Chapter 12

Which method would be used to report cash paid for dividends on the statement of cash flows?

Both the indirect and direct methods.

Which method would be used to report cash paid for purchase of treasury stock on the statement of cash flows?

Both the indirect and direct methods.

Which method would be used to report cash received from stock issuance on the statement of cash flows?

Both the indirect and direct methods.

What are financing activities?

Cash flows from noncurrent/long-term liabilities and stockholder's equity.

What are operating activities?

Cash flows from primary business.

What are investing activities?

Cash flows from short-term or long-term investments and noncurrent assets.

DMG Company had the following cash flows: Cash paid for machinery $200,000 Cash paid for wages 400,000 Cash paid for dividends 100,000 Cash received from customers 1,000,000 Cash received from issuing bonds payable 2,000,000 Cash paid for utilities 390,000 Cash received from issuing stock 1,200,000 Cash received from the sale of land 300,000 Compute net cash provided by (used in) Financing Activities.

Cash paid for dividends ($100,000) Cash received from issuing bonds payable 2,000,000 Cash received from issuing stock 1,200,000 _______________ Net cash provided by financing activities $3,100,000

DMG Company had the following cash flows: Cash paid for machinery $200,000 Cash paid for wages 400,000 Cash paid for dividends 100,000 Cash received from customers 1,000,000 Cash received from issuing bonds payable 2,000,000 Cash paid for utilities 390,000 Cash received from issuing stock 1,200,000 Cash received from the sale of land 300,000 Compute net cash provided by (used in) Investing Activities.

Cash paid for machinery ($200,000) Cash received from the sale of land 300,000 ________________ Net cash provided by Investing Activities $100,000

DMG Company had the following cash flows: Cash paid for machinery $200,000 Cash paid for wages 400,000 Cash paid for dividends 100,000 Cash received from customers 1,000,000 Cash received from issuing bonds payable 2,000,000 Cash paid for utilities 390,000 Cash received from issuing stock 1,200,000 Cash received from the sale of land 300,000 Compute net cash provided by (used in) Operating Activities.

Cash received from customers $1,000,000 Cash paid for utilities (390,000) Cash paid for wages (400,000) ______________ Net cash provided by Operating Activities $210,000

T or F: When companies borrow, cash outflows from financing activities have occurred.

False - A cash inflow occurs if the borrowing is noncurrent.

T or F: Amortization of an intangible asset creates a cash inflow from operating activities.

False - Amortization of an intangible asset does not create a cash flow. It is added to net income but it is only an adjustment (not a cash flow).

T or F: Cash flows from investing activities are calculated by making adjustments to net income.

False - Cash flows from investing activities are calculated by netting cash flows from changes in investments and noncurrent asset accounts.

T or F: Cash paid to acquire long-lived assets is reported as a cash inflow from investing activities.

False - Cash paid to acquire long-lived assets are a cash outflow from investing activities.

T or F: Cash received from issuing a long-term payable is reported as a cash inflow from investing activities.

False - Cash received from issuing a long-term payable is reported as a cash outflow from financing activities.

T or F: When companies receive dividends, cash inflows from financing activities have occurred.

False - Dividends received are a cash inflow from operating activities.

T or F: FASB prefers (recommends) the indirect method of preparing the statement of cash flows because it gives a more accurate calculation of cash provided by operating activities.

False - FASB recommends the direct method because it provides more and better information.

T or F: Paying a cash dividend would cause a cash outflow that would appear in the operating activities section of the statement of cash flows.

False - It creates a cash outflow that would appear in the financing section of the statement of cash flows.

T or F: The statement of cash flows prepared using the direct method results in a larger amount of cash flow from operating activities than does the indirect method.

False - The amount reported is the same whether computed using the direct or indirect method.

T or F: When companies pay dividends, cash inflows from financing activities have occurred.

False - When companies pay dividends, cash outflows from financing activities have occurred.

What is a cash equivalent?

Financial equipment bought 3 months or less than when it's due. (Ex: Bond bought 2 months before maturity)

Which method would be used to report depreciation expense on the statement of cash flows?

