Vol. 3 LM 3 Preparing the Cash Flow Statement

Question 1

Example 3

Blue Bayou, a fictitious advertising company, reported revenues of $50 million, total expenses of $35 million, and net income of $15 million in the most recent year. If accounts receivable decreased by $12 million, how much cash did the company receive from customers?
A. $38 million
B. $50 million
C. $62 million

Cash Flow Statements

Answer 1

C is correct.
* Revenues of $50 million plus the decrease in accounts receivable of $12 millions equals $62 million cash received from customers. The decrease in accounts receivable means that the company received more in cash than the amount of revenue it reported

Cash Flow Statements

Question 2

alternate names

“cash received from customers”

Cash Flow Statements

Answer 2

• “cash collections from customers”
• “cash collections”

Cash Flow Statements

Question 3

Components in

cash paid to suppliers

Cash Flow Statements

Answer 3

cost of goods sold
plus: increase in inventory
equals purchases from suppliers
less increase in accounts payable
cash paid to suppliers

Cash Flow Statements

Question 4

Example 4

Orange Beverages Plc., a fictitious manufacturer of tropical drinks, reported cost of goods sold for the year of $100 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, but accounts payable decreased by $2 million. How much cash did the company pay to its suppliers during the year?
A. $96 million
B. $104 million
C. $108 million

Cash Flow Statements

Answer 4

A is correct.
* cost of goods sold of $100 million less the decrease in inventory of $6 million equals purcahses from suppliers of $94 million. The decrease in accounts payable of $2 million means that the company paid $96 million in cash ($94 million plus $2 million)

Cash Flow Statements

Question 5

Calculate

cash paid to employees

Cash Flow Statements

Answer 5

salary and wages expense
less: increase in salary and wages payable
cash paid to employees

Cash Flow Statements

Question 6

where reflected

The amount of cash paid to employees

Cash Flow Statements

Answer 6

salary and wages payable account

Cash Flow Statements

Question 7

Calculate

cash paid for other operating expenses

Cash Flow Statements

Answer 7

other operating expenses
less decrease in prepaid expenses
less increase in other accrued liabilities
cash paid for other operating expenses

Cash Flow Statements

Question 8

Example 5

Black Ice, a fictitious sportswear manufacturer, reported other operating expenses of $30 million. prepaid insurance expense increased by $4 million and accrued utilities payable decreased by $7 million. Insurance and utilities are the only two components of other operating expenses. How much cash did the company pay in other operating expenses?
A. $19 million
B. $33 million
C. $41 million

Cash Flow Statements

Answer 8

C is correct.
* other operating expenses of $30 million plus the increase in prepaid insurance expense of $4 million plus the decrease in accrued utilities payable of $7 million equals $41 million.

Cash Flow Statements

Question 9

Calculate

cash paid for income taxes

Cash Flow Statements

Answer 9

income tax expense
less: increase in income tax payable
cash paid for income taxes

instructions:
* if taxes receivable or deferred tax assets increase during the year, income taxes on a cash basis will be higher than on an accrual basis, and vice versa.
* if taxes payable or deferred tax liabilities increase during the year, income tax expense on a cash basis will be lower than on an accrual basis, and vice versa.

Cash Flow Statements

Question 10

How much cash did the company receive from the equipment sale?

Copper, inc., a fictitious brewery and restaurant chain, reported a gain on the sale of equipment of $12 million. In addition, the company’s income statement shows depreciation expense of $8 million and the cash flow statement shows capital expenditure of $15 million, all of which was for the purchase of new equipment.

Cash Flow Statements

• A. $12 million
• B. $16 million
• C. $18 million

Answer 10

A is correct.
* seeing price (cash inflow) minus book value equals gain or loss on sale; therefore, gain or loss on sale plus book value equals selling price. The amount of gain is given, $12 million.

Cash Flow Statements

Question 11

Calculate

dividends

Cash Flow Statements

Answer 11

Recall the following relationship:
* beginning retained earnings + net income - dividends = ending retained earnings

Beginning balance of retained earnings (from the balance sheet)
plus net income (from the income statement)
less ending balance of retained earnings (from the balance sheet)
equals dividends paid

Cash Flow Statements