chapter 5 exercise

Question 1

guardare domanda 1

Question 2

Compared to a firm that appropriately expenses recurring maintenance costs, a firm that capitalizes these costs will most likely have cash flow from operations (CFO) that are:
A. Lower
B. Higher
C. The same

Answer 2

Ans: B
Capitalizing costs takes them out of expenses, which results in increased CFO and will be subtracted from Cash Flow from Investments. So CFO will be higher.

Question 3

Under IFRS, interest paid and dividends paid can be categorized as either:
A. Operating or financing section of the cash flow statement.
B. Operating or investing section of the cash flow statement.
C. Investing or financing section of the cash flow statement.

Answer 3

A

Question 4

cash paid to suppliers formula

Answer 4

COGS + change in Inventory - Change in A/P

Question 5

cash collected from customers formula

Answer 5

Revenues - increase in A/R

Question 6

what is the cash conversion cycle

Answer 6

The cash conversion cycle measures the average time between the outlay of cash to purchase inventory and the cash recovery from collecting accounts receivable.

Question 7

Formula CCC

Answer 7

cash conversion cycle=days of inventory on hand (DOH)
+das of sales outstanding (DSO)
-number of days of
payables

Question 8

formula DOH

Answer 8

(average inventory / cost of good sold) * 365

Question 9

formula DSO

Answer 9

(average A/R / net sales) * 365

Question 10

formula numbers of days payable

Answer 10

(average A/P / purchases) * 365

Question 11

formula purchases

Answer 11

purchases= ending inventory + COGS - beginning inventory
NOTE: it is preferable to use Purchases rather tan COGS to calculate days of payables, if it is available or can be calculated.

Question 12

direct format IFRS VS GAAP

Answer 12

Companies using IFRS can decide to report interest and dividend receipts as either an investing or operating activity, whereas under U.S. GAAP, they must report such income as an operating activity. The listed operating and investment activities indicate that the company reports under IFRS, using the direct method.

Question 13

benefit direct method vs indirect method

Answer 13

Under the direct method, cash flow from operations accumulates cash received from customers, cash paid to suppliers, cash paid to employees, cash paid for interest, etc. This method provides specific detail on a firm’s operating cash receipts and cash payments for a given reporting period, while eliminating the effects of accrual accounting. It provides supplementary data under U.S. GAAP.
Providing insight on the differences between net income and cash flow is a benefit of the indirect method. The indirect method starts with net income and integrates a series of adjustments to calculate cash flow from operations.

Question 14

guardare domanda 10-12

Question 15

Which of the following statements is most accurate regarding cash flow ratios?
A. Interest coverage ratio is calculated as operating cash flow over interest payments.
B. Debt payment ratio measures the firm’s ability to pay debts with operating cash flows.
C. Reinvestment ratio measures the firm’s ability to acquire assets with investing cash flows.

Answer 15

Ans: B.
Debt payment ratio measures the firm’s ability to satisfy long-term debt with operating cash flow.
A is incorrect. The interest coverage ratio measures the firm’s ability to meet its interest obligations.
Note: if interest paid was classified as a financing activity under IFRS, no interest adjustment is necessary.
C is incorrect. The reinvestment ratio measures the firm’s ability to acquire long- term assets with operating cash flow.

Question 16

formula debt payment

Answer 16

CFO/cash paid for long term asset

Question 17

interest coverage ratio formula

Answer 17

CFO + interest paid + taxes paid/interest paid

Question 18

reinvestment ratio formula

Answer 18

CFO / cash paid for long term asset

Question 19

cash collection from sales formula

Answer 19

sales - change in A/R

Question 20

A company issued shares to acquire a large tract of undeveloped land for future development. The most likely recording of this transaction in the cash flow statement is as a(n):
A. disclosure in a note or supplementary schedule.
B. outflow from investing activities, and an inflow from financing activities.
C. outflow from operating activities, and an inflow from financing activities.

Answer 20

Ans. A.
Non-cash transactions are not reported in the cash flow statement but if they are significant they are reported in a note or supplementary schedule.

