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Accounts Receivable Turnover Ratio

A/R Turnover Ratio = Net Credit Sales/Average Net Accounts Receivable

In preparing a work sheet for the statement of cash flows, the lower portion corresponds to a statement of cash flows prepared using the indirect method. Items in the debit column of this lower portion most closely correspond to items which:

Explain increase in cash.

Only transactions that directly generate or consume cash are reported on a statement of cash flows.

False

The statement of cash flows is primarily designed to explain the changes in retained earnings.

False

_____________ activities are those that supply a firm with funds from either the firm's owners or creditors.

Financing

If the indirect approach for the statement of cash flows is presented, which of the following items should be subtracted from accrual basis net income to derive cash flow from operating activities?

Gains on the sale of long-term investments

Gross Profit Margin

Gross Profit Margin = Gross Profit/ Net Sales

As a generalization, the adjustment of accrual basis income to cash provided by operating activities requires which of the following to be added?

Increases in current liabilities related to operating activities

Significant noncash investing/financing transactions are reported on a statement of cash flows prepared using either the direct method or:

Indirect Method

Which of the following approaches to preparing the statement of cash flows translates income from the accrual basis to the cash basis?

Indirect Method

The times interest earned ratio consists of income before income taxes and interest divided by:

Interest Charges

The numerator for the return on assets ratio includes net income and:

Interest Expense

Inventory Purchased

Inventory Purchased = Cost of Goods Sold Minus the Decrease in Inventory (or, plus an increase in inventory)

Inventory Turnover Ratio

Inventory Ratio = Cost of Goods Sold/Average Inventory

_____________ activities are those that involve investment of an entity's resources.

Investment

Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and other indicators. To which does the current ratio most relate?

Liquidity

_____________ ratios measure the ability of a business to meet current debts and obligations as they come due.

Liquidity

Which type of ratio is useful for measuring the ability of a business to meet current debts as they come due?

Liquidity Ratio

Which of the following is excluded in calculating the quick ratio?

Merchandise Inventory

Merchandise Inventory

Merchandise Inventory = Inventory Purchased - Cash Paid for Inventory

The payment of dividends and receipt of proceeds from bond issues are examples of _____________ activities.

financing

Under the _____________ method, individual items on the income statement are translated from the accrual basis to the cash basis.

indirect

Under the _____________ method, operating cash flows are calculated by starting with accrual basis net income, then adding and subtracting amounts to convert to the cash basis.

indirect

The purchase of land, disposal of equipment, and so forth are _____________ activities.

investing

Net Profit on Sales

Net Profit on Sales = Net Income/Net Sales

Zhang Corporation had net income of $100,000, paid income taxes of $30,000, and had interest expense of $8,000. What was Zhang's times interest earned ratio?

17.25(Income before income taxes and interest ($100,000 + $30,000 + $8,000 = $138,000) is divided by interest charges ($8,000).)

Ames Corporation's net accounts receivable were $750,000 on December 31, 20X1, and $1,250,000 on December 31, 20X2. Net cash sales for 20X2 were $3,300,000. The accounts receivable turnover ratio for 20X2 was 16. What were the total net sales for 20X2?

19,300,000(Total net sales equals cash sales ($3,300,000) plus credit sales ($16,000,000). Credit sales are 16 times the amount of average accounts receivable (($750,000 + $1,250,000)/2 = $1,000,000).)

Selected information for 20X1 for the Bernstein Company is as follows: Cost of goods sold $6,000,000 Average inventory $2,000,000 Net sales $8,000,000 Average receivables $3,000,000 Net income $1,000,000 Assuming a 360-day business year, what was the inventory turnover ratio for Bernstein?

3(Cost of goods sold ($6,000,000) is divided by average inventory ($2,000,000).)

Direct Approach

The preferred method for preparing the statement of cash flows; operating cash flows are presented according to their direct source. Companies using the direct approach must supplement the cash flow statement with a reconciliation of income to cash from operations.

