Chapter 13

The purchase of inventory and investments in property, plant, and equipment are considered cash outflows from operations. True or False

False; no buying fixed assets are investing activities.

Cash dividends paid to stockholders are classified on the statement of cash flows as: a. an operating activity. b. an investing activity. c. a combination of an operating activity and an investing activity. d. a financing activity.

d. Cash dividends paid to stockholders are classified as a financing activity, not (a) an operating activity, (b) an investing activity, or (c) a combination of an operating and an investing activity.

A statement of cash flows starts with net income and adds (or deducts) items that did not affect cash to arrive at net cash provided by operating activities if the indirect method is used. True or False

True

Inflows and outflows from investing and financing activities should be reported separately on the statement of cash flows. True or False

True

Report cash outflows to purchase property, plant, and equipment in the investing section of the statement of cash flows. True or False

True

Cash inflows from investing activities include a. sale of common stock. b. purchase of equipment. c. sale of land. d. issuance of long-term debt.

c. Selling land is an investing activity—as is buying land, but they are respectively cash (outflows)/inflows.

statement of cash flows

reports the cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period.

direct method

shows operating cash receipts and payments. It is prepared by adjusting each item in the income statement from the accrual basis to the cash basis.

When companies issue stocks or bonds for cash, the actual proceeds will appear in the

statement of cash flows as a financing inflow (rather than the par value of the stocks or face value of bonds).

Investing activities

Cash flow activities that include (a) purchasing and disposing of investments and property, plant, and equipment using cash and (b) lending money

Equation to compute cash payments to suppliers—direct method

Cash payments to suppliers= cost of goods sold { + increase in inventory or - decrease in inventory { + decrease in accounts payable or - increase in accounts payable

The amortization of a patent is added back to net income to arrive at net cash provided by operating activities. True or False

True

The issuance of shares of stock for plant assets is a significant non-cash transaction. True or False

True

Which of the following is not reported in the statement of cash flows? a. The net change in stockholders' equity during the year. b. Cash payments for plant assets during the year. c. Cash receipts from sales of plant assets during the year. d. How acquisitions of plant assets during the year were financed.

a. The net change in stockholders' equity during the year is not reported in the statement of cash flows. The other choices are true statements.

Free cash flow equation

net cash provided by operating activities- capital expenditures- cash dividends

Financing activities

Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

Besides the adjusted trial balance, information for the statement of cash flows is taken from comparative balance sheets and the current income statement. True or False

False; e.g., show trading a building for land.

Free cash flow

describes the net cash provided by operating activities after adjustment for capital expenditures and dividends

Do not include noncash investing and financing activities

in the body of the statement of cash flows. Report this information in a separate schedule.

Transactions and other events characteristic of each kind of activity are as follows.

1. Operating activities include the cash effects of transactions that generate revenues and expenses. They thus enter into the determination of net income. 2. Investing activities include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans. 3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.

The information in a statement of cash flows helps investors, creditors, and others assess the following.

1. The entity's ability to generate future cash flows. By examining relationships between items in the statement of cash flows, investors can better predict the amounts, timing, and uncertainty of future cash flows than they can from accrual-basis data. 2. The entity's ability to pay dividends and meet obligations. If a company does not have adequate cash, it cannot pay employees, settle debts, or pay dividends. Employees, creditors, and stockholders should be particularly interested in this statement because it alone shows the flows of cash in a business. 3. The reasons for the difference between net income and net cash provided (used) by operating activities. Net income provides information on the success or failure of a business. However, some financial statement users are critical of accrual-basis net income because it requires many estimates (see Ethics Note). As a result, users often challenge the reliability of the number. Such is not the case with cash. Many readers of the statement of cash flows want to know the reasons for the difference between net income and net cash provided by operating activities. Then, they can assess for themselves the reliability of the net income number. 4.The cash investing and financing transactions during the period. By examining a company's investing and financing transactions, a financial statement reader can better understand why assets and liabilities changed during the period.

Equation to compute cash receipts from customers

=Sales revenue{ + decrease in accounts receivable or - in accounts receivable

The information to prepare this statement(state of cash flows using the indirect method) usually comes from three sources:

Comparative balance sheets. Information in the comparative balance sheets indicates the amount of the changes in assets, liabilities, and stockholders' equity from the beginning to the end of the period. Current income statement. Information in this statement helps determine the amount of net cash provided or used by operating activities during the period. Additional information. Such information includes transaction data that are needed to determine how cash was provided or used during the period.

An increase in equipment will increase net cash provided by operating activities. True or False

False; no, buying equipment does not increase operating activities.

When accounts receivable increases during the year, revenues on a cash basis are higher than revenues on an accrual basis. True or False

False; no, increased accrued accounts receivables means delayed cash receipts compared to using a cash basis.

The only use of a statement of cash flows is to help investors, creditors, and others assess the reasons for the difference between net income and net cash provided by operating activities. True or False

False; no, statements of cash flows also provides information about operating and investment activities.

