Chapter 24 The Statement of Cash Flows

Question 1

The statement of cash flows: A financial statement that provides information about the cash receipts and cash payments of a business.

Answer 1

The statement of cash flows: A financial statement that provides information about the cash receipts and cash payments of a business.

Question 2

Cash equivalents: Assets that are easily convertible into known amounts of cash.

Answer 2

Cash equivalents: Assets that are easily convertible into known amounts of cash.

Question 3

Sources and Uses of Cash:
Cash inflows are called sources of cash. Cash outflows are called uses of cash. Sources and uses of cash are classified under three headings on the statement of cash flows:
1.Cash Flows from Operating Activities.
2.Cash Flows from Investing Activities.
3.Cash Flows from Financing Activities.

Answer 3

Sources and Uses of Cash:
Cash inflows are called sources of cash. Cash outflows are called uses of cash. Sources and uses of cash are classified under three headings on the statement of cash flows:
1.Cash Flows from Operating Activities.
2.Cash Flows from Investing Activities.
3.Cash Flows from Financing Activities.

Question 4

Operating activities: Routine business transactions—selling goods or services and incurring expenses are routine business operations.

Answer 4

Operating activities: Routine business transactions—selling goods or services and incurring expenses are routine business operations.

Question 5

Investing activities: Transactions that involve the acquisition (cash outflow) or disposal (cash inflow) of long-term assets.

Answer 5

Investing activities: Transactions that involve the acquisition (cash outflow) or disposal (cash inflow) of long-term assets.

Question 6

Financing activities: Transactions with those who provide cash to the business to carry on its activities.

Answer 6

Financing activities: Transactions with those who provide cash to the business to carry on its activities.

Question 7

The schedule of operating expenses: is a supplemental schedule showing the selling and general and administrative expenses in greater detail.

Answer 7

The schedule of operating expenses: is a supplemental schedule showing the selling and general and administrative expenses in greater detail.

Question 8

Accrual Basis:
Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when owed, not necessarily when the cash is received or paid.

Answer 8

Accrual Basis:
Under the accrual basis of accounting, revenues are recorded when earned and expenses are recorded when owed, not necessarily when the cash is received or paid.

Question 9

important!
Depreciation Expense:
The depreciation expense on the income statement is not a cash outflow; therefore, it is added back to net income on the statement of cash flows.

Answer 9

important!
Depreciation Expense:
The depreciation expense on the income statement is not a cash outflow; therefore, it is added back to net income on the statement of cash flows.

Question 10

Note that the depreciation expense did not involve a cash outflow. Net income was reduced by a noncash expense. To obtain cash flows from operating activities, the depreciation expense is added back to net income.

Answer 10

Note that the depreciation expense did not involve a cash outflow. Net income was reduced by a noncash expense. To obtain cash flows from operating activities, the depreciation expense is added back to net income.

Question 11

important!
Bond Interest Expense:
The bond interest expense on the income statement is less than the actual cash outflow; therefore, on the statement of cash flows, the difference is subtracted from net income.

Answer 11

important!
Bond Interest Expense:
The bond interest expense on the income statement is less than the actual cash outflow; therefore, on the statement of cash flows, the difference is subtracted from net income.

Question 12

Gain or Loss on Sale of Equipment:
The sale of the equipment is not a part of the routine operating activities of the business. The gain of $4,000 is a part of the $8,000 in cash received from the asset sale. As we see, the entire $8,000 was included in cash inflows from investing activities. It is therefore necessary to remove (deduct) the $4,000 of gain on sale of equipment from the net income figure in arriving at the net cash inflow provided by operations. A loss on sale of long-term assets would be added to net income.

Answer 12

Gain or Loss on Sale of Equipment:
The sale of the equipment is not a part of the routine operating activities of the business. The gain of $4,000 is a part of the $8,000 in cash received from the asset sale. As we see, the entire $8,000 was included in cash inflows from investing activities. It is therefore necessary to remove (deduct) the $4,000 of gain on sale of equipment from the net income figure in arriving at the net cash inflow provided by operations. A loss on sale of long-term assets would be added to net income.

