FA Module 5

the basic rules for creating a Statement of Sources and Uses are

A decrease in a liability or owner's equity account represents a use of funds, and an increase in these accounts represents a source of funds. A decrease in an asset account is a source of funds, while an increase is a use of funds. Changes in cash are ignored.

Using the Indirect Method to create the Statement of Cash Flows, which of the following options are correct in describing what must be done to convert net income to operating cash flow? (Please select all that apply.)

A gain is subtracted from net income. An increase in operating current assets is subtracted from net income. A decrease in operating current liabilities is subtracted from net income. (A gain, an increase in operating current assets, and a decrease in operating current liabilities would all need to be subracted from net income in order to convert net income into operating cash flow when using the indirect method to create the Statement of Cash Flows.)

Which of the following is a common finding in looking at the statement of cash flows of a mature company?

A negative cash flow from financing activities

Which of the following is a common finding in looking at statement of cash flows of a startup company?

A negative cash flow from investing activities

Which of the following is a common finding in looking at the statement of cash flows of a declining company?

A negative cash flow from operating activities

Which of the following is a common finding in looking at the statement of cash flows of a declining company?

A positive cash flow from investing activities

Which of the following is a common finding in looking at the statement of cash flows of a mature company?

A positive cash flow from operating activities

Based on this income statement for Company ZYX for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for Gain or Loss in calculating cash flow from Operating Activities using the indirect method?

(gain of The correct answer is: Adjustment of (16,000) in the Operating Section The total cash flows received from both the sale of equipment and the sale of debt investment are investing activities and not operating activities. The net of the gain and loss is a gain of $16,000. To eliminate this gain, the $16,000 amount should be subtracted from net income. Since the gain would have increased net income, this subtraction ensures that the net effect on cash flow from operations is zero.

What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Payable and Accrued Expenses account balances for Apple Inc.? *******ACCOUNTS PAYABLE*******

(rev has both increasaed from 2012-2013) Increase of $1,192 for Accounts Payable and increase of $2,442 for Accrued Expenses

Uses of funds include:

Accounts Receivable, Accumulated Project Costs, Prepaid Expenses, and Accounts Payable, PP&E, net, Other Current Liabilities, Long Term Debt, Other Long Term Liabilities, Common Stock & Paid In Capital, and AOCI & Other Equity

Accounts not used in creating the Statement of Sources and Uses include

Cash (because it is never used in creating this Statement) as well as Software, Note Payable, and Common Stock (because each of those accounts had no change during the year).

Which of the statements below is NOT true regarding Company H?

Company H has negative cash flows from operations because it has a negative gross income.

Sources of funds include:

Furniture & Equipment, net, Accrued Expenses, and Retained Earnings,Inventory, Other Current Assets, Intangibles, net, Other Long Term Assets, Accounts Payable, Accrued Expenses, and Retained Earnings

Based on this income statement for Company Z for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for gain/loss on sale of equipment in calculating cash flow from Operating Activities using the indirect method? gain of 1000

Adjustment for (1,000) in the Operating Section The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The gain itself is a non-cash item. To eliminate this gain, the $1,000 amount should be subtracted from Net Income in the Operating Section of the Statement of Cash Flows. Since the gain would have increased Net Income, this subtraction ensures that the net effect on cash flow from operations is zero.

cash flows in operating activity

Cash paid to suppliers: cash paid for current period operating activity purchases cash paid for previous period credit purchases cash paid in advance for future period purchases Cash received from customers: cash received from current period sales cash collections from previous period credit sales cash received in advance for future period sales

Based on this income statement for Company Y for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for gain or loss in calculating cash flow from Operating Activities using the indirect method? loss is bracketed

Increase by $12,000 The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The loss itself is a non-cash item. To eliminate this loss, the $12,000 amount should be added to Net Income in the Operating Section of the Statement of Cash Flows. Since the loss would have decreased Net Income, this addition ensures that the net effect on cash flow from operations is zero.

What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Payable and Accrued Expenses account balances for Green Mountain Coffee Roasters? *******ACCOUNTS PAYABLE******* pc4

Increase of $32,593 for Accounts Payable and increase of $70,977 for Accrued Expenses (rev has increaseaed from 2012 - 2013) Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.

