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45 Cards in this Set
- Front
- Back
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The purpose of the ______ _ _____ ____ is to report all major cash receipts (inflows) and cash payments (out flows) during a period
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statement of cash flows
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A cash equivalent must satisfy two criteria....
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1) be readily convertible to a known amount of cash
2) be sufficiently close to its maturity so its market value is unaffected by interest rate changes |
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______________ include those transactions and events that determine net income
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operating activities
remember to think of things that would be on an income statement = the activites that are operating activities |
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operating activities cash inflow examples....
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- from customers for sales
-from collections on credit sales -from lawsuit settlements -from borrowers for interest -from cash dividends received |
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operating activities cash outflow examples.....
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-to salaries and wages
-to lenders for interest -to charities -to suppliers for goods and services -to governments for taxes and fines |
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___________ generally include those transactions and events that effect long-term assets, namely, the purchase and sale of long term assets
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Investing activities
They also include the 1) purchase and sale of short-term investments other than cash equivalents and trading securities and 2) lending and collecting money for notes receivable |
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investing activities cash inflows examples....
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-from selling available - for - sale securities
-from selling (discounting) notes -from collecting principal on loans -from selling long-term productive assets -from selling held-to-maturity securities |
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investing activities cash outflows examples....
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-to make loans to others
-to purchase held-to-maturity securities -to purchase long-term productive assets -to purchase available for sale securities |
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______________ include those transactions and events that affect long term liabilities and equity
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Financing activities
examples are 1) obtaining cash from issuing debt and repaying the amounts borrowed and 2) receiving cash from or distributing cash to owners |
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financing activities cash inflows examples
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-from contributions by owners
-from issuing bonds and notes -from issuing its own equity stock -from issuing short and long term debt |
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financing activities cash outflow examples
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-to repay cash loans
-to pay withdrawals by owners -to pay dividends to shareholders -to purchase treasury stock |
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important noncash and investing activies that are sometimes posted at the bottom of the cash flows statement include....
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-retirement of debt by issuing equity stock
-conversion of preferred stock to common stock -lease of assets in a capital lease transaction -purchase of long-term assets by issuing a note or bond -exchange of noncash assets for other noncash assets -purchase of noncash assets by issuing equity or debt |
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Does the statement of cash flows report the cash payments to purchase cash equivalents? does it report the cash receipts from selling cash equivalents?
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No to both. The statement of cash flows reports changes in the sum of cash plus cash equivalents. It does not report transfers between cash and cash equivalents
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identify the categories of cash flows reported separately on the statement of cash flows
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the three categories of cash inflows and outflows are operating activities, investing activites, and financing activites
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identify the cash activity category for each transaction a) purcahse equipment for cash b) cash payment of wages c) sale of common stock for cash d) receipt of cash dividends from stock investment e)cash collection from customers f) bond issuance for cash
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a) investing activity
b) operating activity c) financing activity d) operating activity e) operating activity f) financing activity |
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Preparing a statement of cash flows involves five steps:
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1) compute the net increase or decrease in cash 2) compute and report net cash provided (used) by operating activities 3) compute and report net cash provided (used) by investing activities; 4) compute and report net cash provided (used) by operating, investing, and financing and then prove it by adding it to the beginning cash balance to show that it equals the ending cash balance
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the ______________ separately lists each major item of operating cash receipts and each major item of operating cash payments.
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direct method
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determine net cash provided (used) by operating activities using the following data: net income, 74,900; decrease in accounts receivable, 4,600; increase in inventory, 11,700; decrease in accounts payable, 1,000; loss on sale of equipment, 3,400; payment of cash dividends, 21,500
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= 70,200
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why are expenses such as depreciation and amoritization added to net income when cash flow from operating activities is computed by the indirect method
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expense such as depreciation and amortization do not require current cash outflows. Therefore, adding these expenses back to net income eliminates these noncash items from the net income number, converting it to a cash basis
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The _____________ reports net income and then djusts it for items necessary to obtain net cash provided (used) by operating activities
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indirect method
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a company reports net income of 15,000 that includes a 3,000 gain on the sale of plant assets. Why is this gain subtracted from net income in computing cash flow from operating activities using the indirect methjod
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a gain on the sale of plant assets is subtracted from net income because a sale of plant assets is not an operating activity; it is an investing activity for the amount of cash received from its sale. Also, such a gain yilds no cash effects
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equipment costing 80,000 with accumulated depreciation of 30,000 is sold at a loss of 10,000. What is the cash receipt from this sale? In what section of the statement of cash flows is this transaction reported
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40,000; the 40,000 cash receipt is reported as an investing activity
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cash flow on total assets =
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cash flow from operations / average total assets
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cash coverage of growth =
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operating cash flow / cash outflow for plant assets
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operating cash flow to sales =
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operating cash flow / net sales
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Which statement is incorrect about a statement of cash flows?
