ACC 711 Ch 14: HW
Sales
the amount of cash from customers
What are the three major sections on a statement of cash flows?
(1) Operating activities (2) Investing activities (3) Financing activities
When a DECREASE in account balance for Current Assets (AR, INV, and PREpaid EXP)
*ADD*
When an INCREASE in account balance for Current Liabilities (AP, Accrued Liabilities, and Income Tax Pay)
*ADD*
When a DECREASE in account balance for Current Liabilities (AP, Accrued Liabilities, and Income Tax Pay)
*SUBTRACT*
When an INCREASE in account balance for Current Assets (AR, INV, and PREpaid EXP)
*SUBTRACT*
an increase in the company's common stock account would be classified as
a source and a financing activity
an increase in accounts payable would be classified as
a source and an operating activity
Would a sale of equipment for cash be considered a financing activity or an investing activity? Why?
A sale of equipment for cash would be classified as an investing activity. Any transaction involving the acquisition or disposition of noncurrent assets is classified as an investing activity.
For purposes of constructing a statement of cash flows, an increase in inventory would be classified as
A use and an operating activity
cash dividends paid to the company's stockholders would be classified as
a use and a financing activity
Retained Earnings
Activity that is not on the statement of cash flows (NA)
If the Accounts Receivable balance increases during a period, how will this increase be recognized using the indirect method of computing the net cash provided by operating activities
An increase in the Accounts Receivable account must be subtracted from the net income under the indirect method because this is an increase in a non cash asset.
an increase in longterm investments would be classified as
a use and an investing activity
Asset Account Equation
Beg Bal (+) Debits (-) Credits = End Bal
Contra-Asset, Liability and S&E Accounts
Beg Bal (-) Debits (+) Credits = End Bal
As Accounts Payable decreases,
COGS decreases (normal balance is debit)
What are *Cash Equivalents* and why are they included with cash on a statement of cash flows?
Cash Equivalents are short term, highly liquid investments such as Treasury Bills, commercial paper, and money market funds. They are included with cash because investments of this type are made solely for the purpose of generating a return on temporarily idle funds and they can be easily converted to cash.
Dividends Paid are always
DEBIT
Expense Accounts Normal Balance
DEBIT
A business executive once stated, "Depreciation is one of our biggest operating cash inflows." Do you agree? Explain.
Deprecation is not a cash inflow, even though it is added to net income on the statement of cash flows. Adding deprecation to net income to compute the amount of net cash provided by operating activities creates the *illusion* that deprecation is a cash inflow. IT ISN'T
Interest paid on amounts borrowed is included in the financing activities section of the statement of cash flows
False
Only changes in noncurrent accounts are analyzed for a statement of cash flows
False
The direct and indirect methods can yield different figures for the next cash provided by operating activities
False
Transactions involving all forms of debt, including accounts payable, short-term borrowing, and long term borrowing are classified as financing activities on the statement of cash flows.
False
Borrowed money from a creditor
Financing
Issuance of common stock
Financing
Paid a cash dividend to stock holders
Financing
Paid cash to repurchase its own stock
Financing
Repaid the principal amount of a debt
Financing
Repayment of Long-term loan
Financing
Sold common stock
Financing
Issuance of common stock for cash
Financing +
Payment of cash dividends
Financing -
Payment of longterm debt
Financing -
Purchase of treasury stock
Financing -
Transactions that affect LONG TERM LIABILITIES and Stockholders Equity are classified as?
Financing activities
Lending money to another entity (such as to a subsidiary) is classified as a financing activity
Flase
What is the difference between net cash provided by operating activities and free cash flow?
Free Cash Flow is net cash provided by operating activities minus capital expenditures and dividends Free Cash Flow= Net Cash provided by operating activities (-)Capital expenditures (-) Dividends
In operating activities, Net Income GAIN--- Net Income LOSS---
Gain goes to Debit because inflow Loss goes to credit because outflow
Investing activities
Include cash inflows and outflows *related to acquiring or disposing of noncurrent assets*
Financing activities
Include cash inflows and outflows related to *borrowing from and repaying principal to creditors and completing transactions with the company's owners.*
Purchase of equipment
Investing
Purchased equipment with cash
Investing
loaned money to another entity
Investing
Cash Sale of land (no gain or loss)
Investing +
Sale of long term investment
Investing +
Purchase building with cash
Investing -
Purchase of delivery truck
Investing -
Transactions that affect LONG TERM ASSETS are classified as?
Investing activities
Normal Account Balance Liability- Assest-
L-Credit A-Debit
Acquisition of equipment by issuance of note payable
NIF
Collected Cash from Customers
Operating
Paid Supplies for inventory purchases
Operating
Paid bills to insurers and utility providers
Operating
Paid interest to lenders
Operating
Paid taxes to the government
Operating
Paid wages and salaries to Employees
Operating
Amortization of patent
Operating +
Decrease in prepaid expense
Operating +
Depreciation of Equipment
Operating +
Increase in accounts payable
Operating +
Increase in accrued liabilities
Operating +
Increase in accrued taxes payable
Operating +
Loss on sale of land
Operating +
Net Income
Operating +
Amortization Expense
Operating + (add to net income)
Decrease in salaries payable
Operating -
Gain on sale of building or sale of equipment
Operating -
Increase in Raw Materials Inventory
Operating -
Increase in accounts receivable
Operating -
Increase in inventory
Operating -
Net Income (Loss)
Operating -
Transactions that affect net income, current assets, and current liabilities are classified as?
Operating activities
Noncurrent assets
PP&E, L-T investments, Loans to another entity
If an asset is sold at a gain, why is the gain subtracted from net income when computing the next cash provided by operating activities under the indirect method?
Since the entire cash proceeds from the sale of a noncurrent asset appear as a cash inflow from investing activities, the gain must be deducted from net income to avoid double counting a portion of those proceeds.
What general guidelines can you provide for interpreting the statement of cash flows?
The company's specific circumstances should be considered when interpreting the statement of cash flows. The relationships among numbers should also be considered rather than evaluating each number in isolation.
How do the direct and indirect methods differ in their approach to computing the net cash provided by the operating activities?
The direct method reconstructs the income statement on a cash basis by resting revenues and expenses in terms of cash inflows and outflows. The indirect method starts with net income and adjusts it to a cash basis to determine the net cash provided by operating activities.
Assume that a company repays a $300,000 loan from its bank and then later in the same year borrows $500,000. What amount(s) would appear on the statement of cash flows?
The repayment of $300,000 and the borrowing of the $500,000 must both be shown "gross" on the statement of cash flows. That is, the company would show $500,000 of cash provided by financing activities and then show $300,000 of cash used by financing activities.
an increase in bonds payable would be classified as
a source and a financing activity
What is the purpose of a statement of cash flows?
The statement of cash flows highlights the major actives that impact cash flows and hence affect the overall cash balance
Why aren't transactions involving accounts payable considered to be financing activities?
Transactions involving accounts payable are not considered to be financing activities because such transactions relate to a company's day-to-day operating activities rather than to its financing activities.
Dividends received on stock held as an investment are included in the operating activities section of the statement of cash flows
True
For both financing and investing activities, items on the statement of cash flows should be presented gross rather than net
True
In computing the net cash provided by operating activities, depreciation is added to net income under the indirect method, but it is deducted from operating expenses under the direct method.
True
Paying cash dividends to the company's stockholders is classified as a financing activity
True
The income statement is reconstructed on a cash basis from top to bottom under the direct method of computing the next cash provided by operating activities
True
If a loss on equipment
book value > the amount you sold it as
Operating activities
include cash inflows and outflows related to *revenue and expense* transactions that affect net income