Net cash provided/Used by operating activites equation

Net Income+/−Adjustments=Net Cash Provided/Used by OperatingActivities

The following data are available for Orange Peels Corporation. Proceeds from sale of land$100,000Proceeds from sale of equipment50,000Issuance of common stock70,000Purchase of equipment30,000Payment of cash dividends60,000 Net cash provided by investing activities is: a. $120,000. b. $130,000. c. $150,000. d. $190,000.

a. Net cash provided by investing activities is $120,000 (Sale of land $100,000 + Sale of equipment $50,000 − Purchase of equipment $30,000), not (b) $130,000, (c) $150,000, or (d) $190,000. Issuance of common stock and payment of cash dividends are financing activities.

Which is an example of a cash flow from an operating activity? a. Payment of cash to lenders for interest. b. Receipt of cash from the sale of common stock. c. Payment of cash dividends to the company's stockholders. d.None of the answer choices is correct.

a. Payment of cash to lenders for interest is an operating activity. The other choices are incorrect because (b) receipt of cash from the sale of common stock is a financing activity, (c) payment of cash dividends to the company's stockholders is a financing activity, and (d) there is a correct answer.

The statement of cash flows should not be used to evaluate an entity's ability to: a. generate net income. b. generate future cash flows. c. pay dividends. d. meet obligations.

a. The statement of cash flows is not used to evaluate an entity's ability to generate net income. The other choices are true statements.

indirect method

adjusts net income for items that do not affect cash. A great majority of companies (98%) use this method. Companies favor the indirect method for two reasons: 1. It is easier and less costly to prepare. 2. It focuses on the differences between net income and net cash flow from operating activities.

*19. (LO 5) In a worksheet for the statement of cash flows, a worksheet entry that includes a credit to accumulated depreciation will also include a: a. credit in the operating activities section and a debit in another section. b. debit in the operating activities section. c. debit in the investing activities section. d. debit in the financing activities section

b. A worksheet entry that includes a credit to accumulated depreciation will also include a debit to depreciation expense. This debit in the operating activities section of the statement of cash flows will be added to the net income to determine net cash provided by operating activities. The other choices are therefore incorrect.

Items that are added back to net income in determining net cash provided by operating activities under the indirect method do not include: a. depreciation expense. b.an increase in inventory. c.amortization expense. d.loss on disposal of plant assets.

b. An increase in inventory is subtracted, not added, to net income in determining net cash provided by operating activities. The other choices are incorrect because (a) depreciation expense, (c) amortization expense, and (d) loss on disposal of plant assets are all added back to net income in determining net cash provided by operating activities.

In a worksheet for the statement of cash flows, a decrease in accounts receivable is entered in the reconciling columns as a credit to Accounts Receivable and a debit in the: a. investing activities section. b. operating activities section. c. financing activities section. d. None of the answer choices is correct.

b. Because accounts receivable is a current asset, the debit belongs in the operating activities section of the worksheet, not in the (a) investing activities or (c) financing activities section. Choice (d) is incorrect as there is a right answer.

Which is an example of a cash flow from a financing activity? a. Receipt of cash from sale of land. b.Issuance of debt for cash. c. Purchase of equipment for cash. d. None of the answer choices is correct.

b. Issuance of debt for cash is a financing activity. The other choices are incorrect because (a) the receipt of cash from the sale of land is an investing activity, (c) the purchase of equipment for cash is an investing activity, and (d) there is a correct answer.

The following data are available for Retique! Increase in accounts payable$40,000Increase in bonds payable100,000Sale of investment50,000Issuance of common stock60,000Payment of cash dividends30,000 Net cash provided by financing activities is: a. $90,000. b. $130,000. c. $160,000. d. $170,000.

b. Net cash provided by financing activities is $130,000 (Increase in bonds payable $100,000 + Issuance of common stock $60,000 − Payment of cash dividends $30,000), not (a) $90,000, (c) $160,000, or (d) $170,000. Increase in accounts payable is an operating activity, and sale of investment is an investing activity.

11. (LO 2) The following data are available for Bill Mack Corporation. Net income$200,000Depreciation expense40,000Dividends paid60,000Gain on sale of land10,000Decrease in accounts receivable20,000Decrease in accounts payable30,000 Net cash provided by operating activities is: a. $160,000. b. $220,000. c. $240,000. d. $280,000.

b. Net cash provided by operating activities is $220,000 (Net income $200,000 + Depreciation expense $40,000 − Gain on sale of land $10,000 + Decrease in accounts receivable $20,000 − Decrease in accounts payable $30,000), not (a) $160,000, (c) $240,000, or (d) $280,000.

The statement of cash flows classifies cash receipts and cash payments into these activities: a. operating and nonoperating. b. investing, financing, and operating. c. financing, operating, and nonoperating. d. investing, financing, and nonoperating.

b. Operating, investing, and financing activities are the three classifications of cash receipts and cash payments used in the statement of cash flows. The other choices are therefore incorrect.