Indirect method

How do you use the direct method for operating activities?

List cash inflows or outflows from operations. (Cash received from customers, cash paid to suppliers, cash paid for wages)

What does a statement of cash flows look like?

Net Cash Inflow (outflow) from Operations X Net Cash Inflow (outflow) from Investing X Net Cash Inflow (outflow) from Financing X ________ Increase (decrease) in Cash X Beginning Cash Balance +X ________ Ending Cash Balance X

DMG Company reported cash flows as follows: Investing activities - $2,000 net outflow Financing activities - $3,500 net inflow Beginning cash balance - $2,500 Ending cash balance - $4,750 How much was cash flow from operations?

Net Cash Inflow from Operating Activities ?????? Net Cash Outflow from Investing Activities ($2,000) Net Cash Inflow from Financing Activities 3,500 _________________ Increase in cash (4,750 - 2,500 = 2,250) $2,250 Beginning Cash Balance 2,500 __________________ Ending Cash Balance $4,750 Net cash inflow from operating activities - Net cash outflow from investing activities + net cash inflow from financing activities = Increase (Decrease) in cash ???? - 2,000 + 3,500 = $2,250. Therefore, ???? = $750.

What is the proper way to net cash flows by operating activities using the indirect method?

Net Income Plus Noncash Expenses Plus Decreases in Current Assets Minus Increases in Current Assets Plus Increases in Liabilities Minus Decreases in Liabilities

DMG Company had the following information for its first year of operations: Net Income $1,000,000 Accounts Receivable Increased by $20,000 Prepaid Insurance Decreased by $30,000 Depreciation Expense $100,000 Wages Payable Decreased by $70,000 Unearned Revenue Increased by $110,000 Compute net cash inflow (outflow) from operating activities.

Net Income $1,000,000 Minus Increase in Accounts Receivable (20,000) Plus Decrease in Prepaid Insurance 30,000 Plus Depreciation Expense 100,000 Minus Decrease in Wages Payable (70,000) Plus Increase in Unearned Revenue 110,000 _______________ Net Cash Inflow from Operating Activities $1,150,000

DMG Company's prepaid advertising account increased by $100,000 in 2016. What does this mean?

Prepaid advertising is an asset account. Therefore it is increased with a debit and decreased by a credit. Prepaid advertising is increased when more advertising is purchased. The journal entry is: Prepaid Advertising XXXXX Cash XXXXX Prepaid advertising is decreased when the advertising is used. The journal entry is: Advertising Expense XXXXX Prepaid Advertising XXXXX If prepaid advertising increased, then the debits (JE #1) must have been greater than the credits (JE #2) by $100,000. That is, the company purchases or paid for $100,000 more prepaid advertising than used.

How can you tell if a business is doing well by its investing activities?

The investing activities have a net outflow.

How can you tell if a business is doing well by its operating activities?

The operating activities have a net inflow.

T or F: A cash outflow from financing activities is created when a company purchases some of its own stock from stockholders.

True

T or F: Although FASB prefers the direct method of accounting for cash flows from operating activities; many US companies use the indirect method.

True

T or F: Collecting cash from a customer cause a cash inflow that would appear in the operating activities section of the statement of cash flows.

True

T or F: Paying cash for a utility bill would cause a cash outflow that would appear in the operating activities section of the statement of cash flows.

True

T or F: Paying cash to a supplier causes a cash outflow that would appear in the operating activities section of the statement of cash flows.

True

T or F: Payment of a cash dividend creates a cash outflow from financing activities.

True

T or F: Sale of equipment at book value creates a cash inflow from investing activities.

True

T or F: The proceeds from the sale of investments is reported as cash inflows from investing activities.

True

T or F: When companies repurchase their own stock, cash outflows from financing activities have occurred.

True

When analyzing a company's statement of cash flows, which of the following would be most favorable for operating cash flows, investing cash flows, and financing cash flows? a) Net outflow, net outflow, net inflow b) Net inflow, net inflow, net inflow c) Net inflow, net outflow, net outflow d) Net outflow, net outflow, net outflow

c) Net inflow, net outflow, net outflow