Accounting, Chapter 13

The net income of generally does not equal the net cash flows from operating activities for the period. This is because net income is determined using the ______ method of accounting.

accrual

Under the ______ method of accounting, revenues and expenses are recorded at different times from when cash is received or paid. Under the indirect method, adjustments to _____ must be made to determine cash flows from operating activities.

accrual; net income

Net income is normally adjusted to cash flows from operating activities, using the following steps: Step 1. Expenses that do not affect cash are ______. Step 2. Losses on the disposal of assets are _____ and gains on the disposal of assets are ______. Step 3. Changes in current operating assets and liabilities are added or deducted as follows: -Increases in noncash current operating assets are deducted. -Decreases in noncash current operating assets are added. -Increases in current operating liabilities are added. -Decreases in current operating liabilities are deducted.

added; added; deducted

A building with a book value of $54,000 is sold for $63,000 cash. Using the indirect method, this transaction should be shown on the statement of cash flows as follows: a. an increase of $54,000 from investing activities b. an increase of $63,000 from investing activities and a deduction from net income of $9,000 c. an increase of $9,000 from investing activities d. an increase of $54,000 from investing activities and an addition to net income of $9,000

an increase of $63,000 from investing activities and a deduction from net income of $9,000

The statement of cash flows provides useful information about a company's ability to do the following: -Generate ____ from operations -Maintain and expand its _____ capacity -Meet its financial obligations -Pay ______

cash; operating; dividends

A company may enter into transactions involving investing and financing activities that do not directly affect cash. A company may issue _____ to retire long-term debt. Although this transaction does not directly affect cash, it does eliminate future cash payments for _____ and for paying the bonds when they mature. Because such transactions indirectly affect cash flows, they are reported in a separate section of the statement of cash flows.

common stock; interest

Companies may select one of two alternative methods for reporting cash flows from operating activities on the statement of cash flows: -The _____ method: Look at all the cash you get -The ______ method: Get cash by looking at net income Both methods result in the same amount of cash flows from operating activities.

direct; indirect

Cash inflows - cash ____ Cash outflows - cash ____

in; out

As reported, cash flow per share is normally computed as ______ from operating activities divided by the number of _______ outstanding. However, such reporting may be misleading because of the following: -Users may misinterpret cash flow per share as the per-share amount available for dividends. -Users may misinterpret cash flow per share as equivalent to (or better than) earnings per share. For these reasons, the financial statements, including the statement of cash flows, should not report cash flow per share.

net cash flows; common shares

A primary advantage of the indirect method is that it reconciles the differences between ______ and _______ from operations.

net income; net cash flows

statement of cash flows

reports a company's cash inflows and outflows for a period

The indirect method

reports cash flows from operating activities by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash

Cash flows from (used for) investing activities

the cash flows from transactions that affect investments in the noncurrent assets of the company -related to changes in a company's long-term assets -Outflows > inflows

Cash flows from (used for) financing activities

the cash flows from transactions that affect the debt and equity of the company -changes in a company's long-term liabilities and stockholders' equity -Dividends paid

Which of the following should be shown on a statement of cash flows under the financing activity section? a. the purchase of a long-term investment in the common stock of another company b. the payment of cash to retire a long-term note c. the proceeds from the sale of a building d. the issuance of a long-term note to acquire land

the payment of cash to retire a long-term note

When AP increases,

we add because we have money

When inventories increase,

we buy more inventory and have less cash so we deduct that in the statement of cash flows

When AP decreases,

we deduct because we paid the AP so we have less cash

When inventories decrease,

we sold more so we have more cash so we add that in the statement of cash flows

Increase in prepaid expenses (asset)

will result in less cash so deduct that

Decrease in prepaid expenses (asset)

will result in more cash so we add that

When AR increases,

you have less cash so we deduct that in the statement of cash flows

When AR decreases,

you have more cash so we add that in the statement of cash flows

The statement of cash flows reports three types of cash flow activities, as follows:

-Cash flows from (used for) operating activities (sales/expenses) -Cash flows from (used for) investing activities -Cash flows from (used for) financing activities

Cash flows from (used for) operating activities (sales/expenses)

-report the cash inflows and outflows from a company's day-to-day operations -affect the net income of the company -Derived from income statement

what is a note

A legal document that obligates a borrower to repay a loan. It specifies the terms by which the repayment will occur. -Promise to pay

dividends paid

Dividends payable (opening balance) + dividends declared - dividend payable (ending balance)