27. Understanding the Cash Flow Statement (Sch, CFA)
Under U.S. GAAP, interest paid would be classified as: A. operating cash flow. B. financing cash flow. C. no cash flow impact.
A Interest paid is classified as operating cash flow under U.S. GAAP.
Sales of inventory would be classified as: A. operating cash flow. B. investing cash flow. C. financing cash flow.
A Sales of inventory would be classified as operating cash flow.
Under U.S. GAAP, taxes paid would be classified as: A. operating cash flow. B. financing cash flow. C. no cash flow impact.
A Taxes paid are an operating cash flow under U.S. GAAP.
Jaderong Plirikett Stores reported net income of$25 million. The company has no outstanding debt. Using the following information from the comparative balance sheets (in millions), what should the company report in the financing section of the statement of cash flows in 2010? Balance Sheet Item ==12/31/09 ==12/31/10 ==Change common stock =========$100m ===$102m ===$2m Addi paid-in capital C.S ==$100m ===$140m ====$40m Retained earnings =======$100m ===$115m ===$15m Total stockholders' equity =$100m ===$357m ===$57m B. Issuance of common stock of$42 million; dividends paid of $10 million. B. Issuance of common stock of$38 million; dividends paid of $10 million. C. Issuance of common stock of$42 million; dividends paid of$40 million
A is correct. The increase of $42 million in common stock and additional paid-in capital indicates that the company issued stock during the year. The increase in retained earnings of$15 million indicates that the company paid $10 million in cash dividends during the year, determined as beginning retained earnings of $100 million plus net income of $25 million minus ending retained earnings of $115 million, which equals $10 million in cash dividends.
For the year ended December 31, 2007, Gremlin Corporation reported the following transactions: Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million. Purchased a patent for $3.3 million cash. Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank. Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade. Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million. Calculate Gremlin's cash flow from investing activities and cash flow from financing activities for the year ended December 31, 2007. Cash flow from investing activities =================Cash flow from financing activities A) $1.7 million inflow $1.3 million outflow B) $6.0 million outflow $2.7 million inflow C) $2.7 million outflow $6.0 million inflow
B Only the acquisition of common stock of the affiliate for $2.7 million and the purchase of the patent for $3.3 million are included in cash flow from investing activities. Since the acquisition of the stock purchase was financed with a bank loan, $2.7 million will be reported as a financing inflow. Both remaining transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement.
Continental Corporation reported sales revenue of $150,000 for the current year. If accounts receivable decreased $10,000 during the year and accounts payable increased $4,000 during the year, cash collections were: A. $154,000. B. $160,000. C. $164,000.
B $150,000 sales + $10,000 decrease in accounts receivable = $160,000 cash collections. The change in accounts payable does not affect cash collections. Accounts payable result from a firm's purchases from its suppliers.
An increase in notes payable would be classified as: A. investing cash flow. B. financing cash flow. C. no cash flow impact.
B Increase in notes payable would be classified as financing cash flow.
Sale of land would be classified as: A. operating cash flow. B. investing cash flow. C. financing cash flow.
B Sale of land would be classified as investing cash flow.
Sale of obsolete equipment would be classified as: A. operating cash flow. B. investing cash flow. C. financing cash flow.
B Sale of obsolete equipment would be classified as investing cash flow.
The sale of a building for cash would be classified as what type of activity on the cash flow statement? A. Operating. B. Investing. C. Financing.
B is correct. Purchases and sales of long-term assets are considered investing activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock ofanother company, or a long-term note receivable), it would have been considered a significant non-cash activity
Which of the following would be least likely to cause a change in investing cash flow? A. The sale of a division of the company. B. The purchase of new machinery. C. An increase in depreciation expense.
C Depreciation does not represent a cash flow. To the extent that it affects the firm's taxes, an increase in depreciation changes operating cash flows, but not investing cash flows.
