Statement of Cash Flows

Question 1

When must a statement of cash flows included in a set of F/S?

Answer 1

a statement of cash flows must be presented for every year in which an income statement is shown

Question 2

In a statement of cash flows what cash equivalents are reported in the same manner as cash?

Answer 2

investments with 3 or less months to maturity are generally considered to be a cash equivalent and given the same treatment as cash on the CF stmt

Question 3

What are the 3 main classifications on the stmt of CF?

Answer 3

investing activities

financing activities

operating activities

Question 4

On a stmt of CF what are the transactions disclosed in the investing activities section?

Answer 4

investing activities reflect transaction involving assets that do not normally change in the regular course of business from daily operations. examples purchase of land, selling a building, selling a patent, buying equipment

Question 5

On a stmt of CF what are the transactions disclosed in the financing activities section?

Answer 5

financing activities are all transactions that involve either stockholders’ equity or liabilities that do not occur as a normal part of daily operations examples paying a note payable with cash, paying cash dividends, issuance of common stock for cash, issuing bonds for cash

Question 6

On a stmt of CF what are the transactions disclosed in the operating activities section?

Answer 6

operating activities include all transactions happening in the regular course of daily operations. examples paying A/P, buying inventory, receiving interest revenue, paying interest exp, collecting from the sale of inventory or services provided

Question 7

Indicate how each of the following transactions will be shown on the CF stmt

1. Bought truck for $9,000 cash and note of $30,000
2. Sold inventory for $3,000 cash
3. Paid $15,000 on a note, $12,000 principal and $3,000 int
4. Declared a $6,000 cash dividend
5. Paid the above dividend
6. sold treasury stock for $32,000

Answer 7

1. $9,000 outflow in investing activities
2. $3,000 cash inflow in operating activities
3. $12,000 principal outflow in financing, $3,000 interest is cash outflow in operating
4. no change, no reporting required
5. $6,000 cash outflow in financing
6. $32,000 cash inflow in financing

Question 8

What are some transactions that would not be reported on a stmt of CF?

Answer 8

examples, a non-monetary exchange, stock dividend or stock split, issuance of stock for an asset

Question 9

An entity spends $10,000 in cash to buy an investment that comes due in 60 days. How is this transaction reported on the stmt of CF?

Answer 9

not reported on stmt of CF. the investment is a cash equivalent because it was bought within 3 mos. of maturity. thus the entity exchanged cash for a cash equivalent so no overall change in the cash balance took place.

Question 10

What are the 2 different methods that can be used to report cash flows from operating activities?

Which of these methods is preferred by the FASB?

Answer 10

1) direct method 2) indirect method

FASB has indicated a preference for the direct method

Question 11

An entity is going to report its CF from operating by means of the direct method. How does this approach work?

Answer 11

in the direct method, each separate figure reported on the entities income statement is converted to the amount of cash collected or paid in connection with daily operations.

Question 12

What 3 changes are made to convert the I/S to a CF from operating activities stmt?

Answer 12

1) gains and losses are eliminated because they do not pertain to daily operations
2) non-cash revenues and expenses are eliminated because they do not affect cash
3) changes in any operational assets and liabilities are also removed to convert from accrual to cash

Question 13

What are the operational assets and liabilities?

Answer 13

A/R
inventory
PP expenses
A/P
Accrued liabilities
income tax payable

Question 14

What operational assets and liabilities are associated with the following I/S accounts?

1) Sales
2) COGS
3) Insurance exp
4) Salary exp
5) Income tax exp

Answer 14

1) A/R
2) Inventory, A/P
3) PP exp, Insurance payable
4) Salaries payable
5) income tax payable and deferred income taxes

Question 15

An entity reports sales of $200,000 for the year, while A/R went up by $15,000. Using the direct approach, how much cash was actually collected from customers?

Answer 15

Credit Sales - Change in A/R = Cash collected from customers

$200,000 - $15,000 = $185,000

Question 16

An entity reports COGS of $100,000 for the year, while inventory went down by $9,000 and A/P went down by $2,000. using the direct approach, how much cash was actually paid for the inventory?

Answer 16

COGS + Change in inventory + change in A/P = cash paid for inventory

$100,000 + ($9,000) + $2,000 = $93,000

Question 17

An entity reports insurance expense of $21,000 for the year while PP insurance went down by $3,000. Using the direct approach, how much cash was actually paid for the insurance?