Wilkin Corporation reported accrual basis sales of $200,000, cost of goods sold of $80,000, and operating expenses, taxes, and interest summing to $30,000. In evaluating Wilkin's comparative balance sheets, it is determined that accounts receivable increased $10,000, inventory increased $5,000, and accounts payable decreased $7,000. There were no changes in prepaid expenses nor were there any interest or taxes payable at the beginning or end of the year. How much was cash basis income for Wilkin Corporation for the year?

68,000(The accrual basis income ($200,000 - $80,000 - $30,000 = $90,000) is reduced by the increase in accounts receivable ($10,000), the increase in inventory ($5,000), and the decrease in accounts payable ($7,000).)

Dixon Corporation reported 20X1 accrual basis net income of $50,000. Relevant information to adjust accrual basis income to cash basis income follows. Depreciation expense $12,000 Loss on the sale of land 16,000 Increase in accounts receivable 8,000 Decrease in merchandise inventory 4,000 Increase in accounts payable 3,000 Increase in taxes payable 2,000 How much is net cash provided by operating activities?

79,000(The $50,000 accrual basis income should be increased by depreciation expense ($12,000), loss on the sale of land ($16,000), decrease in merchandise inventory ($4,000), increase in accounts payable ($3,000), and increase in taxes payable ($2,000), and be decreased by the increase in accounts receivable ($8,000). ($50,000 + $12,000 + $16,000 + $4,000 + $3,000 + $2,000 - $8,000 = $79,000).)

Operating Activities

A cash flow category; generally related to transactions that enter into the determination of income - items that are not investing or financing. Cash inflows consist of receipts from customers for providing goods and services, and cash received from interest and dividend income. Cash outflows consist of payments for inventory, trading securities, employee salaries and wages, taxes, interest, and other normal expenses.

Investing Activities

A cash flow category; including receipts from disposal of investments and long-term assets, payments to acquire long-term assets and investments. Cash inflow consists of items such as sale of long-term stock and bond investments, disposal of long-term productive assets, and receipt of principal repayments on loans made to others. Cash outflows include payments made to acquire plant assets or long-term investments in other firms, loans to other, and similar items.

Financing Activities

A cash flow category; including receipts from stock issues, bonds, notes and loans, payment for loans repayment, acquisitions of treasury stock, and dividend distributions. Cash inflows include proceeds from company's issuance of its own stock or bonds, borrowings under loans, and so forth. Cash outflows include repayments of amounts borrowed, acquisitions of treasury stock, and dividend distributions.

Statement of Cash Flows

A financial statement that summarizes the cash flows relating to operating, investing, financing, and noncash investing/financing activities of an entity Required financial statement.

Inventory turnover and accounts receivable turnover are examples of:

Activity Ratios

Indirect Approach

An alternative method for preparing the statement of cash flows; operating cash flows are presented as a reconciliation of income to cash from operating activities

Financial Statement Analysis

Application of analytical tools to general-purpose financial statements and related data for making business decisions. CPAs and SEC provide safeguards to protect the integrity of reported information. This is different than suggesting that reporting companies are necessarily good investments. Financial reports must be studied and evaluated using key metrics and ratios to assist.

Gain on sale of land

Does not appear in the operating cash flows. The entire proceeds will be listed in the investing activities; it is a "nonoperating" item. In Reconciliation: It increased income, but is not related to operations. It is an investing item and the gain is not the sales price.

In preparing the statement of cash flows, how should noncash investing/financing activities be reported?

Be reported in a separate schedule accompanying the statement of cash flows

Cash Paid for Inventory

Cash Paid for Inventory = Inventory Purchased Minus the Increase in Accounts Payable (or, plus a decrease in accounts payable)

Cash received from customers

Cash Received From Customers = Total Sales Minus the Increase in Net Receivables (or, plus a decrease in net receivables)

When preparing a statement of cash flows under the indirect method, supplemental disclosure should be made for which of the following?

Cash paid for interest and taxes

Cash and Cash Equivalents

Companies broadly define "cash" to consist of cash and items that are equivalent to cash. As a general rule, cash equivalents are short-term, highly liquid investments that mature in 90 days or less.