Operating activities do not include cash a. inflows from revenue. b. inflows from sale of equipment. c. outflows for income taxes. d. outflows for wages.

b. Selling equipment is an investment—not an operating activity

A company has credit sales of $900,000 and cash sales of $540,000 during the same year that the Accounts Receivable account decreased by $120,000. What was the total of cash receipts from sales? a. $1,320,000. b. $1,560,000. c. $1,020,000. d. $780,000.

b. Total cash receipts: $900K A/Receivables + $540K Cash Sales + $120K Current Year Decreased A/R Implies Increased Cash Collections: $900K + $540K + $120K = $1,560K

The beginning balance in accounts receivable is $44,000, the ending balance is $42,000, and sales during the period are $129,000. What are cash receipts from customers? a. $127,000. b. $129,000. c. $131,000. d. $141,000.

c. Cash from customers amount to $131,000 ($129,000 + a decrease in accounts receivable of $2,000). The other choices are therefore incorrect.

Which is an example of a cash flow from an investing activity? a. Receipt of cash from the issuance of bonds payable. b. Payment of cash to repurchase outstanding common stock. c. Receipt of cash from the sale of equipment. d. Payment of cash to suppliers for inventory.

c. Receipt of cash from the sale of equipment is an investing activity. The other choices are incorrect because (a) the receipt of cash from the issuance of bonds payable is a financing activity, (b) payment of cash to repurchase outstanding common stock is a financing activity, and (d) payment of cash to suppliers for inventory is an operating activity.

Which of the following is incorrect about the statement of cash flows? a. The direct method may be used to report net cash provided by operating activities. b. The statement shows the net cash provided (used) for three categories of activity. c. The operating section is the last section of the statement. d. The indirect method may be used to report net cash provided by operating activities.

c. The operating section of the statement of cash flows is the first, not the last, section of the statement. The other choices are true statements.

Which of the following is incorrect about the statement of cash flows? a. It is a fourth basic financial statement. b. It provides information about cash receipts and cash payments of an entity during a period. c. It reconciles the ending Cash account balance to the balance per the bank statement. d. It provides information about the operating, investing, and financing activities of the business.

c. The statement of cash flows does not reconcile the ending cash balance to the balance per the bank statement. The other choices are true statements.

Equation to compute cash payments for income taxes—direct method

cash payments for income taxes= income tax expenses {+decrease in income taxes payable or -increase in income taxes payable

direct method

companies compute net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. To simplify and condense the operating activities section, companies report only major classes of operating cash receipts and cash payments. For these major classes, the difference between cash receipts and cash payments is the net cash provided by operating activities.

under the indirect method, companies must adjust net income to

convert certain items to the cash basis.

Which of the following items is reported on a statement of cash flows prepared by the direct method? a. Loss on sale of building. b. Increase in accounts receivable. c. Depreciation expense. d. Cash payments to suppliers.

d. Cash payments to suppliers are reported on a statement of cash flows prepared by the direct method. The other choices are incorrect because (a) loss on sale of building, (b) increase in accounts receivable, and (c) depreciation expense are reported in the operating activities section of the statement of cash flows when the indirect, not direct, method is used.

Free cash flow provides an indication of a company's ability to: a. manage inventory. b. generate cash to pay additional dividends. c. generate cash to invest in new capital expenditures. d. both generate cash to pay additional dividends and invest in new capital expenditures.

d. Free cash flow provides an indication of a company's ability to generate cash to pay additional dividends and invest in new capital expenditures. Choice (a) is incorrect because other measures besides free cash flow provide the best measure of a company's ability to manage inventory. Choices (b) and (c) are true statements, but (d) is the better answer.

Net income is $132,000, accounts payable increased $10,000 during the year, inventory decreased $6,000 during the year, and accounts receivable increased $12,000 during the year. Under the indirect method, what is net cash provided by operating activities? a. $102,000. b. $112,000. c. $124,000. d. $136,000.

d. Net cash provided by operating activities is computed by adjusting net income for the changes in the three current asset/current liability accounts listed. An increase in accounts payable ($10,000) and a decrease in inventory ($6,000) are added to net income ($132,000), while an increase in accounts receivable ($12,000) is subtracted from net income, or $132,000 + $10,000 + $6,000 − $12,000 = $136,000, not (a) $102,000, (b) $112,000, or (c) $124,000.

Non-cash investing and financing activities a. may represent significant investing and financing activities. b. do not involve cash receipts or cash payments. c. are disclosed on a separate schedule. d. all of the above.

d. Non-cash investing and financing activities affect the content of items a, b and c.

Depreciation is similar to any other expense in that it reduces net income. It differs in that it does not involve a current cash outflow. That is why it must be added back to

net income to arrive at net cash provided by operating activities.