Chapter 7, 8

What impact would this have on the cash flow statement?

Ending cash would be higher so the change in cash would be impacted. Change in accounts payable would balance the difference.

The proceeds from the sale of equipment formerly used in the business positive/negative

positive

What impact does a decrease in prepaid expenses have on cash flow?

A reduction in prepaid expenses results in an increase in cash

The piece of the journal entry for an increase in accounts payable will be? Debit/Credit

Credited

When depreciation expense is booked, the account-accumulated depreciation (contra asset) will be? Debit/Credit

Credited

Entries to revenues accounts such as Interest income are usually Dr/Cr

Credits

THE PIECE OF THE JOURNAL ENTRY FOR AN INCREASE IN AN ASSET? Debit/Credit

Debit

The piece of the journal entry for an increase in an expense? Debit/Credit

Debit

When a company receives cash from a customer, the account Cash will be Dr/Cr

Debited

When cash is received, the account Cash will be? Debit/Credit

Debited

The accounting clerk at Healthy hospital attended the annual holiday party on December 27, 2013. Unfortunately, he got real drunk and ended up throwing up in the punch bowl. He was so embarrassed that he did not come back to work until January 4. Sitting on his desk were the electric bills for electricity for the months of November and December for a total amount of $2,000. These bills did not get paid until January 5, 2014. a) What impact does this have on the income statement, assuming Healthy hospital has a December 31, year end?

No Impact - cash payment only

What is the main purpose of the Statement of Cash Flows?

The Statement of Cash Flows is intended to show the sources and uses of an organization's cash. In other words, how did the organization get cash and how did the organization spend its cash?

What is the accounting journal?

The accounting journal is the master book or computer file in which all financial events are recorded in chronological order. By keeping the journal chronologically, the accountant has a record of every financial event, and can periodically summarize the organization's financial position and the results of its operations.

Describe the basic accounting equation. How does the double entry accounting system work?

The fundamental accounting equation is Assets = Liabilities + Net Assets. This equation must hold true at all times for all accounting entities. The double entry system is based on the fact that each financial event affects the basic accounting equation. Therefore, in order for the equation to remain in balance each financial event must affect at least two items in the equation.

How do ledger and journal entries interact with one another?

The ledger is a book or computer file that tracks the impact of each financial event on each specific account. Because the ledger is organized chronologically, it keeps a running total for each account and can be used at any time to generate financial statements and account balances. Each financial event that generates a journal entry is also entered into the ledger to maintain the account balances. The ledger will include the information from each journal entry, but separates that information into the individual accounts impacted by the journal entry.

What will usually cause an asset account to decrease? Dr/Cr

credit

What will usually cause the liability account Accounts Payable to increase? Dr/Cr

credit

Which term is associated with "right" or "right-side"?

credit

When cash is paid, the account Cash will be Dr/Cr

credited

WHICH TERM IS ASSOCIATED WITH "LEFT" OR "LEFT-SIDE"?

debit

Entries to expenses such as Salary Expense are usually Dr/Cr

debits

9. A $500K payment on a note payable would be reflected as a (an) ___________ in the _______________ activities section of the cash flow statement.

decrease; financing

Debit

left side of an account increase in assets and expenses

Credit

the right side of an account increase in liabilities and revenue

An increase in the current liability Income Taxes Payable positive/negative

positive

An increase in the current liability Warranty Liability positive/negative

positive

Proceeds from the issuance of Preferred Stock positive/negative

positive

An increase in rent payable results in a (an) ______ in cash flows?

An increase in rent payable results in an increase in cash flow.

Explain how the ledger provides the information needed to prepare the Balance Sheet.

Because the ledger keeps a running total of all accounts, it directly provides the information needed to compile the Balance Sheet. At the end of the particular accounting period, the account totals from the ledger are the direct entries for each asset and liability listed on the Balance Sheet. The different net asset accounts kept in the ledger are summarized (usually via the Statement of Changes in Net Assets) and then included in the Balance Sheet.

What 2 balance sheet accounts are impacted?

Cash and accounts payable or accrued electric

Differentiate between the direct and the indirect methods for preparing and presenting the Statement of Cash Flows. For each of the following, indicate whether they will have a positive or negative EFFECT ON CASH. A positive effect could also be thought of as a source of cash, an increase in cash, or a positive amount on the cash flow statement. A negative effect could also be thought of as a use of cash, a decrease in cash, or a negative amount on the cash flow statement.

The direct method of presenting the Statement of Cash Flows simply lists the change in cash caused by each account. In essence, the cash account from the ledger is analyzed to identify which corresponding account caused each change in cash. For example, if on a given date wages were paid to employees and the cash account in the ledger was reduced, the statement of cash flows would show cash paid for wages. This payment would be listed under the operating activities section of the Cash Flow Statement. While the direct method is easy to understand and compile when a small number of financial transactions are involved, it may be more cumbersome when large numbers of transactions are involved. The indirect method starts with net income as an estimate of cash flow, and makes a series of adjustments to net income to determine the actual cash flow from operating activities. For example, when an organization takes depreciation it enters a depreciation expense in the ledger. This depreciation expense does not involve the use of any cash. When net income is calculated, however, it will subtract the non-cash depreciation expense. Therefore, to adjust net income to show actual cash flows, the depreciation expense must be added back in. This is just one example of the many adjustments that would need to be made to net income to determine the actual cash flows of the organization.

Explain how the ledger provides the information needed to prepare the Operating Statement.

The ledger provides the year-end balances for all of the revenue and expense accounts that make up the Operating Statement. At the end of the particular accounting period, the expense and revenue accounts totals are simply transferred directly to the Operating Statement.

What are the three categories used within the Statement of Cash Flows and why are these categories important for understanding an organization's cash situation?

To help distinguish the different purposes and organization may have spending and collecting cash, the statement is divided into three section: • Cash flows from operating activities • Cash flows from investing activities • Cash flows from financing activities These categories differentiate between the sources of cash. Because cash can be generated from borrowing and selling off assets, these might be indicators of financial problems. So a user of financial statements would want to know the specific sources of changes in cash balances.

A decrease in Accounts Payable positive/negative

negative

AN INCREASE IN THE BALANCE OF PREPAID INSURANCE positive/negative

negative

An increase in Accounts Receivable positive/negative

negative

An increase in the long-term asset Investment in Another Company positive/negative

negative

Dividends declared and paid positive/negative

negative

A decrease in Supplies on hand positive/negative

positive