Cash flows from taxes on income must be separately disclosed under: A. IFRS only. B. US GAAP only. C. both IFRS and US GAAP.
C is correct. Taxes on income are required to be separately disclosed under IFRS and US GAAP. The disclosure may be in the cash flow statement or elsewhere.
Red Road Company, a consulting company, reported total revenues of $100 million, total expenses of$80 million, and net income of$20 million in the most recent year. If accounts receivable increased by $10 million, how much cash did the company receive from customers? A. $90 million. B. $100 million. C. $110 million.
A is correct. Revenues of $100 million minus the increase in accounts receivable of $10 million equal $90 million cash received from customers. The increase in accounts receivable means that the company received less in cash than it reported as revenue.
Which of tire following is most likelyto appear in the operating section ofa cash flow statement under the indirect method? A. Net income. B» Cash paid to suppliers. C. Cash received from customers
A is correct. Under the indirect method, tire operating section would begin with net income and adjust it to arrive at operating cash flow. The other two items would appear in the operating section under the direct method.
The RR Corporation had cash flow from operations of $20 million. RR purchased $5 million in equipment and sold $3 million of equipment during the period. What is RR's free cash flow to equity for the period? A) $15 million. B) $18 million. C) $22 million.
B Free cash flow to equity (FCFE) is generally defined as cash flow from operations (CFO) less net fixed capital expenditures plus net borrowing. No information on borrowing is given here, so FCFE = 20 ? (5 ? 3) = $18 million.
Using the following information, what is the firm's cash flow from operations? Net income ========================$120 Decrease in accounts receivable =======20 Depreciation =======================25 Increase in inventory ================10 Increase in accounts payable ==========7 Decrease in wages payable ===========5 Increase in deferred tax liabilities ======15 Profit from the sale of land ===========2 A. $158. B. $170. C. $174.
B Net income — profits from sale of land + depreciation + decrease in receivables — increase in inventories + increase in accounts payable- decrease in wages payable + increase in deferred tax liabilities = 120- 2 + 25 + 20- 10 + 7- 5 + 15 = $170. Note that the profit on the sale of land should be subtracted from net income because this transaction is classified as investing, not operating.
In preparing a common-size cash flow statement, each cash flow is expressed as a percentage of: A. total assets. B. total revenues. C. the change in cash.
B The cash flow statement can be converted to common-size format by expressing each line item as a percentage of revenue.
Issuing bonds would be classified as: A. investing cash flow. B. financing cash flow. C. no cash flow impact.
B Issuing bonds would be classified as financing cash flow.
Which of the following items is least likely considered a cash flow from financing activity under U.S. GAAP? A. Receipt of cash from the sale of bonds. B. Payment of cash for dividends. C. Payment of interest on debt.
C The payment of interest on debt is an operating cash flow under U.S. GAAP.
The write-off of obsolete equipment would be classified as: A. operating cash flow. B. investing cash flow. C. no cash flow impact.
C Write-off of obsolete equipment has no cash flow impact.
The first step in cash flow statement analysis should be to: A. evaluate consistency of cash flows. B. determine operating cash flow drivers. C. identify the major sources and uses of cash.
C is correct. An overall assessment of the major sources and uses of cash should be the first step in evaluating a cash flow statement.
Assuming U.S. GAAP, Net income ================================$45 Depreciation ================================75 Taxes paid ==================================25 Interest paid =================================5 Dividends paid ==============================10 Cash received from sale of company building ======40 Issuance of preferred stock ====================35 Repurchase of common stock ==================30 Purchase of machinery ========================20 Issuance of bonds ============================50 Debt retired through issuance of common stock ====45 Paid off long-term bank borrowings ==============15 Profit on sale of building =======================20 1. Cash flow from operations is: A. $70. B. $100. C. $120. 2. Cash flow from investing activities is: A. -$30. B. $20. C. $50. 3. Cash flow from financing activities is: A. $30. B. $55. C. $75.