How does the following transaction impact cash flow? Purchasing inventory on credit

No Impact

Operating

Operating cash flows will generally be positive for these businesses. They will have a consistent and steady stream of cash from revenue and will generally be one of the major players in their market.

Suppose Green Mountain Coffee Roasters (GMCR) sold a piece of land during the year for $30 million. GMCR also bought a long term investment in a small competitor for $10 million, and, at the end of the year, GMCR purchased computers for $1 million to replace its current equipment. What would be the net impact of these transactions in the Investing Section of the statement of cash flows?

$19 million net increase in cash from Investing Activities. All the transactions are part of the GMCR Investing Section. As a result, the section will show a positive cash flow effect of 19 million (sum of $30M inflow, $10M outflow, and $1M outflow).

Based on this income statement for Company B for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for Depreciation and Amortization in calculating cash flow from Operating Activities using the indirect method?

(add up all amortization and depreciation cost) Increase by $22,000 This is the correct answer! The adjustment to Net Income is an increase of $22,000, because $22,000 of Depreciation and Amortization expense was recognized during the year. By adding this amount back to Net Income, we eliminate the impact of this non-cash transaction.

Which of the following is a common finding in looking at statement of cash flows of a startup company?

A negative cash flow from operating activities

Suppose Company Z lent $100,000 to Company A on January 1, 2012. On December 31, 2013, Company A paid back the $100,000 and also paid $12,000 interest to Company Z. Under U.S.GAAP, what would be the impact of the transaction on Company Z's statement of cash flows of 2013 using the direct method?

$100,000 would be shown as an increase in the funds in the Investing Section but the $12,000 would be shown as an increase in the Operating Section

What adjustments would need to be made in the Operating section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Receivable and Inventory account balances for IBM? ******ACCOUNTS RECIEVabEL* pc3

Decrease of $1,547 for Accounts Receivable and decrease of $23 for Inventory (rev has increasee from 2012 to 2013)

US GAAP vs IFRS

US GAAP vs IFRS Interest Paid: Operating Section / Operating OR Financing Section Dividends Paid:Financing Section / Operating OR Financing Section Interest Received: Operating Section / Operating OR Investing Section Dividends Received: Operating Section / Operating OR Investing Section

Based on this income statement for Company A for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for Depreciation in calculating cash flow from Operating Activities using the indirect method? pc1

Increase by $10,000 This is the correct answer! The adjustment to Net Income is an increase of $10,000, because $10,000 of Depreciation expense was recognized during the year. By adding this amount back to Net Income, we eliminate the impact of this non-cash transaction.

How does the following transaction impact cash flow? Paying cash for property insurance covering next 2 years

Negative (Decrease)

How does the following transaction impact cash flow? Receiving cash for goods or services yet to be provided

Positive (Increase)

Which of the following items would NOT be shown on a statement of cash flows created using the indirect method?

Retained Earnings

Suppose Waterman Cable Company lent $125,000 to Comcast. On December 31, 2015, Comcast paid back the $125,000 and also paid $3,000 interest to Waterman Cable Company. Under U.S.GAAP, what would be the impact of the repayment on Waterman Cable Company's statement of cash flows using the direct method?

The $125,000 would be shown as an increase in the funds in the Investing Section but the $3,000 would be shown as an increase in the Operating Section.

Profitable/Growing Stage

The company has positive cash flows from operations, negative cash flows from investing, and positive cash flows from financing.

What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Receivable and Inventory account balances for PepsiCo Inc.? ******ACCOUNTS RECIEVabEL* pc3

The correct answer is: Increase of $87 for Accounts Receivable and increase of $172 for Inventory Since Accounts Receivable decreased, it means that the cash collected was more than the revenue recognized, so the adjustment is to record an increase related to Accounts Receivable. Since Inventory decreased it means that COGS expense was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventor

How does the following transaction impact cash flow? Recording an account receivable for the sale of goods to a customer.

The correct answer is: No Impact When a company records an account receivable for goods sold to a customer, it is because they are allowing the customer to pay for the goods at a later date. Since no cash was received at the time of transaction, there is no impact on cash flows.

