Module 5 (Statement of Cash Flows) Flashcards
How does the following transaction impact cash flow?
Receiving cash for goods or services yet to be provided
A - Positive (Increase)
B - No impact
C - Negative (Decrease)
A - Positive (Increase)
Although revenue is not recognized until goods or services are provided, cash is received at the time of this transaction.
How does the following transaction impact cash flow?
Paying cash for property insurance covering next 2 years
A - Positive (Increase)
B - No impact
C - Negative (Decrease)
C - Negative (Decrease)
Although expense is not recognized until prepaid insurance is amortized, cash is paid out at the time of this transaction.
Which of the following items would NOT be shown on a statement of cash flows created using the indirect method?
A - Net Income
B - Retained Earnings
C - Cash, beginnning of year
D - Cash, end of year
B - Retained Earnings
Which of the following is a common finding in looking at the statement of cash flows of a declining company?
A - A positive cash flow from operating activities
B - A negative cash flow from investing activities
C - A positive or negative cash flow from financing activities
C - A positive or negative cash flow from financing activities
A declining company usually has negative cash flows from operations, positive cash flows from investing, and positive or negative cash flows from financing.
What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Payable and Accrued Expenses account balances for Google?
A - Decrease of $441 for Accounts Payable and decrease of $670 for Accrued Expenses
B - Increase of $441 for Accounts Payable and decrease of $670 for Accrued Expenses
C - Decrease of $441 for Accounts Payable and increase of $670 for Accrued Expenses
D - Increase of $441 for Accounts Payable and increase of $670 for Accrued Expenses
D - Increase of $441 for Accounts Payable and increase of $670 for Accrued Expenses
Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.
A company under IFRS standards decides to include interest paid in the Financing Section of their Statement of Cash Flows.
How will this company’s Statement of Cash Flows differ from how it would appear if the company were abiding by US GAAP standards?
A - There will be no difference in the statements.
B - The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.
C - The company under IFRS will have lower cash flow in the financing section and lower cash flow in the operating section than the company under US GAAP.
D - The company under IFRS will have higher cash flow in the financing section and lower cash flow in the operating section than the company under US GAAP.
E - The company under IFRS will have higher cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.
B - The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.
How does the following transaction impact cash flow?
Recording an account receivable for the sale of goods to a customer.
A - Positive (Increase)
B - No impact
C - Negative (Decrease)
B - No impact
When a company records an account receivable for goods sold to a customer, it is because they are allowing the customer to pay for the goods at a later date. Since no cash was received at the time of transaction, there is no impact on cash flows.
In which stage would you typically expect to see large negative Financing Cash Flows?
A - Startup
B - Profitable/Growing
C - Mature/Steady
D - Decline
C - Mature/Steady
Mature/Steady companies tend to have positive Operating Cash Flows, either positive or negative Investment Cash Flows, and negative Financing Cash Flows.
In which stages would you typically expect to see large negative Investment Cash Flows? Select all that apply.
A - Startup
B - Profitable/Growing
C - Mature/Steady
D - Decline
A - Startup
B - Profitable/Growing
Startups tend to have negative Operating Cash Flows, negative Investment Cash Flows, and Positive Financing Cash Flows.
Profitable/Growing companies tend to have positive Operating Cash Flows, negative Investment Cash Flows, and positive or negative Financing Cash Flows.
In which stage would you typically expect to see large positive Investment Cash Flows?
A - Startup
B - Profitable/Growing
C - Mature/Steady
D - Decline
D - Decline
Companies in decline tend to have negative Operating Cash Flows, positive Investment Cash Flows, and positive or negative Financing Cash Flows.
Suppose Waterman Cable Company lent $125,000 to Comcast. On December 31, 2015, Comcast paid back the $125,000 and also paid $3,000 interest to Waterman Cable Company.
Under U.S.GAAP, what would be the impact of the repayment on Waterman Cable Company’s statement of cash flows using the direct method?