1. B Net income- profit on sale of building + depreciation = 45 — 20 + 75 = $100. Note that taxes and interest are already deducted in calculating net income, and that the profit on the sale of the building should be subtracted from net income. 2. B Cash from sale of building- purchase of machinery = 40- 20 = $20. 3. A Sale of preferred stock + issuance of bonds — principal payments on bank borrowings - repurchase of common stock- dividends paid = 35 + 50-15-30-10 = $30. Note that we did not include $45 of debt retired through issuance of common stock since this was a noncash transaction. Knowing how to handle noncash transactions is important.
Which of the following transactions would least likely be reported in the cash flow statement as investing cash flows? A) Purchase of plant and equipment used in the manufacturing process with financing provided by the seller. B) Principal payments received from loans made to others. C) Sale of held-to-maturity securities for cash.
A The purchase of plant and equipment with financing provided by the seller is a non-cash transaction. Non-cash transactions are disclosed separately in a note or supplementary schedule to the cash flow statement.
How would a stock split be reported on the statement of cash flows? A stock split would: A) not be reported on the statement of cash flows because it is a non-cash event. B) be reported as a source of cash in the cash flows from financing. C) be reported as a use of cash in the cash flows from financing.
A No cash is involved in a stock split--shares are exchanged for shares.
Under U.S. GAAP, dividends received from investments would be classified as: A. operating cash flow. B. investing cash flow. C. financing cash flow.
A Dividends received from investments would be classified as operating cash flow under U.S. GAAP.
Net income for Monique, Inc. for the year ended December 31, 20X7 was $78,000. Its accounts receivable balance at December 31, 20X7 was $121,000, and this balance was $69,000 at December 31, 20X6. The accounts payable balance at December 31, 20X7 was $72,000 and was $43,000 at December 31, 20X6. Depreciation for 20X7 was $12,000, and there was an unrealized gain of$15,000 included in 20X7 income from the change in value of trading securities. Which of the following amounts represents Monique's cash flow from operations for 20X7? A. $52,000. B. $67,000. C. $82,000.
A Net income $78,000 Depreciation 12,000 Unrealized gain (15,000) Increase in accounts receivable (52,000) Increase in accounts payable 29,000 Cash flow from operations $52,000
Which of the following is least likely a change in cash flow from operations under U.S. GAAP? A. A decrease in notes payable. B. An increase in interest expense. C. An increase in accounts payable.
A A change in notes payable is a financing cash flow.
Under IFRS, interest expense would be classified as: A. either operating cash flow or financing cash flow. B. operating cash flow only. C. financing cash flow only.
A Under IFRS, interest expense can be classified as either an operating cash flow or financing cash flow.
Silverago Incorporated, an international metals company, reported a loss on the sale of equipment of $2 million in 2010. In addition, the company's income statement shows depreciation expense of$8 million and the cash flow statement shows capital expenditure of$10 million, all of which was for the purchase of new equipment. Using the following information from the comparative balance sheets, how much cash did the company receive from the equipment sale? Balance Sheet Item ==12/31/09 ==12/31/10 ==Change Equipment ===========$100m ===$105m ===$5m Acc depr—equipment ==$40m ====$46m =====$6m A. $1 million. B. $2 million. C. $3 million.
A is correct. Selling price (cash inflow) minus book value equals gain or loss on sale; therefore, gain or loss on sale plus book value equals selling price (cash inflow). The amount of loss is given—$2 million. To calculate the book value of the equipment sold, find the historical cost of the equipment and the accumulated depreciation on the equipment. • Beginning balance of equipment of$100 million plus equipment purchased of $1 0 million minus ending balance of equipment of $105 million equals the historical cost of equipment sold, or $5 million. • Beginning accumulated depreciation of $40 million plus depreciation expense for the year of $8 million minus ending balance of accumulated depreciation of $46 million equals accumulated depreciation on the equipment sold, or $2 million. • Therefore, the book value of the equipment sold was $5 million minus $2 million, or $3 million. • Because the loss on the sale of equipment was $2 million, the amount of cash received must have been $1 million
Which of the following components of the cash flow statement may be prepared under the indirect method under both IFRS and US GAAP? A. Operating. B. Investing. C. Financing.
