Accounting 2302 Chapter 14: The Statement of Cash Flows
If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?
A loss on disposal of long-term assets would be removed from the net income on the statement of cash flows by adding it back in the operating section. The loss was originally included in net income, but the cash from the sale needs to be shown in the investing section of the statement of cash flows.
If current assets other than cash increase, what is the effect on cash? What about a decrease in current assets other than cash?
An increase in a current asset other than cash causes a decrease adjustment to net income in the operating activities section of the statement of cash flows. A decrease in a current asset other than cash causes an increase adjustment to net income.
Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.
Depreciation expense, depletion expense, and amortization expense all impact the income statement decreasing net income. None of these use cash at the time they are expensed, these expenses occurred when the asset was purchased. Therefore, to go from net income to cash flows, depreciation must be removed by adding it back to net income.
indirect: issuance of common stock
F+
indirect: issuance of long-term note payable to borrow cash
F+
issuance of common stock
F+
indirect: payment of cash dividend
F-
indirect: payment of long-term debt
F-
indirect: purchase of treasury stock
F-
payment of dividends
F-
indirect: cash sale of land (no gain or loss)
I+
purchase of equipment
I-
How does the direct method differ from the indirect method when preparing the operating activities section of the statement of cash flows?
In the indirect method, start with net income and then adjust it to cash basis through a series of adjusting items. When calculating the direct method, take each line item of the income statement and convert it from accrual to cash basis.
What types of transactions are reported in the non-cash investing and financing activities section of the statement of cash flows?
Investing and financing transactions that do not involve cash are called non-cash investing and financing activities. Examples of these non-cash investing and financing activities include issuing stock in exchange for plant assets, retirement of debt by issuing stock, or purchasing plant assets with long-term notes payable.
indirect: acquisition of building by issuance of common stock
NIF
indirect: acquisition of equipment by issuance of notes payable
NIF
What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?
The long-term asset accounts must be evaluated when completing the investing activities section of the statement of cash flows.
How does the statement of cash flows help users of financial statements?
The statement of cash flows helps users do the following: Predict future cash flows. Evaluate management decisions. Predict ability to pay debts and dividends.
What does the statement of cash flows show?
The statement of cash flows reports on a business's cash receipts and cash payments for a specific period.
Describe the three basic types of cash flow activities.
The three basic types of cash flow activities are: operating, investing, and financing. Operating activities are ones that create revenue or expenses in the entity's business. Investing activities increase or decrease long-term assets. Financing activities include cash inflows and outflows involved with long-term liabilities and equity.
Financial statements all have a goal. The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors: 1. predict future cash flows 2. evaluate management decisions 3. predict the ability to make debt payments to lenders and pay dividends to stockholders
1. predict future cash flows by reporting past cash receipts and payments, which are good predictors of future cash flows 2. evaluate management decisions by reporting on managers' investments. Good decisions will benefit the company's performance 3. predict the ability to make debt payments to lenders and pay dividends to stockholders by reporting where cash came from and how it was spent
If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?
An increase in current liabilities causes an increase adjustment to net income in the operating activities section of the statement of cash flows. A decrease in current liabilities causes a decrease adjustment to net income.
Why might a spreadsheet be helpful when completing the statement of cash flows?
Companies face complex situations, and a spreadsheet can help in preparing the cash flow statement. It details the balance sheet accounts' beginning and ending balances as well as the debit and credit amounts to each account.
What is free cash flow, and how is it calculated?
Free cash flow is the amount of cash available from operating activities after paying for planned investments in long-term assets and after paying dividends to shareholders. It is calculated as: Net cash provided by operating activities - Cash planned for investments in long-term assets - Cash dividends
decrease in accounts receivable
O+
depreciation expense
O+
increase in accounts payable
O+
indirect: decrease in merchandise inventory
O+
indirect: depreciation expense
O+
indirect: increase in accounts payable
O+
indirect: increase in salaries payable
O+
indirect: loss on sale of land
O+
indirect: net income
O+
loss on sale of land
O+
decrease in accrued liabilities
O-
gain on sale of building
O-
increase in merchandise inventory
O-
indirect: decrease in accrued liabilities
O-
indirect: increase in prepaid expenses
O-
O+
Operating activity, addition to net income
O-
Operating activity, subtraction from net income
Describe the five steps used to prepare the statement of cash flows by the indirect method.
Step 1: Complete the cash flows from operating activities section using net income and adjusting for increases or decreases in current assets (other than cash) and current liabilities. Also, adjust for gains or losses on long-term assets and non-cash expenses such as depreciation expense. Step 2: Complete the cash flows from investing activities section by reviewing the long-term assets section of the balance sheet. Step 3: Complete the cash flows from financing activities section by reviewing the long-term liabilities and equity sections of the balance sheet. Step 4: Compute the net increase or decrease in cash during the year. The change in cash is the key reconciling figure for the statement of cash flows and must match the change in cash reported on the comparative balance sheet. Step 5: Prepare a separate schedule reporting any non-cash investing and financing activities.
What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?
The long-term liability accounts and the equity accounts must be evaluated when completing the financing activities section of the statement of cash flows.
What should the net change in cash section of the statement of cash flows always reconcile with?
The net change in the cash section of the statement of cash flows reconciles the statement of cash flows. It is computed by combining the cash provided for or used by operating, investing, and financing activities. This amount should equal the change in cash on the balance sheet.
Describe the two formats for reporting operating activities on the statement of cash flows?
The two formats for reporting the operating activities section are the indirect and direct methods. The indirect method starts with net income and adjusts it to net cash provided by operating activities. The direct method restates the income statement in terms of cash. It shows all the cash receipts and cash payments from operating activities.
cash payment of dividends
financing
cash receipt from the issuance of common stock
financing
cash received from borrowing money
financing
issued $14 par preferred stock for cash
financing
purchased treasury stock for $28,000
financing
F-
financing activity, cash outflow
F+
financing activity. cash inflow
Purchased equipment for $130,000 cash
investing
cash receipt from sale of land
investing
cash receipt from the collection of long-term notes receivable
investing
I+
investing activity, cash inflow
I-
investing activity, cash outflow
sold building for $19,000 gain for cash
investing and operating (gain)
purchase of equipment in exchange for notes payable
non-cash
retired a notes payable with 1250 shares of the company's common stock
non-cash investing and financing
Cash purchase of merchandise inventory
operating
cash paid to vendors $17,000
operating
cash payment for income taxes
operating
cash payment of salaries
operating
cash receipt for interest income
operating
cash received from sales to customers of $35,000
operating