Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

accounting > Chapter 12 > Flashcards

Chapter 12 Flashcards

1
Q

Statement of cash flows

A

Reports the cash receipts and cash pyaments from operating, investing, and financing activities during a period, in a format that reconciles the beginning and ending cash balances

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Statement of Cash Flows helps assess

A
  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 provided by operating activities
  4. The cash investing and financing transactions during the period
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Financing activities

A

Cash flow activities that include:

a. obtaining cash from issuing debt and repaying the amounts borrowed
b. obtaining cash from stockholders, repurchasing shares, and paying dividends

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Investing activities

A

Cash flow activities that include

a. cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash
b. lending money and collecting the loans

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Operating activities

A

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Why is operating activities considered the most important?

A

It shows the cash provided by company operations

This source of cash is generally considered to be the best measure of a company’s ability to generate sufficient cash to continue as a going concern

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Operating activities involve ___________________

A

income statement items

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Investing activities involve _____________________

A

cash flows resulting from changes in investments and long-term asset items

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Financing activities involve ______________________

A

cash flows resulting from changes in long-term liability and stockholders’ equity items

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Why are interest, dividends, and payments of interest to lenders considered operating activities?

A

Because companies report these items in the income statement, where results of operations are shown

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Comparing cash from operations to net income can reveal what?

A

Information about the “quality” of reported net income

It can reveal the extent to which net income provides a good measure of actual performance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Examples of significant non cash activities

A
  1. Direct issuance of common stock to purchase assets
  2. Conversion of bonds into common stock
  3. Direct issuance of debt to purchase assets
  4. Exchanges of plant assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Difference of the statement of cash flows betwen IFRS and GAAP

A

Noncash investing and financing activities are reported in the notes to the financial statements under IFRS

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Operating activities-Income statement items

Cash inflows

A

From sale of goods or services

From interest received and dividends received

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Operating activities-Income statement items

Cash outflows:

A

To suppliers for inventory

To employees for services

To government for taxes

To lenders for interest

To others for expenses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Investing activities-Changes in investments and long-term assets

Cash inflows

A

From sale of property, plant, and equipment

From sale of investments in debt of equity securities of other entities

From collection of principal on loans to other entities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Investing activities-Changes in investments and long-term assets

Cash outflows

A

To purchase property, plant, and equipment

To purchase investments in debt or equity securities of other entities

To make loans to other entities

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Financing activities-Changes in long-term liabilities and stockholder’s equity

Cash inflows

A

From sale of common stock

From issuance of debt (bonds and notes)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Financing activities - Changes in long-term liabilities and stockholders’ equity

Cash outflows

A

To stockholders as dividends

To redeem long-term debt or reacquire capital stock (treasury stock)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Where do companies report significant financing and investing activities that do not affect cash?

A

In either a seperate schedule at the bottom of the statement of cash flows or in a seperate note or supplementary schedule to the financial statements

*fulfills the full disclosure principle

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Product life cycle

A

A series of phases in a product’s sales and cash flows over time

These phases, in order of occurrence, are:

  1. Introductory
  2. Growth
  3. Maturity
  4. Decline
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Cash in all the stages during the introductory phase

A

Cash form operations - negative

Cash from investing - negative

Cash from financing - positive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Growth phase