A is correct. The operating section may be prepared under tire indirect method. The other sections are always prepared under the direct method.
An analyst has calculated a ratio using as the numerator the sum of operating cash flow, interest, and taxes and as the denominator the amount of interest What is this ratio, what does it measure, and What does it indicate? A. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. B. This ratio is an effective tax ratio, measuring the amount of a company's operating cash flow' used for taxes and indicating a company's efficiency in tax management C. This ratio is an operating profitability ratio, measuring the operating cash flow' generated accounting for taxes and interest and indicating a company's liquidity.
A is correct. This ratio is an interest coverage ratio, measuring a company's ability to meet its interest obligations and indicating a company's solvency. This coverage ratio is based on cash flow information; another common coverage ratio uses a measure based on the income statement (earnings before interest, taxes, depreciation, and amortisation)
Purple Fleur S.A., a retailer of floral products, reported cost of goods sold for the year of$75 million. Total assets increased by $55 million, but inventory declined by $6 million. Total liabilities increased by $45 million, and accounts payable increased by $2 million. The cash paid by the company to its suppliers is most likely closest to: A. $67 million. B. $79 million. C. $83 million.
A is correct. Cost of goods sold of $75 million less the decrease in inventory of$6 million equals purchases from suppliers of $69 million. The increase in accounts payable of $2 million means that the company paid $67 million in cash ($69 million minus $2 million)
Given the following: Sales $1,500 Increase in inventory 100 Depreciation 150 Increase in accounts receivable 50 Decrease in accounts payable 70 After-tax profit margin 25% Gain on sale of machinery $30 Cash flow from operations is: A. $115. B. $275. C. $375.
B Net income = $1,500 x 0.25 = $375, and cash flow from operations = net income gain on sale of machinery + depreciation - increase in accounts receivable - increase in inventory - decrease in accounts payable = 375 - 30 + 150- 50- 100- 70 = $275.
Where are dividends paid to shareholders reported in the cash flow statement under U.S. GAAP and IFRS? U.S. GAAP=========================IFRS A. Operating or financing activities==========Operating or financing activities B. Financing activities=================Operating or financing activities C. Operating activities============Financing activities
B Under U.S. GAAP, dividends paid are reported as financing activities. Under IFRS, dividends paid can be reported as either operating or financing activities.
An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Balances as of Year Ended 31 December 2009 ===2010 Retained earnings ===================120 ====145 Accounts receivable ==================38 =====43 Inventory ==========================45 =====48 Accounts payable ====================36 =====29 In 2010, the company declared and paid cash dividends of $10 million and recorded depreciation expense in the amount of$25 million. The company considers dividends paid a financing activity. The company's 2010 cash flow from operations (in $ millions) was closest to A. 25. B. 45. C. 75.
B is correct. All dollar amounts are in millions. Net income (NI) for 2010 is $35. This amount is the increase in retained earnings, $25, plus the dividends paid, $10. Depreciation of $25 is added back to net income, and the increases in accounts receivable, $5, and in inventory, $3, are subtracted from net income because they are uses of cash. The decrease in accounts payable is also a use of cash and, therefore, a subtraction from net income. Thus, cash flow from operations is $25 + $10 + $25- $5- $3- $7 = $45.
Which is an appropriate method of preparing a common-size cash flow' statement? A. Show each item ofrevenue and expense as a percentage of net revenue. B. Show each line item on the cash flow statement as a percentage of net revenue. C, Show each line item on the cash flow' statement as a percentage of total cash outflows
B is correct. An appropriate method to prepare a common-size cash flow statement is to show each line item on the cash flow statement as a percentage of net revenue. An alternative way to prepare a statement of cash flows is to show each item of cash inflow as a percentage of total inflows and each item of cash outflows as a percentage of total outflow's.