Question 13

operating assets and liabilities:

Current assets and current liabilities are often referred to as Operating assets and liabilities.

Answer 13

operating assets and liabilities:

Current assets and current liabilities are often referred to as Operating assets and liabilities.

Question 14

Cash Flows from Investing Activities:
Investing activities are transactions involving the acquisition or disposal of assets that are not consumed in routine operations within one year.

Answer 14

Cash Flows from Investing Activities:
Investing activities are transactions involving the acquisition or disposal of assets that are not consumed in routine operations within one year.

Question 15

important!
Investing Activities:
Investing activities are transactions that involve the acquisition or disposal of assets that will not be used up or consumed in routine operations in a short time.

Answer 15

important!
Investing Activities:
Investing activities are transactions that involve the acquisition or disposal of assets that will not be used up or consumed in routine operations in a short time.

Question 16

About accounting:
Managing Cash:
Large companies actively manage their own corporate cash. Smaller businesses often place their cash in money market funds or “sweep accounts” by their banker, due to the limited time and resources available for cash management.

Answer 16

About accounting:
Managing Cash:
Large companies actively manage their own corporate cash. Smaller businesses often place their cash in money market funds or “sweep accounts” by their banker, due to the limited time and resources available for cash management.

Question 17

Treasury Stock:
Treasury stock is a corporation’s own capital stock that has been issued, fully paid for, and reacquired by the corporation.

Answer 17

Treasury Stock:
Treasury stock is a corporation’s own capital stock that has been issued, fully paid for, and reacquired by the corporation.

Question 18

Bonds Issued at a Premium:
On the day that bonds are issued, if the market rate of interest is lower than the face rate of interest, the bonds will sell at a premium.

Answer 18

Bonds Issued at a Premium:
On the day that bonds are issued, if the market rate of interest is lower than the face rate of interest, the bonds will sell at a premium.

Question 19

CASH OUTFLOWS FROM FINANCING ACTIVITIES:
Cash outflows from financing activities result from the repayment of debt obligations such as bonds payable, notes payable, and mortgages; the purchase of treasury stock; and the retirement of preferred stock. The payment of cash dividends is classified as a cash outflow from financing activities. Interest expense, however, is classified as an outflow of cash from operating activities.

Answer 19

CASH OUTFLOWS FROM FINANCING ACTIVITIES:
Cash outflows from financing activities result from the repayment of debt obligations such as bonds payable, notes payable, and mortgages; the purchase of treasury stock; and the retirement of preferred stock. The payment of cash dividends is classified as a cash outflow from financing activities. Interest expense, however, is classified as an outflow of cash from operating activities.

Question 20

Payment of Mortgage Payable: Figure 24.4 shows a decrease of $5,000 in the Mortgage Payable account during 2013. This decrease is a result of $5,000 of principal payments. These payments are shown on the statement of cash flows as a cash outflow from financing activities.
During 2013, Special Products, Inc., did not acquire cash through short-term borrowing, nor did it repay any short-term loans. However, if it had, these short-term transactions might not appear on the balance sheet. For example, the corporation could have borrowed $10,000 by signing a three-month note payable on March 1, 2013, and repaid the note on June 1, 2013. The note would not appear on the December 31, 2013, balance sheet. However, the note would represent both an inflow and an outflow of cash. The note would be reported in the Cash Flows from Financing Activities section of the statement of cash flows.

Answer 20

Payment of Mortgage Payable: Figure 24.4 shows a decrease of $5,000 in the Mortgage Payable account during 2013. This decrease is a result of $5,000 of principal payments. These payments are shown on the statement of cash flows as a cash outflow from financing activities.
During 2013, Special Products, Inc., did not acquire cash through short-term borrowing, nor did it repay any short-term loans. However, if it had, these short-term transactions might not appear on the balance sheet. For example, the corporation could have borrowed $10,000 by signing a three-month note payable on March 1, 2013, and repaid the note on June 1, 2013. The note would not appear on the December 31, 2013, balance sheet. However, the note would represent both an inflow and an outflow of cash. The note would be reported in the Cash Flows from Financing Activities section of the statement of cash flows.

