Chapter 4--Cash Flow Analysis

Question 1

Why is a statement of cash flows necessary under accrual accounting?

Answer 1

Because net income as calculated under accrual accounting is not equal to a change in the company’s cash

Question 2

Where is information about company liquidity reported?

Answer 2

The Statement of Cash Flows

Question 3

When did FASB begin requiring a Statement of Cash Flows?

Answer 3

1987

Question 4

How is a Statement of Cash Flows an improvement over a Statement of Working Capital?

Answer 4

The latter indicates, not cash on hand, but all liquid assets. There are situations where cash on hand is the information that is needed.

Question 5

What is a Cash Flow?

Answer 5

The sum of net income plus noncash expenses minus noncash revenues

Question 6

What are three examples of Noncash Expenses?

Answer 6

Depreciation of plant assets
Amortization of intangibles
Depletion of natural resources

Question 7

What are Noncash revenues?

Answer 7

Accrued revenues that have not been collected in a prior period

Question 8

How are noncash assets related to cash flow?

Answer 8

Decreases in noncash assets indicate cash flow into the business; Increases in noncash assets indicate cash flow out of the business

Question 9

How are liabilities related to cash flow?

Answer 9

Increases in liabilities indicate cash flow into the business; Decreases in liabilities indicate cash flow out of the business

Question 10

What is a Cash Inflow, and what are three examples?

Answer 10

A cash inflow is a source of cash, of which there are three:

1. Decreases in noncash assets
2. Increases in liabilities
3. Increases in Owner’s Equity

Question 11

What is a Cash Outflow, and what are three examples?

Answer 11

A cash outflow is a use of cash, of which there are three:

1. Increases in noncash assets
2. Decreases in liabilities
3. Decreases in Owner’s Equity

Question 12

What is the most important figure on the statement of cash flows?

Answer 12

Cash Provided by Operating Activities; it should be the largest source of cash over the long term

Question 13

Cash flow is _______-related to Accounts Receivable

Answer 13

Inversely

Question 14

Cash flow is _______-related to Accounts Payable

Answer 14

Directly

Question 15

Cash flow is _______-related to Inventory

Answer 15

Inversely

Question 16

Cash flow is _______-related to Accrued Expenses

Answer 16

Directly

Question 17

Cash flow is _______-related to Wages

Answer 17

Inversely

Question 18

Cash flow is _______-related to Taxes Payable

Answer 18

Directly

Question 19

What are the three Sections of a Statement of Cash Flows?

Answer 19

Cash Flow from Operating Expenses
Cash Flow from Investments
Cash Flow from Financing Activities

Question 20

What is the Indirect Method of preparing a Statement of Cash Flows?

Answer 20

Start with Net Income and use subsequent adjustments to convert it to cash

Question 21

What is the Direct Method of preparing a Statement of Cash Flows?

Answer 21

Looks at cash in and cash out directly; Cash inflows are revenues, and cash outflows are cash payments for expenses and related operating items

Question 22

In the direct method, how is Cash Collected from Customers calculated?

Answer 22

Net Income, adjusted by the change in Accounts Receivable

Question 23

In the direct method, how is Cash Payments to Suppliers calculated?

Answer 23

Cost of Goods Sold adjusted by changes in inventory and accounts payable (assuming AP are all inventory purchases)

Question 24

In the direct method, how is Cash Payments to Employees calculated?

Answer 24

Salaries Expense adjusted by the change in Accrued Expenses (assuming AE consist of Accrued Salaries)

Question 25

In the direct method, how is Cash Payments for Administrative Expenses calculated?

Answer 25

Administrative Expenses adjusted by the change in other current assets (prepaid expenses)

Question 26

In the direct method, how is Cash Payments to Interest calculated?

Answer 26

Interest Expense adjusted by the change in prepaid interest

Question 27

In the direct method, how is Cash Payments for Income Taxes calculated?

Answer 27

Tax expense adjusted by the change in taxes payable

Question 28

How are the direct and indirect methods of determining the Statement of Cash Flows different?

Answer 28

How Cash Flows from Operating Expenses are determined

Question 29

Of the direct and indirect methods of determining the Statement of Cash Flows, which is preferred by FASB and why?

Answer 29

Direct method; it gives more detail on the nature of cash payments for expenses

Question 30

What is an example of a non-cash revenue?

Answer 30

A negative income tax value (usually due to overpayment in a previous period). This is counts as a non-tax revenue for the period, but since there were no taxes, and–thus–no loss

Question 31

What is an example of a non-case expense?

Answer 31

Depreciation, since it is counted as an expense on our balance sheet, but no cash has actually left the company.

Question 32

What are the values in a Cash Flows from Operating Expenses section?

Answer 32

Net Income (i.e.: receivables, payables, inventories, prepayments, cash, accruals, taxes payable)
add Non-cash expenses (e.g. depreciation)
less Non-cash revenues (e.g. negative income tax)

Question 33

What are the values in a Cash Flows from Investments section?

Answer 33

Property, Plant, & Equipment (from change in gross PP&E on the balance sheet, plus any depreciation expense for the year )
Long-term investments (if any)

Question 34

What are the values in a Cash Flows from Financing Activities section?

Answer 34

Long-term debts
Dividends
Common stock