Which of the following is an appropriate method of computing free cash flow' to the firm? A. Add operating cash flows to capital expenditures and deduct after-tax interest payments. B. Add operating cash flow's to after-tax interest payments and deduct capital expenditures. C. Deduct both after-tax interest payments and capital expenditures from operating cash flows.
B is correct. Free cash flow to the firm can be computed as operating cash flows plus after-tax interest expense less capital expenditures.
The three major classifications of activities in a cash flow statement are: A. inflows, outflows, and net flows. B. operating, investing, and financing. C. revenues, expenses, and net income.
B is correct. Operating, investing, and financing are the three major classifications of activities in a cash flow statement. Revenues, expenses, and net income are elements of the income statement. Inflows, outflows, and net flows are items of information in the statement of cash flows.
Based on the following information for Star Inc., what are the total net adjustments that the company would make to net income in order to derive operating cash flow? =======================Year Ended Income Sta. Item ====12/31/09===12/31/10 Net income ===================$20m Depreciation ==================$2m Balance Sheet Item ==12/31/09 ==12/31/10 ===Change Accounts receivable===$25m=====$22 m==($3 million) Inventory ===========$10m=====$14m =====$4m Accounts payable =====$8m =====$13m =====$5m A. Add $2 million. B. Add $6 million. C. Subtract $6 million.
B is correct. To derive operating cash flow, the company would make the following adjustments to net income: Add depreciation (a non-cash expense) of $2 million; add the decrease in accounts receivable of$3 million; add the increase in accounts payable of $5 million; and subtract tire increase in inventory of $4 million. Total additions would be $10 million, and total subtractions would be $4 million, which gives net additions of $6 million
Which of the following best describes a ratio that measures a firm's ability to acquire long-term assets with cash flows from operations, and a performance ratio, respectively? Acquire assets with CFO Performance ratio A) Investing and financing ratio Cash-to-income ratio B) Reinvestment ratio Debt payment ratio C) Reinvestment ratio Cash-to-income ratio
C The reinvestment ratio measures a firm's ability to acquire long-term assets with cash flows from operations. In contrast, the investing and financing ratio, which is more comprehensive, measures the firm's ability to purchase assets, satisfy debts, and pay dividends. The cash-to-income ratio measures the ability to generate cash from a firm's operations and is a performance ratio for cash flow analysis purposes. The debt payment ratio measures the firm's ability to satisfy long-term debt with cash flow from operations but it is more of a coverage ratio than a performance ratio.
Torval, Inc. retires debt securities by issuing equity securities. This is considered a: A. cash flow from investing. B. cash flow from financing. C. noncash transaction.
C The exchange of debt securities for equity securities is a noncash transaction.
Martin, Inc. had the following transactions during 20X7: • Purchased new fixed assets for $75,000. • Converted $70,000 worth of preferred shares to common shares. • Received cash dividends of$12,000. Paid cash dividends of$21,000. • Repaid mortgage principal of $17,000. Assuming Martin follows U.S. GAAP, which of the following amounts represents Martin's cash flows from investing and cash flows from financing in 20X7, respectively? Cash flows from investing===Cash flows from financing A. ($5,000)================($21,000) B. ($75,000)===============($21,000) C. ($75,000)===============($38,000)
C Purchased new fixed assets for $75,000 - cash outflow from investing Converted $70,000 of preferred shares to common shares — noncash transaction Received dividends of $12,000 - cash inflow from operations Paid dividends of $21,000- cash outflow from financing Mortgage repayment of $17,000 — cash outflow from financing CFI = -75,000 CFF = -21,000- 17,000 = -$38,000
Depreciation expense would be classified as: A. operating cash flow. B. investing cash flow. C. no cash flow impact.