Question 21

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Question 22

what implies a decrease in credit sales? and an increase in A/R

Answer 22

decrease in the proportion of cash sales implies an increase in the proportion of credit sales, increasing accounts receivable. An increase in accounts receivable would decrease cash flow from operations.

Question 23

A company accrued wages of $2,000 and collected accounts receivable of $10,000. Which of
the following best describes the effect of these two transactions on the company?
A. Net income will increase decrease.
B. Current ratio will decrease
C. Cash from operations will decrease

Answer 23

Ans: B.
Accruing wages increases current liabilities, but collecting receivables has no effect on current assets therefore the current ratio decrease.
A is incorrect. Accruing wages increases expenses, but collecting receivables has no
effect on sales therefore the net income decrease.
C is incorrect. Collecting accounts receivable increases cash flow from operations and accruing wages increases current liabilities, which also increases cash flow from operations so cash from operations will increase not decrease.

Question 24

A company is buying back its stocks to offset the dilution of earnings from its stock option program. Which of the following statements best describes the effect on the financial statements of the amount spent to buy back the stocks? The amount spent reduces:
A. net income.
B. cash from operating activities. C. cash from financing activities.

Answer 24

Ans: C.
Financing activities include cash flows that result from: borrowing or repaying debt principal, issuing or repurchasing equity capital, and paying cash dividends.
The amount spent to buy back stocks to offset dilution is classified as a financing activity on the cash flow statement and therefore cash from financing decreases.
A is incorrect. Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. Buying back stock will not affect the net income.
B is incorrect. Operating activities include cash flows from the sale of a company’s goods/services, the cash impact of changes in operating assets and liabilities, and adjustments for noncash items reported on the income statement (using the indirect method).

Question 25

If a company has a current ratio of 2.0, the effect of repaying $150,000 in short-term borrowing will most likely decrease:
A. the current ratio, but not the cash flow from operations.
B. the cash flow from operations, but not the current ratio.
C. neither the current ratio nor the cash flow from operations.

Answer 25

Ans: C.
Financing activities include cash flows that result from: borrowing or repaying debt principal, issuing or repurchasing equity capital, and paying cash dividends. Operating activities include cash flows from the sale of a company’s goods/services, the cash impact of changes in operating assets and liabilities, and adjustments for noncash items reported on the income statement (using the indirect method).
The repayment of short-term debt would reduce cash flow from financing, not cash flow from operations.
Current ratio=
Any time the current ratio is above 1, equal changes in a current asset and a current liability will result in an increase in the current ratio: if current assets = 550 and current liabilities are 275, current ratio = 550/275 = 2.0. After the bank borrowing has been paid, the ratio becomes (550- 150)/(275-150) = 3.2. Had the ratio initially been below 1, current assets = 250 and current liabilities are 275, current ratio = 250/275 = 0.91, the equal change in current assets and liabilities would decrease the current ratio: 100/125=0.80.

Question 26

At the end of the year, a company sold equipment for $30,000 cash. The company paid $110,000 for the equipment several years ago and had recorded accumulated depreciation of $70,000 at the time of its sale. All else equal, the equipment sale will result in the company’s cash flow from:
A. investing activities increasing by $30,000.
B. B. investing activities decreasing by $10,000.
C. C. operating activities being $10,000 less than net income.

Answer 26

Ans: A.
The book value of the equipment at the time of sale is $110,000 - $70,000 = $40,000.
The proceeds are $30,000; therefore a loss of $10,000 is reported on the income statement. The loss reduces net income, but it is a non-cash amount, so is added back to net income in the calculation of the cash from operations. Therefore, cash from operations is higher than net income, not lower. The total amount of the proceeds, $30,000, is the cash inflow from the transaction and is shown as a cash inflow from investing activities.

Question 27

FCF to equity formula

Answer 27

CFO - capital expenditures +/- net borrowing

Question 28

CFO Formula

Answer 28

CFO = net income
+ depreciation
+ loss on sale of equipment
+ decrease in accounts receivable

• increase in inventories
  + increase in accounts payable.