Based on this income statement for Company XYZ for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for gain/loss on sale of a building in calculating cash flow from Operating Activities using the indirect method?

Adjustment for 4,000 in the Operating Section The correct answer is: Adjustment for 4,000 in the Operating Section The total cash flows received from sale of a building is an Investing Activity and not an Operating Activity. The loss itself is a non-cash item. To eliminate this loss, the $4,000 amount should be added to Net Income in the Operating Section of the Statement of Cash Flows. Since the loss would have decreased Net Income, this addition ensures that the net effect on cash flow from operations is zero.

Financing:

Although it can fluctuate, cash flow from financing activities will generally be negative for mature companies. This is because they are generating cash through operations that is sufficient to cover their investment needs. Because any excess cash generated isn't needed to fund growth, the money can be used to pay down loans or give money back to shareholders through dividends.

Investing

Because they aren't looking to grow or expand rapidly, cash flow from investing activities will generally be slightly negative as the new equipment being purchased replaces the equipment that has worn out.

Which of the following cash flows should be included in the Financing Section of the statement of cash flows under US GAAP? Drag the cash transaction to the appropriate column. Cash flow from financing activities vs NOT a cash flow from financing activities

Cash flow from financing activities REPAYMENT OF A BANK LOAN (PRINCIPAL) PAYMENT OF DIVIDENDS RECEIPT OF CAPITAL FROM AN OWNER REPURCHASES OF COMMON STOCK PROCEED FROM ISSUING BONDS REPAYMENT OF LONG TERM DEBT (PRINCIPAL) CASH RECEIVED FROM RAISING DEBT FINANCING CASH RECEIVED FROM RAISING DEBT PAYMENTS TO REACQUIRE STOCK PROCEEDS FROM ISSUING STOCK PRINCIPAL PAID ON NOTES PAYABLE CASH RECEIVED FROM RAISING DEBT CASH RECEIVED FROM ISSUING STOCKS CASH CONTRIBUTED BY AN OWNER REPAYMENT OF LONG TERM DEBT NOT a cash flow from financing activities PURCHASE OF INVENTORY SALE OF LAND SALE OF INVENTORY SALE OF PLANT EQUIPMENT PURCHASE OF A BUILDING PAYMENT OF UTILITIES PAYING WAGES TO EMPLOYEES CASH COLLECTIONS FROM CUSTOMERS CASH RECEIVED IN SALE OF EQUIPMENT WAGES PAID TO EMPLOYEES CASH PAID TO BUY A NEW FACILITY INTEREST EARNED IN CASH PAYMENT TO SUPPLIERS CASH DIVIDEND RECEIVED CASH PAID TO SUPPLIERS PRINCIPAL RECEIVED FROM LOAN MADE TO OTHERS ACQUISITION OF EQUITY INVESTMENT CASH PAID FOR INTEREST SALE PROCEEDS FROM DEBT INVESTMENT RENT PAID IN ADVANCE PURCHASE OF A BUILDING SALE OF PLANT EQUIPMENT CASH PAID FOR TAXES PRINCIPAL RECEIVED FROM LOANS MADE TO OTHERS CASH PAID FOR LONG TERM INVESTMENT

Suppose Company X sold a piece of equipment during the year. The equipment had been purchased five years ago for $10,000. At the time of the sale, $5,000 of Depreciation had been recognized against the equipment. Company X received $6,000 from the sale of the equipment. What would be the impact of the sale on the statement of cash flows prepared using the Indirect Method?

The $6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as a decrease in the Operating Section. The correct answer is: the $6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as a decrease in the Operating Section The $6,000 received for the equipment should be an increase in the Investing Section and, because the $1,000 gain is a non-cash item which would have been included in net income, it has to be deducted from the Operating Section.

What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in the Accounts Receivable and Inventory account balances for Green Mountain Coffee Roasters? ******ACCOUNTS RECIEVabEL* pc3

The correct answer is: Decrease of $104,205 for Accounts Receivable and increase of $92,348 for Inventory Since Accounts Receivable increased during the year, it means that the cash collected was less than the revenue recognized, so the adjustment is to record a decrease related to Accounts Receivable. Since Inventory decreased it means that the COGS expense recognized was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventory.

