intermediate chap 23

Why is it necessary to convert accrual-based net income to a cash basis when preparing a statement of cash flows?

It is necessary to convert accrual-basis net income to a cash basis because net income includes items that do not provide or use cash

Identify and explain the major steps involved in preparing the statement of cash flows.

1) Determine the change in cash. This is simply the difference between the beginning and ending cash balances. (2) Determine the net cash flow from operating activities. This involves analyzing the current year's income statement, comparative balance sheets and selected transaction data. (3) Determine cash flows from investing and financing activities. All other changes in balance sheet accounts are analyzed to determine their effect on cash.

a separate section entitled "Noncash investing and financing activities." Give three examples of significant noncash transactions that would be reported in this section.

issuance of stock for noncash assets, (2) issuance of stock to liquidate debt, (3) issuance of bonds or notes for noncash assets, and (4) noncash exchanges of property, plant, and equipment.

Of what use is the statement of cash flows?

provide information to help assess entity's ability to generate future cash flow, entity's ability to pay dividends and meet obligations, reasons for difference between net income and net cash flow from operating activities, and lastly cash and non cash investing and financing transactions.

What are some of the arguments in favor of using the indirect (reconciliation) method as opposed to the direct method for reporting a statement of cash flows?

(a) By providing a reconciliation between net income and net cash provided by operating activities, the differences are highlighted. (b) The direct method is nothing more than a cash basis income statement which will confuse and create uncertainty for financial statement users who are familiar with the accrual-based income statements.

Why is it desirable to use a worksheet when preparing a statement of cash flows?

A worksheet is desirable because it allows the orderly accumulation and classification of data that will appear on the statement of cash flows.

What is the purpose of the statement of cash flows? What information does it provide?

The main purpose of the statement of cash flows is to provide information about a company's cash receipts and cash payments in a period. The statement of cash flows provides information about a company's operating, financing, and investing activities. It reports cash receipts, cash payments, and net change in cash from operating, investing, and financing activities.

Explain how the amount of cash payments to suppliers is computed under the direct method.

To determine cash payments to suppliers, it is first necessary to find purchases for the year. To find purchases, cost of goods sold is adjusted for the change in inventory.After purchases are computed, cash payments to suppliers are determined by adjusting purchases for the change in accounts payable.

Your roommate is puzzled. During the last year, the company in which she is a stockholder reported a net loss of $675,000, yet its cash increased $321,000 during the same period of time. Explain to your roommate how this situation could occur.

A number of factors could have caused an increase in cash despite the net loss. These are: (1) high cash revenues relative to low cash expenses, (2) sales of property, plant, and equipment, (3) sales of investments, and (4) issuance of debt or equity securities.

Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance. From what sources does the information to prepare this statement come, and what information does each source provide?

Comparative balance sheets, a current income statement, and certain transaction data all provide information necessary for preparation of the statement of cash flows. Comparative balance sheets indicate how assets, liabilities, and equities have changed during the period. A current income statement provides information about the amount of cash provided from operating activities. Certain transactions provide additional detailed information needed to determine whether cash was provided or used during the period.

Differentiate between the direct method and the indirect method by discussing each method.

Net cash flow from operating activities under the direct method is the difference between cash revenues and cash expenses. The direct method adjusts the revenues and expenses directly to reflect the cash basis. This results in cash net income, which is equal to "net cash flow from operating activities." The indirect method involves adjusting accrual-based net income. This is done by starting with accrual net income and adding or subtracting noncash items included in net income.

Differentiate between investing activities, financing activities, and operating activities.

a) Investing activities generally involve long-term assets and include (1) lending money and collecting on those loans and (2) acquiring and disposing of investments and productive long-lived assets. b) Financing activities, on the other hand, involve liability and stockholders' equity items and include (1) obtaining cash from creditors and repaying the amounts borrowed and (2) obtaining capital from owners and providing them with a return on their investment. c) Operating activities include all transactions and events that are not investing and financing activities. Operating activities involve the cash effects of transactions that enter into the determination of net income.

What are the major sources of cash (inflows) in a statement of cash flows? What are the major uses (outflows) of cash?

Examples of sources of cash in a statement of cash flows include cash from operating activities, issuance of debt, issuance of equity securities, sale of investments, and the sale of property, plant, and equipment. Examples of uses of cash include cash used in operating activities, payment of cash dividends, redemption of debt, purchase of investments, and the purchase of property, plant, and equipment.