery) and/or purchases on credit with vendors wanting payment in 30 days or less.
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What are the four financial statements for a corporation?
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Income statement, statement of retained earnings, balance sheet, and statement of cash flows.
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What is the primary purpose of the statement of cash flows?
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to provide relevant information about the cash receipts and cash payments of an enterprise during a period.
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What categories does the statement of cash flows classify cash receipts and cash payments?
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operating, investing, and financing activities.
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True/false: The statement of cash flows also discloses significant financing and investing activites not affecting cash flow?
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True
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What are cash equivalents?
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Consist of short term (original maturities of 90 days or less), highly liquid investments.
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What do the direct and indirect methods do?
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Convert the income statement from accrual to cash basis.
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What does the direct method do?
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Adjusts each item on the income statement from accural to cash basis.
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What does the indirect method do?
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Starts with net income and lists all the adjustments necessary to convert net income to cash flow from operations (cash basis net income)
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What is the first step in the indirect method?
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Start with net income.
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What is the second step in the indirect method?
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Analyze income statement for items such as depreciation expense and amortization expense.
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What is the third step in the indirect method?
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Analyze changes in current assests and current liabilities.
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What is the last step in the indirect method?
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Analyze transactions which have occured during the year.
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What are the basic five adjustments?
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+depreciation expense
+amortization expense +depletion expense +losses -gains |
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What are the supplemental disclosures for the indirect method?
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Interst paid and income taxes paid
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What are the signs to tell if the company is in trouble?
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1) negative cash flows from operating activites
2) slow collection of accounts receivable 3) credit problems with vendors 4) excessive inventory 5) heavy debt financing and payments (leverage) |
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true/false: Since depreciation, depletion, and amortization are added back to net income, there is a tendency to think that all you have to do to increase net cash flow is to increase those charges.
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False.
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Increase depreciation, depletion, and amortization ____ net income.
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reduces.
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