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Cash equivalents are not included in the cash flows on the statement of cash flows.
Feedback: The main purpose of the statement of cash flows is to report the major cash receipts and payments for a period. Cash flows are defined to include both cash and cash equivalents. Statements A, C, D, and E are all correct statements. C1 |
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Which of the following is a purpose of preparing a cash flow statement?
A) A statement of cash flows is separated into operating, financing and investing sections. B) Cash equivalents are not included in the cash flows on the statement of cash flows. C) Two different methods may be used to compute the net cash flows from operating activities. D) The cash flow statement reports the changes in cash. E) Noncash investing and financing activities must be disclosed either in a note or separate schedule to the statement of cash flows. |
B) Cash equivalents are not included in the cash flows on the statement of cash flows.
Feedback: The main purpose of the statement of cash flows is to report the major cash receipts and payments for a period. Cash flows are defined to include both cash and cash equivalents. Statements A, C, D, and E are all correct statements. C1 |
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Which of the following is a purpose of preparing a cash flow statement?
A) To show how a company obtained its cash B) To show how a company used its cash C) To explain the change in the cash balance D) All of the above E) None of the above |
All of the above
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Cash flows would include which of the following?
A) Coins and currency B) Checks C) A 3-month CD D) All of the above E) None of the above |
D) All of the above
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Which of the following is a financing activity?
A) Cash paid to charities B) Cash collected from principal on a loan C) Cash used to make a loan to someone D) Cash received from selling a piece of equipment. E) None of the above |
C) Cash used to make a loan to someone
Feedback: Financing activities include those transactions and events that affect long- term liabilities and equity. An example of a financing activity would include using cash to make a loan to someone |
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Which of the following activities would not be reported as an investing activity on a statement of cash flows?
A) Collection of a loan made to an officer of the company B) Purchase of a patent from an inventor C) Sale of a plant asset at a price equal to its book value D) Cash dividends received from an investment made in another company E) Purchase of used production equipment |
D) Cash dividends received from an investment made in another company
Feedback: Receipts of dividends or interest are not considered to be investing activities. They are operating activities. Dividends earned and interest earned will appear on the income statement as part of the determination of net income. |
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Which of the following is an investing activity?
A) Collecting the principal of a long-term note B) Withdrawals of cash made by a partner C) Issuing common stock for cash D) Issuing bonds at a discount E) Retiring bonds before their maturity date at less than par value |
A) Collecting the principal of a long-term note
Feedback: The collection of a long-term note receivable is an investing activity. The other activities (B to E) are financing activities, since they involve liability or owner's equity accounts. |
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Which of the following activities would not be considered a financing activity?
A) Retirement of preferred stock B) Issuing bonds payable C) Paying cash dividends D) Borrowing money by issuing a short-term note E) Purchasing land for cash |
E) Purchasing land for cash
Feedback: Purchasing land is an investing activity. |
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What type of accounts do financing activities affect?
A) Assets B) Current assets and current liabilities C) Long-term liabilities and equity D) Revenues E) Expenses |
C) Long-term liabilities and equity
Feedback: Financing activities include those transactions and events that affect long-term liabilities and equity. |
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The following events occurred during the accounting period: Cash of $56,000 was received from the issue of common stock. Cash dividends of $11,000 were paid to stockholders. Cash of $19,000 was received from an investment. Cash of $14,000 was paid for interest payments to bondholders. Cash of $10,000 was used to retire preferred stock.What was the net cash provided or used by financing activities?
A) $54,000 provided B) $39,000 provided C) $35,000 provided D) $45,000 used E) None of the above |
C) $35,000 provided
Feedback: The financing activities are: (1) issuing common stock ($56,000 provided), (2) paying cash dividends ($11,000 used), and (3) retiring preferred stock ($10,000 used). $56,000 - $11,000 - $10,000 = $35,000. |
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The following events occurred during an accounting period: Machinery was purchased for $4,500 cash. $10,000 was borrowed on a long-term note. 1,000 shares of $5 par value common stock were issued for cash, at par. Cash dividends of $2,000 were declared and paid. An investment in another business was sold for $23,000. $50,000 in bonds was retired at maturity. A plant asset with a book value of $4,500 was sold for $4,500.
