Chapter 23- Statement of Cash Flows

Question 1

The primary purpose of the statement of cash flows is to?? What is the secondary objective?

Answer 1

Provide information about a company’s cash receipts and cash payments during a period. The secondary objective is to provide cash-basis information about the company’s operating, investing, and financing activities

Question 2

What are 4 usefulness information about the statement of cash flows?

Answer 2

1. The entities ability to generate future cash flows
2. The entities ability to pay dividends and meet obligation
3. The reasons for the difference between net income and net cash flow from operating activities
4. The cash and non cash investing and financing transactions during the period

Question 3

How does the statement of cash flows classify cash receipts and cash payments?

Answer 3

By operating, Investing, and financing activities

Question 4

What are operating activities?

Answer 4

Cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services , and cash payments to suppliers and employees for acquisitions of inventory and expenses

(Involve income statement items)

Question 5

What are investing activities?

Answer 5

Generally involve long term assets and include making and collecting loans and acquiring and disposing of investments and productive long lived assets

(Investing activities involve cash flows resulting from change in investments and long-term assets)

Question 6

What are financing activities?

Answer 6

Involve liability and stockholders’ equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed and (b) obtaining capital from owners and providing them with a return on, and a return of their investment

(Involve cash flows resulting from changes in long term liability and stockholders equity items)

Question 7

What three sources provide information to prepare the statement of cash flows?

Answer 7

1. Comparative balance sheet
2. Current income statement data
3. Selected transaction data from the general ledger, to see how the company provided and used cash during the period

Question 8

What are the 3 major steps to prepare the financial statements using the 3 sources?

Answer 8

1. Determine the change in cash
2. Determine the net cash flow from operating activities
3. Determine the net cash flow from investing and financing activities

Question 9

To arrive to net cash flow from operating activities you..?

Answer 9

Eliminate non cash revenues and eliminate non cash expenses from operating activities

Question 10

The indirect method (or reconciliation method)?

Answer 10

Starts with net income and converts it to net cash flow from operating activities. In other words the indirect method adjusts net income for items that affected reported net income but did not effect cash

Question 11

Retained Earnings formula=?

Answer 11

Net income - dividends

Question 12

Indirect method additions to get net cash flow from operating activities

Answer 12

Depreciation expense
Amortization of intangible and deferred charges
Amortization of discount on bonds payable
Increase in deferred income tax liability
Loss on investment in common stock using the equity method
Loss on sale of plant assets
Loss on impairment of assets
Decrease in receivables
Decrease in inventory
Decrease in prepaid expenses
Increase in accounts payable
Increase in accrued liabilities

Question 13

Indirect method deductions to get net cash flow from operating activities

Answer 13

Amortization of premium on bonds payable
Decrease in deferred income tax liability
Income on investment in common stock using equity method
Gain on sale of plant asset
Increase in receivables
Increase in inventory
Increase in prepaid expense
Decrease in accounts payable
Decrease in accrued liabilities

Question 14

Under the direct method, companies…?

Answer 14

Under the direct method, companies compute net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis

Question 15

Cash receipts from customers =

Answer 15

Sales revenue +(decrease in accounts receivable) or - (increase in accounts receivable)

Question 16

Cash payments to suppliers

Answer 16

COGS + (increase) in inventory or - (decrease in inventory), and + (decrease in accounts payable) or - (increases in accounts payable)

Question 17

Cash payments for operating expenses =?

Answer 17

Operating expenses + (increase in prepaid expenses) or - ( decreases in prepaid expenses), and + (decreases in accrued expenses payable or - (increases in accrued expenses payable)

(Don’t consider depreciation expense because it is a non cash charge)

Question 18

Equipment purchases formula? (Plug it in)

Answer 18

Beginning cost balance + purchases(x) - cost of retirement = ending cost balance

Question 19

Solve for depreciation expense on equipment:

Answer 19

Beginning accumulated depreciation + depreciation expense - accumulated depreciation on retirements - extraordinary repairs = end accumulated deprecation