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zAccounting > 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

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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
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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

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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

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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

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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

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7
Q

Operating activities involve ___________________

A

income statement items

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8
Q

Investing activities involve _____________________

A

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

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9
Q

Financing activities involve ______________________

A

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

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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

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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

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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
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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

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14
Q

Operating activities-Income statement items

Cash inflows

A

From sale of goods or services

From interest received and dividends received

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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

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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

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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

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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)

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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)

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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

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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
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22
Q

Cash in all the stages during the introductory phase

A

Cash form operations - negative

Cash from investing - negative

Cash from financing - positive

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23
Q

Growth phase

A

Negative cash from investing

Positive cash from financing

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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

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25
Q

Decline phase

A

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
Q

Since the statement of cash flows deals with cash receipts and payments

A

The company must adjust the effects of the use of accrual accounting to determine cash flows

27
Q

Information to prepare Statement of Cash flows comes from:

A
  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
Q

Three major steps of preparing the statement of cash flows

A
  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
Q

Step 1 of preparing st of csh flows

A

This step involves analyzing not only the current year’s income statement but also comparative balance sheets and selected additonal data

30
Q

Step 2 st. of csh flows

A

This step involves analyzing comparative balance sheet data and selected additional information for their effects on cash

31
Q

Step 3 in preparing st. of csh flows

A

The difference between the beginning and ending cash balacnes can be easily computed from comparative balance sheets

32
Q

Indirect method

A

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
Q

Direct method

A

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
Q

Two reasons companies favor the indirect method:

A
  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
Q

FASB has a preference of what method?

A

the direct method

36
Q

Adjustments for indirect method

A

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
Q

Why is depreciation added bac?

A

It does not involve a current cash outflow

Thus it is added back

38
Q

Adjustments for changes in current liabilities

A

Add increases in current liability accounts

Deduct decreases in current liabilities

39
Q

Noncash charges

A

Depreciation expense - add

Patent amortization expense - add

40
Q

Gains and losses

A

Loss on sale of plant asset - add

Gain on sale of plant asset - deduct

41
Q

Changes in current assets and current liabilities

A

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
Q

When companies issue stocks or bonds for cash, the actuall proceeds will appear _____________________

A

in the statement of cash flows as a financing inflow

43
Q

Payment of the dividends (not declaration) is reported as a ______________________________________

A

cash outflow that the company reports as a financing activity

44
Q

Free cash flow

A

Describes the cash remaining from operations after adjustment for capital expenditures and dividends

45
Q

What indicates the cash-generating capability of a company?

A

Cash provided by operating activities

46
Q

What does cash provided by operating activities fail to take into account?

A

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
Q

What provides additional insight regarding a company’s cash-generating ability?

A

Measurement of free cash flow

48
Q

Free Cash Flow Formula

A

Free Cash Flow = Cash Provided by Operations - Capital Expenditures - Cash Dividends

49
Q

What does it mean if cash from operations exceeds net income?

A

Lends credibility to income number as an indicator of potential future performance.

If anything, net income might understate actual performance

50
Q

Price to cash flow

A

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
Q

Cash-based ratios are derived from what?

A

The statement of cash flows

52
Q

Disadvantage of cash-based measures

A

There are no readily available industry averages for comparison

53
Q

Disadvantage of the current ratio

A

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
Q

Current Cash Debt Coverage Ratio

A

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
Q

Cash debt coverage ratio

A

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
Q

Issued bonds for $200,000 cash

A

Financing activities

57
Q

Purchased equipment for $180,000

A

Investing activity

58
Q

Sold land costing $20,000 cash

A

Investing activity

59
Q

Declared and paid a $50,000 cash dividend

A

Financing activity

60
Q

Free Cash Flow is used for what?

A

Liquidity AND Solvency

61
Q
A

zAccounting (31 decks)

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