A - The $125,000 would be shown as an increase in the funds in the Financing Section but the $3,000 would be shown as an increase in the Investing Section.
B - The $128,000 would be shown as an increase in the funds in the Operating Section.
C - The $125,000 would be shown as an increase in the funds in the Investing Section but the $3,000 would be shown as an increase in the Operating Section.
D - The $128,000 would be shown as an increase in the funds in the Investing Section.
C - The $125,000 would be shown as an increase in the funds in the Investing Section but the $3,000 would be shown as an increase in the Operating Section.
The $125,000 received should be an increase in the Investing Section and, under U.S.GAAP, the $3,000 interest received should be included in the Operating Section.
Suppose Company X sold a piece of equipment during the year. The equipment had been purchased five years ago for $10,000. At the time of the sale, $5,000 of Depreciation had been recognized against the equipment. Company X received $6,000 from the sale of the equipment.
What would be the impact of the sale on the statement of cash flows prepared using the Indirect Method?
A - The $6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as a decrease in the Operating Section.
B - The $6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as an increase in the Operating Section.
C - The $6,000 would be netted against the gain and only $5,000 would be shown as an increase in the Investing Section. No impact on the Operating Section.
D - The $6,000 would be shown as an increase in the Investing Section. No impact on the Operating Section.
A - The $6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as a decrease in the Operating Section.
Describe where we would expect to see cash flows at a mature/steady stage company.
Operating: Operating cash flows will generally be positive for these businesses. They will have a consistent and steady stream of cash from revenue and will generally be one of the major players in their market.
Investing: Because they aren’t looking to grow or expand rapidly, cash flow from investing activities will generally be slightly negative as the new equipment being purchased replaces the equipment that has worn out.
Financing: Although it can fluctuate, cash flow from financing activities will generally be negative for mature companies. This is because they are generating cash through operations that is sufficient to cover their investment needs. Because any excess cash generated isn’t needed to fund growth, the money can be used to pay down loans or give money back to shareholders through dividends.
Describe where we would expect to see cash flows at a profitable/growing stage company.
Operating: Cash flow from operating activities will usually be positive. These businesses are generating cash receipts large enough to cover regular operating cash outflows and are growing at a slow enough rate that internally generated cash can cover the growth.
Investing: Continued growth means that machinery and equipment will need to be purchased. So, investing cash flows will usually be negative for growing companies because more is spent to purchase new equipment than is received from disposing of old equipment.
Financing: Financing cash flows could easily be positive or negative depending on how fast the business is growing and how much cash flow from operations it generates. If cash flow from operations is sufficient to cover purchases of new equipment and other investing activities, then financing cash flows could be negative as the business uses excess cash flow to pay down loans. If a business is growing faster than its cash flow from operations can finance, then it will have positive cash flow from financing activities as it receives more money from investors and creditors. Cash flows from financing could also be neutral or close to zero as the company is generating enough cash from operations to cover investments, but is not generating enough to begin to pay dividends.
Describe where we would expect to see cash flows at a start-up/fast growing stage company.
Operating: This often leads to negative or very low cash flows from operations. This is especially true if it takes a business longer to collect cash from sales than it has to pay its suppliers. In this situation, even if the business has a positive gross profit and net income, it could still have negative cash flows from operations. Some businesses spend years in this phase before achieving positive cash flows from operations.
Investing: The investing section is also likely to be negative for a startup. These businesses will be purchasing equipment and buildings, and since they are just getting started, they won’t often have equipment to dispose of to provide cash inflow.
Financing: The financing section can have large fluctuations for a startup. When a business has negative cash flow from operations and investments, it needs a source of cash to fund both of these activities as it grows and becomes more profitable. This money comes from the financing section. However, a company in the startup phase will often have difficulty raising funds from a bank because there is so much risk involved in a startup. Much of the financing will likely come from equity investments, either by the founders or outside equity investors. In some cases, a business may not need to raise money every year; it could raise a lot of money one year and then use it to purchase equipment and assets over multiple periods.
