Chapter 13

Question 1

What aspects on the B/S relate to operating activities?

Answer 1

Current assets

current liability

Question 2

What aspects on the B/S relate to financing activities?

Answer 2

Non current liability

Share capital

Question 3

What aspects on the B/S relate to investing activities?

Answer 3

Non current assets

Question 4

What is the purpose of the statemend of cash flows?

Answer 4

It helps the user asses:

• company’s ability to generate cash
• What the company did with the cash

Question 5

Diyou want a company with high operating cash flow and lower investing cash flow or with lower operating cash flow and higher investing cash flow?

Answer 5

Higher operating cash flow and lower investing cash flow

Question 6

What are cash equivalents?

Answer 6

Short term, highly liquid trading investments that are readily converted to cash within a short period of time

Question 7

What are some events that do not affect cash and should therefore not be reported in the statement of cash flows?

Answer 7

(1) Issue of debt to purchase assets
(2) Issue of shares to purchase assets
(3) Conversion of debt into equity
(4) Exchange of property plant and equipment

Question 8

How to measure investing activities?

Answer 8

Measure cash flows relating to non current asset accounts, long temr investments, PPE, intangible assets.
Asset acquisitions are uses of cash, disposals are sources of cash

Question 9

How to measure financing activities?

Answer 9

Determine the net cash provided (used) by financing activities by analyzing changes in non-current liability and shareholder’s equity. Changes to notes, loans, and bonds payable are analyzed to determine cause of change. Analyze share capital and their cause

Question 10

How to measure operating activities?

Answer 10

Determine the net cash provided by operating activities by converting profit from an accrual basis to a cash basis. Use the indirect or direct method

Question 11

How does the indirect method work?

Answer 11

Start with profit and add or deduct items not affecting cash to arrive at net cash provided (used) by operating activities + noncash expenses such as depreciation and losses - noncash revenues and gains + decreases in noncash current asset accounts and increases in noncash current liability accounts - increases in noncash current asset accounts and decreases in noncash current liability accounts

Question 12

Why do we add back depreciation expenses in the adjustment for operating activities?

Answer 12

Depreciation is the non cash item that decreases net income, but does not affect cash flows

Question 13

Which cash flow section does the money gained from selling PPE belong to>

Answer 13

An increase in investing cash flows

Question 14

Journal entry for increase in interest receivable?

Answer 14

(Dr) Interest receivable
(Cr) Interest revenues

Results in an increase in net income but no impact on cash. Neet to subtract to get to operating cash flows

Question 15

Journal entry for decrease in accounts receivable?

Answer 15

(Dr) Cash
(Cr) A/R
Results in an increase in cash but no impact on net income. There is an increase in operating cash flow

Question 16

Journal entry for increase in salary payable?

Answer 16

(Dr) Salary expense
(Cr) Salary payable

Results in decrease in net income but no impact on cash. Need to add back to get the operating cash flow

Question 17

Journal entry for increase in accounts receivable?

Answer 17

(Dr) A/R
(Cr) revenues

No increase in net income but no impact on cash. Need to subtract to get to operating cash flows

Question 18

Journal entry for decrease in salary payable?

Answer 18

(Dr) Salary payable
(Cr) Cash

No impact on Net income but decrease in cash so need to subtract to get operating cash flows

Question 19

When should we add or deduct for operating cash flow?

Answer 19

Add: Depreciation and losses
Deduct: Gains and non cash revenues (e.g., interest receivable)
Deduct: positive changes in A/R
Add: negative changes in A/R
Add: positive change in A/P
Deduct: negative change in A/P