Answer 17

Insurance expense + change in PP insurance = cash paid for insurance

$21,000 + ($3,000) = $18,000

Question 18

An entity reports its total operational expenses an $90,000 for they year, while accrued liabilities went up by $8,000. Within the total expense figure was $13,000 depreciation. Using the direct approach, how much cash was actually paid for expenses?

Answer 18

Total expenses + change in accrued liabilities - non cash expenses = Total cash paid for expenses

$90,000 + ($8,000) - $13,000 = $69,000

Question 19

An entity is determining its cash flows from operating activities by means of the direct method. On its I/S for the year, the entity reports an $8,000 loss on the sale of equipment. How does the impact of CF from operating activities computation become impacted?

Answer 19

sale of equipment is an investing activity therefore it is eliminated in the operating activities section of the CF stmt

Question 20

How does the indirect method work when determining CF from operating activities?

Answer 20

start with NI

1) non cash revenues and expenses eliminated
2) all gains and losses eliminated
3) changes occurring in operational assets and liabilities must be eliminated

Question 21

An entity reports net income of $200,000. Within NI the entity reports a depreciation expense of $30,000 and a gain on sale of equipment of $11,000.

What are the cash flows from operating activities if the indirect method is applied?

Answer 21

NI + non cash expense - gain on sale of equipment = CF from operating activities

$200,000 + $30,000 - $11,000 = $219,000

Question 22

An entity reports NI of $300,000. Within NI the entity reports amortization exp of $14,000 and a loss on the sale of land $17,000.

What are the CF from operating activities if the indirect method is applied?

Answer 22

NI + non cash exp + loss on sale of land = CF from operating activities

$300,000 + $14,000 + $17,000 = $331,000

Question 23

An entity reports NI of $400,000. The entities inventory went up by $9,000 and A/R went down by $22,000.

What are the CF from operating activities if the indirect method is applied?

Answer 23

NI + change in A/R + change in inventory = CF from operating activities

$400,000 + $22,000 + ($9,000) = $413,000

Question 24

An entity reports NI of $400,000. The entities A/P went up by $13,000 and salaries payable went down by $4,000.

What are the CF from operating activities if the indirect method is applied?

Answer 24

NI + Change in A/P + Change in salaries payable = CF from operating activities

$400,000 + $13,000 + ($4,000) = $409,000

Question 25

An entity sells equipment with a cost of $200,000 and accumulated depreciation of $80,000 for a gain of $16,000.

If the indirect method is applied, how does this transaction impact a stmt of CF?

Answer 25

The gain is eliminated to CF from operations

the cash received is added to CF from investing

Question 26

An entity has a building with a cost of $300,000 and accumulated depreciation of $110,000. The building is sold for $172,000. The indirect method is applied.

How is this transaction reported on a stmt of CF?

Answer 26

The loss of $18,000 is eliminated from the CF from operations.

The cash of $172,000 is added to CF from investing.

Question 27

What is the cash basis of accounting?

Answer 27

the cash basis reports revenues when cash is received and expenses when cash is paid.

therefore there is no need for accrual accounts such as A/R, A/P and accrued assets or liabilities

Question 28

An entity is using the cash basis of accounting but wants to convert to the accrual basis. What 2 steps are carried out to make this conversion?

Answer 28

1) accounts as of the first day of the year that have been left off are placed on the books through a J/E with RE as the plug
2) the beginning balances are adjusted to the ending balances for the period with the plug either increasing or decreasing NI

Question 29

An entity uses the cash basis of accounting and reports NI of $200,000 for year 1. The entity has gathered the following comparative B/S info.

A/R $16,000 1/1 $27,000 12/31
AP $13,000 1/1 $11,000 12/31
Salaries Payable $2,000 1/1 $8,000 12/31

under accrual accounting what net income figure would be reported?

Answer 29

to record the 1/1 balances

A/R 16,000
A/P 13,000
Salary Payable 2,000
RE 1,000

To adjust these accounts to 12/31

A/R 11,000
A/P 2,000
Salaries payable 6,000
NI 7,000

the NI has been increased from $200,000 to $207,000 in accrual accounting