What were the net cash flows from financing activities? A) $14,000, decrease B) $37,000, decrease C) $23,000, increase D) $14,000, increase E) None of the above |
B) $37,000, decrease
Feedback: The inflows from financing activities were (b) $10,000 on the note and (c) $5,000 from the stock issue. Outflows from financing activities were (d) $2,000 of cash dividends and (f) a $50,000 bond retirement. P3 17 UNANSWERED |
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The following events occurred during the accounting period:
* Cash of $43,000 was used to purchase a second-hand forklift. * Cash of $12,000 was received from the sale of an investment at a loss. * Cash of $15,000 was used to retire bonds. * Plant assets were depreciated for $7,000 on the declining balance method. What was the cash provided or used by investing activities? A) $31,000 used B) $16,000 used C) $1,000 used D) $31,000 provided E) None of the above |
A) $31,000 used
Feedback: The investing activities were the purchase of the forklift ($43,000 used) and the sale of an investment ($12,000 provided); $43,000 used less $12,000 provided equals $31,000 used. |
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Under the indirect method, the net cash provided by operating activities was $92,000. Accounts receivable increased $4,000, merchandise inventory decreased $10,000, accounts payable decreased $8,000, income taxes payable increased $3,000. No other items except depreciation were adjustments to reconcile net income of $80,000 to net cash provided by operating activities. What was the amount of the depreciation expense?
A) $31,000 B) $11,000 C) $17,000 D) $ 3,000 E) None of the above |
B) $11,000
Feedback: $80,000 - $4,000 + $10,000 - $8,000 + $3,000 = $81,000. $92,000 - $81,000 = $11,000, the amount of depreciation expense. Depreciation expense is added to net income in the determination of net cash provided or used by operating activities |
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The cash provided from operations was $33,000. The net increase in cash was $22,000. If the net cash inflow from financing activities was $15,000, then what was the net cash flow from investing activities?
A) A net inflow of $26,000 B) A net outflow of $26,000 C) A net outflow of $24,000 D) A net inflow of $11,000 E) None of the above |
B) A net outflow of $26,000
Feedback: Total cash provided by operations ($33,000) and financing activities $15,000) was $48,000. The investing activities used $26,000 ($33,000 + $15,000 - $22,000). |
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The beginning balance of the Equipment account was $45,000; the ending balance was $54,000. The beginning balance of the Accumulated Depreciation account was $24,000; the ending balance was $33,000. Equipment with a cost of $6,000 and accumulated depreciation of $5,000 was sold for $1,200 cash. What was the amount of depreciation expense for the year?
A) $14,000 B) $ 9,000 C) $23,000 D) $ 5,000 E) None of the above |
A) $14,000
Feedback: The net change in the accumulated depreciation account was $9,000 ($33,000 - $24,000). The disposal of the equipment would have resulted in a debit to the accumulated depreciation account of $5,000. The depreciation expense was $9,000 + $5,000 = $14,000 |
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Which of the following is true regarding to cash flows from operating activities of the statement of cash flows (using the indirect method)?
A) Depreciation expense is added B) A loss on the sale of plant assets is added C) A gain on the sale of plant assets is subtracted D) All of the above E) None of the above |
D) All of the above
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When a long-term asset is sold for cash at a price in excess of its book value, the sale should be reported as an inflow of cash from an investing activity equal to which of the following?
A) Selling price (proceeds) B) Book value C) Selling price less the amount of the gain D) Selling price plus the amount of the gain E) Accumulated depreciation |
A) Selling price (proceeds)
Feedback: The proceeds (the amount of the selling price received in cash) should be reported as an inflow of cash from an investing activity. When the indirect method of reporting cash flows from operating activities is used, the gain is subtracted from net income to avoid double counting it. |
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How is cash flow on total assets calculated?
A) Cash flow from operations / ending total assets B) Average cash balance / ending total assets C) Cash flow from operations / average total assets D) Cash flow from operations / ending total assets E) Average cash balance / average total assets |
C) Cash flow from operations / average total assets
Feedback: The first step to preparing a worksheet is to enter the beginning and ending balances of the balance sheet accounts. Analysis of Changes columns are used to explain changes in the accounts and determine the cash flows for operating, investing, and financing activities. |
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The cost of goods sold was $190,000. Beginning merchandise inventory was $14,000, and ending merchandise inventory was $22,000. During the year, prepaid expenses decreased by $6,000, accounts receivable increased by $6,200, and accounts payable increased by $3,000. What is the amount reported for cash paid for merchandise?
A) $201,000 B) $195,000 C) $198,000 D) $185,000 E) None of the above |
B) $195,000
Feedback: A net increase in prepaids is added to the related expense accounts to determine the amount of cash outflow for prepaids ($24,000 - $14,000 + $9,000 = $19,000). |
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The Prepaid Insurance account had a beginning balance of $14,000 and an ending balance of $24,000. The Insurance Expense account has an ending balance of $9,000. What was the net cash flow related to insurance expense?
A) $18,000 B) $19,000 C) $10,000 D) $ 2,000 E) None of the above |
B) $19,000
Feedback: A net increase in prepaids is added to the related expense accounts to determine the amount of cash outflow for prepaids ($24,000 - $14,000 + $9,000 = $19,000) |