What adjustments would need to be made in the Operating Section of the statement of cash flows prepared under the indirect method to account for the changes in Inventory and Other Current Assets account balances for Apple Inc.? ******ACCOUNTS RECIEVabEL* pc 3

The correct answer is: Decrease of $973 for Inventory and decrease of $1,071 for Other Current Assets Since Inventory increased, it means the cash paid for purchasing inventory was more than the COGS expense recognized, so the adjustment is to record a decrease related to Inventory. Since Other Current Assets increased, it means the cash paid to acquire these assets was more than the expenses incurred in the period, so the adjustment is to record a decrease related to Other Current Assets.

How does the following transaction impact cash flow? Recognizing depreciation expense on a piece of equipment purchased six years ago.

The correct answer is: No Impact No cash is actually paid when a company recognizes depreciation expense. This is an implicit transaction related to the passage of time, and therefore, there is no impact on cash flows.

Suppose Zenon Co. issued a long-term bond and received $250,000 cash from the issuance during 2015. The company also issued 12,000 shares of common stock for $260,000. At the end of the year, Zenon paid $165,000 for the dividend declared last year. What would be the net impact of these transactions on Zenon's 2015 statement of cash flows under US GAAP?

$345,000 would be shown as an increase in the Financing Section.

Which of the following cash flows should be included in the Investing Section of the statement of cash flows under US GAAP? Drag the cash transaction to the appropriate column. (Cash flow from investing activities vs NOT a cash flow from investing activities)

Cash flow from investing activities: SALE OF PLANT EQUIPMENT SALE OF LAND PURCHASE OF A BUILDING CASH PAID TO BUY A NEW FACILITY CASH RECEIVED IN SALE OF EQUIPMENT CASH PAID FOR LONG TERM INVESTMENT PRINCIPAL RECEIVED FROM LOANS MADE TO OTHERS SALE PROCEEDS FROM EQUITY INVESTMENTS PAYMENTS RECEIVED FROM LOAN RECEIVABLE SALE PROCEEDS FROM DEBT INVESTMENTS LOAN MADE TO THIRD PARTY PURCHASE OF A PIECE OF LAND NOT a cash flow from investing activities: PURCHASE OF INVENTORY SALE OF INVENTORY PAYMENT OF UTILITIES PAYMENT OF WAGES TO EMPLOYEES REPAYMENT OF A BANK LOAN (PRINCIPAL) PAYMENT OF DIVIDENDS RECEIPT OF CAPITAL FROM AN OWNER CASH COLLECTIONS FROM CUSTOMERS INTEREST EARNED IN CASH WAGES PAID TO EMPLOYEES PAYMENT TO SUPPLIERS PAYMENT OF LONG TERM BONDS PAYABLE SHARES BUYBACK PRINCIPAL AMOUNTS OF DEBT BORROWED CASH COLLECTED FROM CUSTOMERS DIVIDENDS PAID TO SHAREHOLDERS CASH PAID FOR INTEREST PROCEEDS FROM ISSUING STOCK CASH PAID TO PURCHASE INVENTORY CASH RECEIVED FOR GOODS SOLD LAST MONTH CASH CONTRIBUTED BY AN OWNER PAYMENT TO REACQUIRE SHARES PROCEEDS FROM ISSUING STOCKS INTEREST EARNED IN CASH

Which of the following is considered an Operating Activity under US GAAP?

Cash paid to a vendor for inventory This is the correct answer! Inventory is an integral part of a company's operations and cash disbursed to pay for inventory impacts Operating cash flow. Cash received in advance for services This is the correct answer! Cash received from customers, even if it is received in advance, is an Operating Activity. Cash collected from customer This is the correct answer! Collecting cash from customers is an Operating Activity, which impacts Operating cash flow. Wages paid to employees This is the correct answer! Hiring employees is an integral part of a company's operations and cash disbursed to pay for the wages impacts Operating cash flow.

Based on this income statement for Company X for the year ending December 31, 2014, what adjustment would need to be made to Net Income to account for gain or loss in calculating cash flow from Operating Activities using the indirect method? (find gain and loss section - gain is normal)

The correct answer is: Decrease by $1,000 The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The gain itself is a non-cash item. To eliminate this gain, the $1,000 amount should be subtracted from Net Income in the Operating Section of the Statement of Cash Flows. Since the gain would have increased Net Income, this subtraction ensures that the net effect on cash flow from operations is zero.

