Chapter 12 Connect Smartbook

Net cash provided by operating activities was $12,000. Net cash provided by investing activities was $2,000. Net cash used in financing activities was $7,000. The cash balance at the beginning of the year was $4,000. The cash balance at the end of the year is:

$11,000 $12,000+2,000-7,000. $7,000+4,000=11,000

A cash equivalent has two criteria:

1. Be readily convertible to a known amount of cash 2. Be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

Five Steps in Preparing the Statement of Cash

1. Compute net increase or decrease in cash 2. Compute net cash from or for operating activities 3. Compute net cash from or for investing activities 4. Compute net cash from or for financing activities 5. Compute net cash from all sources; then prove it by adding it to beginning cash to get ending cash

Format of the Statement of Cash Flows

A statement of cash flows reports cash flows from three activities: operating investing financing

Information about cash flows can influence decision makers in important ways. Which of the following questions could be answered by the statement of cash flows? (Check all that apply.)

Can the company pay its debts? How does a company spend its cash? Does the company have the resources to pursue opportunities?

Cash flows from financing activities identifies cash receipts and cash payments related to which of the following types of accounts?

Common Stock Bonds Payable

Accountants can use a three-step process to determine cash provided (or used) by investing activities. Which of the following steps is not part of this process?

Identify adjustments to net income.

Importance of Cash Flows

Information about cash flows influences decisions. Cash flows help users decide whether a company has enough cash to pay its debts. They also help evaluate a company's ability to pursue opportunities. Managers use cash flow information to plan day-to-day operations and make long-term investment decisions.

Analyzing Cash Sources and Uses

Managers review cash flows for business decisions. Creditors evaluate a company's ability to generate enough cash to pay debt. Investors assess cash flows before buying and selling stock.

Applying the Indirect Method

Net income is computed using accrual accounting. Revenues and expenses rarely match the receipt and payment of cash. The indirect method adjusts net income to get the net cash provided or used by operating activities.

Statement of cash flows

Reports cash receipts (inflows) and cash payments (outflows) for a period. Cash flows are separated into operating, investing, and financing activities. The details of sources and uses of cash make this statement useful. The statement of cash flows helps answer - What explains the change in cash balance? -Where does a company spend its cash? - How does a company receive its cash? - Why do income and cash flows differ?

Indirect method

Reports net income and then adjusts it for items that do not affect cash. It does not report individual items of cash inflows and cash outflows from operating activities.

Identify which of the following items is a noncash investing and financing activity that must be reported in a note to the statement of cash flows.

Retirement of debt by issuing stock Lease of an asset in a long-term lease transaction

Proving Cash Balances

The final stage in preparing the statement is to report the beginning and ending cash balances and prove that the net change in cash is explained by operating, investing, and financing cash flows.

Which of the following statements about the statement of cash flows are correct?

The purpose is to report cash receipts and cash payments during a period It details the sources and uses of cash

Cash Flows from Financing

To compute cash flows from financing activities, we analyze changes in all noncurrent liability accounts and equity accounts. These accounts include long-term debt, notes payable, bonds payable, common stock, and retained earnings. Reporting of financing activities is identical under the direct method and indirect method.

True or false: A spreadsheet can help a company prepare a statement of cash flows.

True

An increase in wages payable would be (added/subtracted)___to (from) net income, when computing cash flows from operations using the indirect method.

added

Starfish Shells had a beginning balance in Notes Payable of $35,000 and an ending balance of $40,000. This will be reported as _____ on the statement of cash flows.

an increase of $5,000 in the cash flows from financing activities section

Carol Co. prepares a statement of cash flows starting with net income and then adjusting for items that do not affect cash. Carol Co. is using the (direct/indirect)____method of reporting the statement of cash flows.

indirect

To compute cash flows from financing activities, accountants normally analyze changes in all of the following accounts except:

interest payable

A net cash inflow (source)

occurs when the receipts in a category exceed the payments

A gain from the sale of equipment would be (added/subtracted) ____ to (from) net income, when computing cash flows from operations using the indirect method.

subtracted

An increase in accounts receivable would be (added/subtracted)_____to (from) net income, when computing cash flows from operations using the indirect method.

subtracted

Net cash used in operating activities was $10,000. Net cash provided by investing activities was $2,000. Net cash provided by financing activities was $5,000. The cash balance at the end of the year was $12,000. The cash balance at the beginning of the year was $____

$15,000

Examples of Noncash Investing and Financing Activities

Retirement of debt by issuing equity stock. Conversion of preferred stock to common stock. Lease of assets in a long-term lease transaction. Purchase of long-term assets by issuing a note or bond. Exchange of noncash assets for other noncash assets. Purchase of noncash assets by issuing equity or debt.

Three-Step Analysis

To determine cash provided or used by investing activities: 1. identify changes in investing-related accounts, 2. determine the cash effects using T-accounts and reconstructed entries and 3. report the cash flow effects

Cash flow on total assets

Cash flow from operations/Average total assets

Measurement of Cash Flows

Cash flows include both cash and cash equivalents. The statement of cash flows explains the difference between the beginning and ending balances of cash and cash equivalents. Because cash and cash equivalents are combined, the statement of cash flows does not report transactions between cash and cash equivalents, such as cash paid to purchases received from selling cash equivalents.