FAR 2 Flashcards
Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activity in the statement of cash flows for the year ended December 31, year 1?
Only actual cash inflows and outflows are presented on the statement of cash flows. In this case, Polk paid $3,000 in cash as a down payment and financed the remainder of the purchase price. Therefore, the only cash outlay as an investing activity on the statement of cash flows is $3,000. The cash outflows associated with the payment on the note would be classified as a financing activity.
Indirect Method of Operating Activities
B.
Indirect Method Disclosure of Operating Cash Flow – Under the Indirect Method, the Net Income must be adjusted by the following types of “Add Backs” and “Subtract Outs” to get Cash Flow from Operating Activities:
- Add Back (to Net Income): These items were deducted in getting net income, but did not cause cash to be used:
a. Depreciation Expense;
b. Amortization Expense;
c. Depletion Expense;
d. Losses (from sale of assets, etc.);
e. Loss under equity method of accounting for Investments;
f. Amortization of Premium on Bond Investment;
g. Amortization of Discount on Bonds Payable;
h. Decreases in current assets (accounts receivable, inventory, prepaid assets, etc.);
i. Increases in Current Liabilities (accounts payable, deferred taxes, etc.);
j. Increase in Unearned Revenue. - Subtract Out (of Net Income): These items were added in getting net income, but did not cause cash to be received:
a. Gains (from sale of assets, etc.);
b. Amortization of Discount on Bond Investment;
c. Amortization of Premium on Bond Payable;
d. Undistributed income under equity method of accounting for Investments;
e. Increases in Current Assets (accounts receivable, inventory, prepaid assets, etc.);
f. Decreases in Current Liabilities (accounts payable, deferred taxes, etc.);
g. Decrease in Unearned Revenue.
Direct Method of Operating Activities
The Direct Method reports the components of Cash Flow from Operating Activities as individual items of gross receipts of cash (from revenue activities) and gross payments of cash (from expenses incurred).
- Under the Direct Method of presenting “Cash Flows from Operating Activities,” the section should separate cash flows for the following elements of operations:
a. Collections from customers;
b. Collections for interest and dividends (on loans made and investments);
c. Collections from other operating sources;
d. Payments to employees;
e. Payments to suppliers;
f. Payments for operating expenses;
g. Payments for interest (on debt);
h. Payments for income taxes;
i. Payments for other operating uses. - The difference between these collections and payments is “Cash Flow from Operating Activities.”
How to calculate Cash Paid for Inventory
Two accounts are related to cost of goods sold: inventory and accounts payable.
Cost of goods sold
$250,000
Less decrease in inventory (this represents an increase to cost of goods sold for inventory not purchased in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount).
(16,000)
Less increase in accounts payable (this represents an increase in purchases and, therefore, cost of goods sold that was not paid for in the current period. Thus, the cash paid for inventory is less than cost of goods sold by this amount).
( 7,500)
Equals cash paid for inventory
$ 226,500
Working Capital Ratio (Current Ratio)
Working Capital = Current Assets - Current Liability
Working Capital Ratio = Current Assets / Current Liabilities
The more common name of this ratio is “current” ratio.
Acid Test Ratio (Quick Ratio)
Acid-Test Ratio (also known as Quick Ratio) = (Cash + (Net) Receivables + Marketable Securities) / Current Liabilities
Times Interest Earned Ratio
Times Interest Earned Ratios = (Net Income + Interest Expense + Income Tax) / Interest Expense
Times Preferred Dividends Earned Ratio
Times Preferred Dividend Earned Ratio = Net Income / Annual Preferred Dividend Obligation
Accounts Receivable Turnover/Days in AR
Accounts Receivable Turnover = (Net) Credit Sales / Average (Net) Accounts Receivable (e.g. (Beginning + Ending)/2)
Number of Days’ Sales in Average Receivables = (300 or 360 or 365 (or other measure of business days in a year)) / Accounts Receivable Turnover (computed above)
Inventory Turnover/Days in Inventory
Inventory Turnover = Cost of Goods Sold / Average Inventory (e.g. (Beginning + Ending)/2)
Number of Days’ Supply in Inventory = (300 or 360 or 365 (or other measure of business days in a year)) / Inventory Turnover (computed above)
Operating Number of Cycle
Operating Number of Cycle = Days in Operating = Number of Days’ Sale in A/R + Length Cycle Number of Days’ Supply in Inventory
COGS
COGS= Beginning Inv + Purchases - Ending Inventory
Debt to Equity Ratio
Debt to Equity ratio = Total Debt (Liabilities) / Owner’s Equity
Profit Margin
Profit Margin (on Sales) = Net Income / (Net) Sales
Return on Total Assets
Return on Total Assets = (Net Income + (add back) Interest Expense (net of tax effect)) / Average Total Assets