On a statement of cash flows, which of the following types of activities would not be disclosed in a separate section?

contractual activities

What is included in the numerator of the inventory turnover ratio?

Cost of goods sold

Current Ratio

Current Ratio = Current Assets/Current Liabilities

Worksheet Approach

Examines the change in each balance sheet account and relates it to the cash flow statement impacts. The upper portion is the balance sheet information. The lower portion is the cash flow statement information. The change in each balance sheet row is evaluated and keyed to a change in the cash flow statement. The accumulated offsets (in the lower portion) reflect the information necessary to prepare a statement of cash flows.

Which of the following would constitute a noncash investing/financing transaction?

Exchanging land for stock

Debt to Total Assets Ratio

Debt Ratio = Total Debt/Total Assets

Debt to Equity Ratio

Debt to Equity Ratio = Total Debt/Total Equity

Cash received from customers can be calculated by starting with accrual basis sales and adding:

Decreases in accounts receivable

Depreciation on a Cash Flow Statement

Depreciation is a NONCASH expense. It is recorded via a debit to Depreciation Expense and a credit to Accumulated Deprecation. No cash is impacted by this entry. In Reconciliation: Depreciation is added back to net income. It reduced income, but did not consume any cash

_____________ activities are those which arise from transactions and events that enter into net income.

Operating

Which activities relate primarily to the production and sale of goods and services and enter into the determination of income?

Operating activities

Cash dividends paid are reported as a financing cash:

Outflow

Quick Ratio

Quick Ratio = (Cash + Short-term investments + Accounts Receivable)/ Current Liabilities

Which of the following would constitute a typical cash inflow from an investing activity?

Sale of stocks of other firms

Noncash Investing and Financing Activities

Some investing and financing activities occur without generating or consuming cash. A company may exchange common stock for land or acquire a building in exchange for a note payable. The statement of cash flows includes a separate section reporting these noncash items.

For purposes of calculating cash receipts from customers, which of the following adjustments should be made to convert accrual basis sales to cash basis sales?

Subtract an increase in accounts receivable from accrual basis sales

To calculate cash flow from operating activities under the indirect method, nonoperating gains should be:

Subtracted

Times Interest Earned Ratio

Times Interest Earned Ratio = Income Before Income Taxes and Interest/Interest Charges

Both the direct and indirect methods are acceptable for external financial reporting.

True

Cash flow information provides signals about the maturity of a business, as well as information about looming financial problems.

True

In preparing a statement of cash flows, the proceeds from a disposal of equipment should be reported as a cash inflow from investing activities.

True

The statement of cash flows reveals the cash generated or consumed by a firm's operating, investing, and financing activities.

True

With the indirect approach to calculating cash flow from operating activities, increases in current assets related to operations should be subtracted from the accrual basis income figure.

True

Cash Paid for Wages

Wages Expense Plus the Decrease in Wages Payable (or, minus an increase in wages payable)

Thompson Corporation wrote off a $200 uncollectible account receivable against the $2,400 balance in its Allowance for Bad Debts account. Compare the current ratio before the write-off (X) with the current ratio after the write-off (Y).

X equals Y(The write-off of an uncollectible account reduces Accounts Receivable and the corresponding contra account, Allowance for Uncollectible Accounts.)

One of the most widely used liquidity measures is the _____________ ratio which compares current assets and current liabilities.

current

If the indirect method is used, noncash expenses like depreciation should be _____________ in calculating the cash provided by operating activities.

added

Which of the following activities would generally be regarded as a financing activity in preparing a statement of cash flows?

dividend distribution

Insight into the amount of protection that is afforded the long-term creditors is provided by ratios called _____________ to total assets and times _____________ earned.

debt interest

Under both the direct and indirect approaches to preparing a statement of cash flows, a separate schedule of _____________ investing/financing transactions should be presented.

noncash

Activity ratios are often termed _____________ ratios.

turnover

The annual cash dividend per share divided by the current market price of stock is the dividend _____________ .

yield