Question 21

Payment of Cash Dividends: Figure 24.3 indicates that during the year Special Products, Inc., paid cash dividends of $4,000 on preferred stock. This amount is included as a part of cash flows from financing activities.
The statement of cash flows shows that in 2013 cash of $7,000 was used by the financing activities of Special Products, Inc.

Answer 21

Payment of Cash Dividends: Figure 24.3 indicates that during the year Special Products, Inc., paid cash dividends of $4,000 on preferred stock. This amount is included as a part of cash flows from financing activities.
The statement of cash flows shows that in 2013 cash of $7,000 was used by the financing activities of Special Products, Inc.

Question 22

Preparing a Statement of Cash Flows:
The cash flows from the three types of business activities—operating, investing, and financing—are combined to arrive at the net change in cash and cash equivalents for the year. The net change is then combined with the beginning balance of cash and cash equivalents to reconcile to the ending balance of cash and cash equivalents. Figure 24.5 shows that the net change in the cash and cash equivalents was an increase of $34,458. The cash balance was $80,773 on January 1, 2013, and $115,231 on December 31, 2013. These are the same amounts reported on the comparative balance sheet in Figure 24.4.

Answer 22

Preparing a Statement of Cash Flows:
The cash flows from the three types of business activities—operating, investing, and financing—are combined to arrive at the net change in cash and cash equivalents for the year. The net change is then combined with the beginning balance of cash and cash equivalents to reconcile to the ending balance of cash and cash equivalents. Figure 24.5 shows that the net change in the cash and cash equivalents was an increase of $34,458. The cash balance was $80,773 on January 1, 2013, and $115,231 on December 31, 2013. These are the same amounts reported on the comparative balance sheet in Figure 24.4.

Question 23

There are two methods of preparing the statement of cash flows: the indirect and direct methods. Figure 24.5 was prepared using the indirect method: A means of reporting cash generated from operating activities by treating net income as the primary source of cash in the operating section of the statement of cash flows and adjusting that amount for changes in current assets and liabilities associated with net income, noncash transactions, and other items.
Most corporations use the indirect method.

Answer 23

There are two methods of preparing the statement of cash flows: the indirect and direct methods. Figure 24.5 was prepared using the indirect method: A means of reporting cash generated from operating activities by treating net income as the primary source of cash in the operating section of the statement of cash flows and adjusting that amount for changes in current assets and liabilities associated with net income, noncash transactions, and other items.
Most corporations use the indirect method.

Question 24

The Financial Accounting Standards Board allows the indirect or direct method. Under the direct method, all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction. Under the direct method, a corporation reports cash flows from operating activities in two major classes: gross cash receipts and gross cash payments. The FASB suggests the following classifications for reporting cash inflows and outflows:

1. cash collected from customers
2. interest and dividends received
3. cash paid to employees and other suppliers of goods or services, including suppliers of insurance and advertising
4. interest paid
5. income taxes paidCorporations that use the direct method are encouraged to provide additional meaningful information about operating cash receipts and cash payments if feasible. The direct method is not commonly used because many businesses do not have easy access to the records of cash payments for each type of expenditure.

Answer 24

The Financial Accounting Standards Board allows the indirect or direct method. Under the direct method, all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction. Under the direct method, a corporation reports cash flows from operating activities in two major classes: gross cash receipts and gross cash payments. The FASB suggests the following classifications for reporting cash inflows and outflows:

1. cash collected from customers
2. interest and dividends received
3. cash paid to employees and other suppliers of goods or services, including suppliers of insurance and advertising
4. interest paid
5. income taxes paidCorporations that use the direct method are encouraged to provide additional meaningful information about operating cash receipts and cash payments if feasible. The direct method is not commonly used because many businesses do not have easy access to the records of cash payments for each type of expenditure.