Use the direct method for calculating cash flow from Operating Activities.

, Interest paid on loan is included in the Operating Section. Because this is a cash outflow, this is a use of cash. Interest earned in cash, Cash collections from customers is included in the Operating Section. Because this is a cash inflow, this is a source of cash. Sale of used plant equipment for cash is included in the Investing Section. Because this is a cash inflow, this is a source of cash. Cash dividend received is included in the Operating Section. Because this is a cash inflow, this is a source of cash. Purchase of equipment for cash is included in the Investing Section. Because this is a cash outflow, this is a use of cash. Distribution of cash dividend declared last year is included in the Financing Section. Because this is a cash outflow, this is a use of cash. Payment of wages to employees is included in the Operating Section. Because this is a cash outflow, this is a use of cash.

Operating Section of the statement of cash flows under US GAAP Cash flow from operating activities vs NOT a cash flow from operating activities

Cash flow from operating activities: - CASH RECEIVED FROM CUSTOMERS - RENT PAID IN ADVANCE - CASH PAID FOR INVENTORY - CASH PAID FOR OPERATING EXPENSES - WAGES PAID TO EMPLOYEES - INTEREST AND DIVIDENDS RECEIVED - CASH PAID TO SUPPLIERS - COLLECTIONS FROM CUSTOMERS - CASH PAID FOR TAXES - WAGES PAID TO EMPLOYEES - PAYMENT TO SUPPLIERS - SALE OF INVENTORY - CASH PAID FOR INTEREST - CASH PAID TO PURCHASE RAW MATERIALS - WAGES PAID TO MANUFACTURIN-G STAFF - INTEREST RECEIVED IN CASH - CASH PAID FOR WAREHOUSE RENTAL - CASH COLLECTED FOR SERVICE YET TO BE PROVIDED NOT a cash flow from operating activities - CASH LOAN PAYMENT (PRINCIPAL ONLY) - CASH PROCEEDS FROM A LOAN - LOAN MADE TO THIRD PARTY - SALE OF PLANT EQUIPMENT FOR CASH - CASH PAID FOR EQUIPMENT PURCHASE - CASH RECEIVED FROM OWNERS - CASH RECEIVED FROM LOANS RECEIVABLE - PAYMENTS TO REACQUIRE STOCK - PROCEEDS FROM SALE OF FIXED ASSETS - ACQUISITION OF EQUITY INVESTMENT - PRINCIPAL PAID ON DEBT - CASH RECEIVED IN SALE OF EQUIPMENT - CASH PAID TO BUY LAND - PAYMENT OF LONG TERM BONDS PAYABLE - REPURCHASE OF SHARES - CASH PAID FOR LONG TERM INVESTMENT CASH PAID TO PURCHASE A BUILDING CASH DIVIDENDS PAID TO SHAREHOLDERS CASH CONTRIBUTED BY AN OWNER SALE PROCEEDS FROM EQUITY INVESTMENTS LOAN MADE TO THIRD PARTY

Suppose Company X purchased 10,000 common shares at a price of $15 per share on March 1, 2013. On Nov. 30, the company received cash dividend of $10,000 from stock they purchased. Under US GAAP, what would be the impact of this investment and dividend on the statement of cash flows of 2013 using the direct method?

The $150,000 would be shown as a decrease in the funds in the Investing Section but the $10,000 would be shown as an increase in the Operating Section. The correct answer is: the $150,000 would be shown as a decrease in the funds in the Investing Section but the $10,000 would be shown as an increase in the Operating Section The $150,000 paid to purchase common shares should be a decrease in the Investing Section and, under US GAAP, the $10,000 cash dividend received should be included in the Operating Section.

A company under IFRS standards decides to include interest paid in the Financing Section of their Statement of Cash Flows. How will this company's Statement of Cash Flows differ from how it would appear if the company were abiding by US GAAP standards?

The company under IFRS will have lower cash flow in the financing section and higher cash flow in the operating section than the company under US GAAP.