Question 29

cash flow debt coverage ratio formula

Answer 29

CFO / Total Debt

Question 30

If a company has a current ratio of 2.0, that company’s repayment of $510,000 in short-term borrowing obtained from a bank would most likely decrease:
A. current ratio, but not cash flow from operations.
B. cash flow from operations, but not current ratio.
C. neither current ratio nor cash flow from operations

Answer 30

Ans: D.
The current ratio is above 1.0, so the payment of short-term borrowing would increase the current ratio; it would reduce both the numerator ad denominator by the same amount. The repayment of short-term debt would reduce cash flow from financing, not cash flow from operations.

Question 31

In 2012, a company reported net income of $130 million and cash flow from operations of $120 million. All else equal, the most likely explanation for the difference between net income and CFO in 2012 is that the company:
A. tightened credit policies and increased collection efforts during the year.
B. purchased new PP&E at the beginning of the year.
C. increased raw material inventory in anticipation of increased sales at the end of the year.

Answer 31

Ans: C.
The increase in inventory (working capital investment) would reduce CFO relative to net income.
A is incorrect. This would increase CFO relative to net income.
B is incorrect. This would decrease CFI.

Question 32

se ha il sale of equipment ad esempio a 3,500 e ti dice che il costo base dell’equipment sold è stato di 5000 devi mettere 1500 nella formula del CFO

Question 33

free cash flow to firm

Answer 33

CFO + Interest*(1-tax rate) - capital expenditures

Question 34

se nell’esercizio devo calcolarmi il CFO e trovo scritto una linea con equity in earnings of affiliates devo includerlo come segno negativo

Question 35

How would cash flows from operating activities (CFO), investing activities (CFI), and financing activities (CFF) under U.S.GAAP and IFRS be affected by interest received on investment?
A. Under U.S.GAAP CFO increases and Under IFRS CFO increases.
B. Under U.S.GAAP CFO increases and Under IFRS CFO or CFI increases.
C. Under U.S.GAAP CFO or CFI increases and Under IFRS CFO increases.

Answer 35

And: B.
Under U.S.GAAP, interest received is included in CFO. Under IAS GAAP, it can be classified as either CFO or CFI.
Reference: question 3.

Question 36

se in un esercizio mi viene dato il dato sui retained earnings e non il net income devo fare o la differenza tra l’anno prima e quello attuale oppure calcolarli nel caso del CFO

Question 37

On a cash flow statement prepared using the indirect method, which of the following would most likely increases the cash from investing activities?
A. Sale of a long-term receivable.
B. Sale of held-for-trading securities.
C. Securitization of accounts receivable.

Answer 37

Ans: A.
The sale of a long-term receivable would increase cash from investing activities; the other two activities mentioned are operating activities.

Question 38

If a company chooses to capitalize an expenditure related to capital assets instead of expensing it, ignoring taxes, the company will most likely report:
A. a lower cash flow per share in that period.
B. a higher earnings per share in future periods.
C. the same free cash flow to the firm in that period.

Answer 38

Ans: C.
Example: Capitalizing delivery cost as opposed to expensing it.
FCFF=CFO + interest × (1– t) – expenditures
capital
If capitalized, the amount capitalized increases capital expenditures and is recorded as a cash outflow from investing activities.
The CFO will be higher by amount capitalized, i.e., the amount not expensed.
Since capital expenditures and CFO increase by the same amount, FCFF is unchanged.
A is incorrect. Since CFO would be higher, cash flow per share in that period would be higher.
B is incorrect. Capitalizing an expenditure related to capital assets will lead to an increase in the depreciation expense in future period. So the EPS in future period will be lower since net income will be lower.

Question 39

guardare domanda nutro 38

Question 40

For which of the following balance sheet items is a change in market value most likely to affect net income?
A. Debt securities issued by the firm.
B. Debt securities that the firm intends to hold until maturity.
C. Securities held with the intent to profit over the short term.