Question 25

CASH FLOW:

Management needs to ensure that cash is available to meet operating expenses and to pay debts promptly.

Management analyzes the statement of cash flows to evaluate the operations of the company, plan future operations, forecast cash needs, arrange proper financing, and plan dividend payments.

Management uses the statement of cash flows to determine how well the company will be able to meet its maturing obligations.

Management analyzes past cash flows in order to make plans that will keep the company solvent and profitable.

Answer 25

CASH FLOW:

Management needs to ensure that cash is available to meet operating expenses and to pay debts promptly.

Management analyzes the statement of cash flows to evaluate the operations of the company, plan future operations, forecast cash needs, arrange proper financing, and plan dividend payments.

Management uses the statement of cash flows to determine how well the company will be able to meet its maturing obligations.

Management analyzes past cash flows in order to make plans that will keep the company solvent and profitable.

Question 26

Internal Control:
When the statement of cash flows is based on the direct method, it must be accompanied by a reconciliation of net income to the net cash provided by operating activities. This reconciliation shows the same information as the Cash Flows from Operating Activities section of the statement of cash flows prepared using the indirect method. The additional work is another reason that many corporations avoid the direct method of preparing the statement of cash flows. Intermediate accounting textbooks provide detailed information about the direct method.

Answer 26

Internal Control:
When the statement of cash flows is based on the direct method, it must be accompanied by a reconciliation of net income to the net cash provided by operating activities. This reconciliation shows the same information as the Cash Flows from Operating Activities section of the statement of cash flows prepared using the indirect method. The additional work is another reason that many corporations avoid the direct method of preparing the statement of cash flows. Intermediate accounting textbooks provide detailed information about the direct method.

Question 27

DISCLOSURES REQUIRED IN THE STATEMENT OF CASH FLOWS:
important!
Disclosures:
If the indirect method is used, the interest and income taxes paid during the period are separately disclosed.

Answer 27

DISCLOSURES REQUIRED IN THE STATEMENT OF CASH FLOWS:
important!
Disclosures:
If the indirect method is used, the interest and income taxes paid during the period are separately disclosed.

Question 28

DISCLOSURES REQUIRED IN THE STATEMENT OF CASH FLOWS:

Various disclosures are added to the statement of cash flows. If the indirect method of presentation is used, the amount of interest and income taxes paid during the period are reported in notes accompanying the statement. The note at the bottom of Figure 24.5 shows that cash payments were $23,813 for income taxes and $11,355 for interest.

In order to provide complete information to statement readers, information about noncash investing and financing activities are disclosed on the statement of cash flows. Examples of financing and investing activities not affecting cash flows include issuing bonds payable for land or converting bonds payable into common stock.

Answer 28

DISCLOSURES REQUIRED IN THE STATEMENT OF CASH FLOWS:

Various disclosures are added to the statement of cash flows. If the indirect method of presentation is used, the amount of interest and income taxes paid during the period are reported in notes accompanying the statement. The note at the bottom of Figure 24.5 shows that cash payments were $23,813 for income taxes and $11,355 for interest.

In order to provide complete information to statement readers, information about noncash investing and financing activities are disclosed on the statement of cash flows. Examples of financing and investing activities not affecting cash flows include issuing bonds payable for land or converting bonds payable into common stock.

Question 29

The Hasbro, Inc., consolidated statements of cash flows for the fiscal year ended December 31, 2009, reported net cash provided by operating activities of $265.6 million. Depreciation of plant and equipment, increases in accounts receivable, increases in inventories, and increases in prepaid expenses were considered when reconciling net income to net cash provided by operating activities on the statement of cash flows. These transactions affected net income, but they did not affect cash flows.

Answer 29

The Hasbro, Inc., consolidated statements of cash flows for the fiscal year ended December 31, 2009, reported net cash provided by operating activities of $265.6 million. Depreciation of plant and equipment, increases in accounts receivable, increases in inventories, and increases in prepaid expenses were considered when reconciling net income to net cash provided by operating activities on the statement of cash flows. These transactions affected net income, but they did not affect cash flows.