C Depreciation expense would be classified as no cash flow impact.
White Flag, a women's clothing manufacturer, reported salaries expense of$20 million. The beginning balance of salaries payable was $3 million, and the ending balance ofs alaries payable was $1 million. How much cash did the company pay in salaries? A. $18 million. B. $21 million. C. $22 million.
C is correct. Beginning salaries payable of $3 million plus salaries expense of $20 million minus ending salaries payable of $1 million equals $22 million. Alternatively, the expense of $20 million plus the $2 million decrease in salaries payable equals $22 million.
An analyst gathered the following information from a company's 2010 financial statements (in $ millions): Year ended 31 December ========2009 =======2010 Net sales =====================245.8 =======254.6 Cost of goods sold =============168.3 =======175.9 Accounts receivable ============73.2 ========68.3 Inventory ====================39.0 ========47.8 Accounts payable =============20.3 =========22.9 Based only on the information above, the company's 2010 statement of cash flows in the direct format would include amounts (in $ millions) for cash received from customers and cash paid to suppliers, respectively, that are closest to: cash received from customers ==cash paid to suppliers A. =======249.7 ==================169.7 B. =======259.5 ==================174.5 C. =======259.5 ==================182.1
C is correct. Cash received from customers = Sales + Decrease in accounts receivable = 254.6 + 4.9 = 259.5. Cash paid to suppliers = Cost of goods sold + Increase in inventory- Increase in accounts payable = 1 75.9 + 8.8 - 2.6 = 182.1.
Green Glory Corp., a garden supply wholesaler, reported cost of goods sold for the year of$80 million. Total assets increased by $55 million, including an increase of $5 million in inventory. Total liabilities increased by $45 million, including an increase of$2 million in accounts payable. The cash paid by the company to its suppliers is most likely closest to: A. $73 million. B. $77 million. C. $83 million.
C is correct. Cost of goods sold of $80 million plus the increase in inventory of $5 million equals purchases from suppliers of $85 million. The increase in accounts payable of $2 million means that the company paid $83 million in cash ($85 million minus $2 million) to its suppliers.
Interest paid is classified as an operating cash flow under: A. US GAAP but may be classified as either operating or investing cash flows under IFRS. B. IFRS but may be classified as either operating or investing cash flows under US GAAP. C. US GAAP but may be classified as either operating or financing cash flows under IFRS.
C is correct. Interest expense is always classified as an operating cash flow under US GAAP but may be classified as either an operating or financing cash flow under IFRS.
Golden Cumulus Corp., a commodities trading company, reported interest expense of$19 million and taxes of $6 million. Interest pay-able increased by $3 million, and taxes payable decreased by $4 million over the period. How much cash did the company pay for interest and taxes? A. $22 million for interest and $10 million for taxes. B- $16 million for interest and $2 million for taxes. C. $16 million for interest and $10 million for taxes.
C is correct. Interest expense of $19 million less the increase in interest payable of $3 million equals interest paid of $16 million. Tax expense of$6 million plus the decrease in taxes payable of $4 million equals taxes paid of $10 million.
A conversion of a face value $1 million convertible bond for $1 million of common stock would most likely be: A. reported as a SI million investing cash inflow and outflow. B. reported as a $1 million financing cash outflow and inflow. C- reported as supplementary information to the cash flow statement.
C is correct. Non-cash transactions, if significant, are reported as supplementary information, not in the investing or financing sections of the cash flow statement.
Which of the following is an example of a financing activity on the cash flow statement under US GAAP? A. Payment of interest B. Receipt ofdividends. C. Payment of dividends
C is correct. Payment of dividends is a financing activity under US GAAP. Payment of interest and receipt of dividends are included in operating cash flows under US GAAP. Note that IFRS allow companies to include receipt of interest and dividends as either operating or investing cash flows and to include payment of interest and dividends as either operating or financing cash flows.