Answer 40

Ans: C.
Securities held with the intent to profit over the short term are classified as trading securities, and the changes in their market values are reflected in their balance sheet values and also reported on the income statement.
A and B are incorrect. Debt securities issued by the firm, and debt securities that the firm intends to hold until maturity, are both reported at amortized cost, not market value. Debt and equity securities that the firm does not except to hold to maturity or to sell in the near term are marked to market on the balance sheet, but unrealized gains and losses do not affect the income statement.

Question 41

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Question 42

Which of the following statements about cash flow is least accurate?
Under U.S.GAAP, cash flow from:
A. Operations includes cash operating expenses and changes in working capital accounts.
B. Financing includes the proceeds of debt issued and from the sale of the company’s common stock.
C. Investing includes interest income from investment in debt securities.

Answer 42

Ans: C.
Interest income is considered an operating cash flow under U.S.GAAP.

Question 43

guardare domanda 46 per vedere il direct method per misurare il CFO

Question 44

Ans: C.
Interest and dividends received and interest paid are considered operating cash flows under U.S.GAAP, but dividends paid are considered financing cash flows.

Answer 44

Ans: C.
Interest and dividends received and interest paid are considered operating cash flows under U.S.GAAP, but dividends paid are considered financing cash flows.

Question 45

guardare domanda 49 per altra misurazione CFO

Question 46

How will a firm’s operating cash flow be affected by a decrease in accounts receivable and by an increase in accounts payable?
A. Both will increase operating cash flow. B. Both will decrease operating cash flow.
C. One will increase operating cash flow and one will decrease operating cash flow.

Answer 46

Ans: A.
A decrease in the accounts receivable amount on the balance sheet indicates that cash collections exceed revenues (sales). This increases operating cash flow because receivables are being collected. An increase in the accounts payable amount on the balance sheet indicates that purchases form suppliers exceed cash payments. This increases operating cash flow because the cash was not used to pay the suppliers.

Question 47

nel calcolo del CFO devi tenere conto anche cash expenses for other inputs with the segno - e anche i cash paid for taxes con segno meno

Question 48

Bao Inc. is involved in an exchange of debt for equity. In which of the following sections of the cash flow statement would Bao record this transaction?
A. Investing activities section.
B. Financing activities section.
C. Footnotes to the cash flow statement.

Answer 48

Ans: C.
This transaction results in a reduction of debt and an increase in equity. However, since no cash is involved, it is reported as a financing activity in the cash flow statement, but will be disclosed in the notes to the cash flow statement.

Question 49

53. Which of the following statements about the analysis of cash flows is least accurate?
    A. Interest payments on debt are not a financing cash flow under U.S.GAAP.
    B. Both the direct and indirect methods involve adding back noncash items such as depreciation and amortization.
    C. When using the indirect method, an analyst should add any losses on the sales of fixed assets to net income.

Answer 49

Ans: B.
When using the direct method of calculating operating cash flows, depreciation and amortization are not “added back” (to net income) because we don’t begin with net income under the direct method. Depreciation and amortization are noncash charges and are not used under the direct method. The other statements are true. Interest payments on debt affect cash flow from operations. When using the indirect method, an analyst should add any losses on sales of fixed assets to net income since they are not operating cash flow.

Question 50

54. Bao Inc. had $4 million in bonds outstanding that were convertible into common stock at a conversion rate of 100 shares per $1,000 bond. In 2012, all of the outstanding bonds were converted into common stock. Bao’s average share price for 2012 was $15. Bao’s statement of cash flows for the year ended December 31, 2012, should most likely include:
    A. a footnote describing the conversion of the bonds into common stock.
    B. cash flows from financing of +$4 million from issuance of common stock and -$4 million from retirement of bonds.
    C. cash flows from financing of +$6 million from issuance of common stock and -$4 million from retirement of bonds and cash flows from investing of -$2 million for a loss on retirement of bonds.

Answer 50

Ans: A.
Conversion of bonds into common stock is a non-cash transaction, but the conversion should be disclosed in a footnote to the statement of cash flows.