A

Negative cash from investing

Positive cash from financing

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Maturity phase

A

Cash from operations and net income are approximately the same

Cash generated from operations exceeds investing needs

Company can start to pay dividends, retire debt, or buy back stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Decline phase
Cash from operations decreases Cash from investing might be positive - company sells of excess assets Cash from financing may be negative - company buys back stock and retires debt
26
Since the statement of cash flows deals with cash receipts and payments
The company must adjust the effects of the use of accrual accounting to determine cash flows
27
Information to prepare Statement of Cash flows comes from:
1. Comparative balance sheets - indicates the amount of changes in assets, liabilities, and stockholders' equities from beginning to end of period 2. Current income statement - helps determine the amount of cash provided or used by operations during the period 3. Additonal information - includes transaction data that are needed to determine how cash was provided or used during the period
28
Three major steps of preparing the statement of cash flows
1. Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis 2. Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions 3. Compare the net change in cash on the statement of cash flows with the change in the cash account reported on the balance sheet to make sure the amounts agree
29
Step 1 of preparing st of csh flows
This step involves analyzing not only the current year's income statement but also comparative balance sheets and selected additonal data
30
Step 2 st. of csh flows
This step involves analyzing comparative balance sheet data and selected additional information for their effects on cash
31
Step 3 in preparing st. of csh flows
The difference between the beginning and ending cash balacnes can be easily computed from comparative balance sheets
32
Indirect method
A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities
33
Direct method
A method of determing net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. The direct method shows operating cash receipts and payments
34
Two reasons companies favor the indirect method:
1. It is easier and less costly to prepare 2. It focuses on the differences between net income and net cash flow from operating activities
35
FASB has a preference of what method?
the direct method
36
Adjustments for indirect method
Net Income +/- Add back non cash expenses (depreciation expense, amortization, or depletion) Deduct gains and add losses that resulted from investing and financing activities Analyze changes to noncash current asset and current liability accounts = Net Cash Provided / Used by Operating Activities
37
Why is depreciation added bac?
It does not involve a current cash outflow Thus it is added back
38
Adjustments for changes in current liabilities
Add increases in current liability accounts Deduct decreases in current liabilities
39
Noncash charges
Depreciation expense - add Patent amortization expense - add
40
Gains and losses
Loss on sale of plant asset - add Gain on sale of plant asset - deduct
41
Changes in current assets and current liabilities
Increase in current asset account - deduct Decrease in current asset account - add increase in current liability account - add decrease in current liability account - deduct
42
When companies issue stocks or bonds for cash, the actuall proceeds will appear \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
in the statement of cash flows as a financing inflow
43
Payment of the dividends (not declaration) is reported as a \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
cash outflow that the company reports as a financing activity
44
Free cash flow
Describes the cash remaining from operations after adjustment for capital expenditures and dividends
45
What indicates the cash-generating capability of a company?
Cash provided by operating activities
46
What does cash provided by operating activities fail to take into account?
That a company must invest in new fixed assets just to maintain its current level of operations That companies must at least maintain dividends at current levels
47
What provides additional insight regarding a company's cash-generating ability?
Measurement of free cash flow
48
Free Cash Flow Formula
Free Cash Flow = Cash Provided by Operations - Capital Expenditures - Cash Dividends
49
What does it mean if cash from operations exceeds net income?
Lends credibility to income number as an indicator of potential future performance. If anything, net income might understate actual performance
50
Price to cash flow
Company stock price / Cash flow per share high =\> suggests stock price is high relative to the company's ability to generate cash low =\> stock might be a bargain
51
Cash-based ratios are derived from what?
The statement of cash flows
52
Disadvantage of cash-based measures
There are no readily available industry averages for comparison
53
Disadvantage of the current ratio
It uses year-end balances of current asset and current liability accounts These year-end balances may not be representative of the company's position during most of the year
54
Current Cash Debt Coverage Ratio
_Cash Provided by Operations_ Average Current Liabilities Considered better measure of liquidity on the average day because cash provided by operating activities involves the entire year rather than a balance at one point in time below .40=\> casue for addional investigation of a company's liquidity \*MEASURE LIQUIDITY
55
Cash debt coverage ratio
_Cash Provided by Operations_ Average Total Liabilities Indicates a company's ability to repay its liabilities from cash generated from operations, that is, without having to liquidate productive assets such as property. below .20 =\> cause for additional investigation
56
Issued bonds for $200,000 cash
Financing activities
57
Purchased equipment for $180,000
Investing activity
58
Sold land costing $20,000 cash
Investing activity
59
Declared and paid a $50,000 cash dividend
Financing activity
60
Free Cash Flow is used for what?
Liquidity AND Solvency
61

accounting (31 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions