Managerial Accounting

Business

Quiz 14 :

Statement of Cash Flows

Quiz 14 :

Statement of Cash Flows

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Classification of Transactions Below are several transactions that took place in Mohaw k Company last year: a. Bonds were retired by paying the principal amount due. b. Interest was paid to a lender. c. Income taxes were paid to the government. d. A long-term loan w as made to a supplier. e. Cash dividends were declared and paid. f. Common stock was sold for cash to investors. g. Equipment was sold for cash. h. Paid wages to employecs. i. Collected cash from customers. j. Paid cash to repurchase its own stock. k. Bought equipment for cash. 1. Paid suppliers for inventory purchases. Required: Prepare an answer sheet with the follow ing headings: img Enter the transactions above on your answer sheet and indicate how each of them would be classified on a statement of cash flows. As appropriate, place an X in the Operating, Investing, or Financing column. Also, place on X in the Cash Inflow or Cash Outflow column.
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Understanding a Statement of Cash Flows Logan Company is a merchandiser that prepared the statement of cash flows and income statement provided below: img img Required: Assume that you have been asked to teach a workshop to the employees within Logan Company's Marketing Department. The purpose of your workshop is to explain how the statement of cash flows differs from the income statement. Your audience is expecting you to explain the logic underlying each number included in the statement of cash flows. Prepare a memo that explains the format of the statement of cash flows and the rationale for each number included in Logan's statement of cash flows.
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The statement of cash flows summarizes all of a company's cash inflows and outflows during a period, thereby explaining the difference between its beginning and ending cash balance. The statement is divided into three sections-operating activities, investing activities, and financing activities. The operating activities section summarizes the cash inflows and outflows related to activities affect net income. The investing activities section summarizes the cash inflows and outflows related to acquiring or disposing of noncurrent assets. The financing activities section summarizes the cash inflows and outflows related to borrowing from and repaying principal to creditors and dealing with capital.
The statement is either constructed via the indirect or the direct method. Both deal with how the operating activities section of the statement is constructed. The financing and investment sections are the same under both methods. The indirect method of preparing the operating activities section of the statement begins with net income and adjusts it to a cash basis. The first step in completing the indirect method is to add depreciation to net income. Depreciation expense is a noncash expense that must be added to net income to translate to a cash basis. The total credits to Company's Accumulated Depreciation account equal $108, so this amount is added to net income.
The second step is to analyze net changes in noncash balance sheet accounts that impact the computation of net income, mainly current assets and current liabilities. For Company, this includes Accounts Receivable, Inventory, Accounts Payable, Accrued Liabilities, and Income Taxes Payable. Positive changes in current assets are subtracted from net income and negative changes in current assets are added to net income to reverse their original impact on net income. Positive changes in current liabilities are added to net income and negative changes are subtracted from net income for the same reasons.
The third step of the indirect method is to adjust for gains/losses included in the income statement. This adjustment is necessary because the cash realized from the sale of noncurrent assets must be disclosed in the investing activities section of the statement of cash flows. Because losses decrease net income, we add losses to net income (vice versa for gains). Company's income statement includes a loss of $3, so this amount must be added back to net income.
The investing activities section of Company's statement of cash flows records the gross cash flows related to its property, plant, and equipment. The statement includes a $110 cash outflow related to additions to property, plant, and equipment, and a $9 cash inflow related to the proceeds from the sale of property, plant, and equipment.
The financing activities section of Company's statement of cash flows records the gross cash flows related to its bonds payable, common stock, and dividends. The statement includes a $31 cash outflow related to the principal amount of retired bonds. It also includes a $4 cash inflow related to issuing common stock and a $35 cash outflow related to paying a dividend.
The net increase in cash and cash equivalents ($132) explains the difference between the beginning and ending cash balances.

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Prepare a Statement of Cash Flows; Free Cash Flow Comparative financial statement data for Holly Company are given below: img For this Year. the company reported net income as follows: img This year Holly declared and paid a cash dividend. There were no sales of plant and equipment during this year. The company did not repurchase any of its own stock this year. Required: 1. Using the indirect method, prepare a statement of cash flows for this year. 2. Compute Holly's free cash flow for this year.
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The first step is to calculate cash flows from operating activities:
1. Compute the depreciation to add back to net income:
img 2. Use the general guidelines for analyzing how changes in noncash balance sheet accounts affect net income on the statement of cash flows provided in the chapter. The increase or decrease in accounts can be calculated by subtracting the ending balance from the beginning balance.
img img 3. There were no gains or losses reported in the income statement so this ends the analysis of cash flows from operating activities.
Next, calculate cash flows from investing activities
Use the general guidelines for analyzing how changes in noncash balance sheet accounts affect the investing and financing sections of the statement of cash flows provided in the chapter. The increase or decrease in accounts can be calculated by subtracting the ending balance from the beginning balance:
img img Compute the dividend payment in Retained Earnings (debit to the account) with the following equation):
img We are now ready to construct the statement of cash flows:
img 2)Free cash flow can be calculated as:
img

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If the Accounts Receivable balance increases during a period, how will this increase be recognized using the indirect method of computing the net cash provided by operating activities
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Assume that a company repays a $300,000 loan from its bank and then later in the same year borrows $500,000. What amount(s) would appear on the statement of cash flows
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What are cash equivalents , and why are they included with cash on a statement of cash flows
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Why aren't transactions involving accounts payable considered to be financing activities
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Prepare a Statement of Cash Flows A comparative balance sheet and income statement for Eaton Company follow: img img During 2011, Eaton sold some equipment for $18 that had cost $30 and on which there was accumulated depreciation of $10. In addition, the company sold long-term investments for $12 that had cost $7 when purchased several years ago. A cash dividend was paid during 2011 and the company, repurchased $40 of its own stock. Eaton did not retire anv bonds during 2011. Required: 1. Using the indirect method, determine the net cash provided by operating activities for 2011. 2. Using the information in (1) above, along with an analysis of the remaining balance sheet accounts, prepare a statement of cash flows for 2011.
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If an asset is sold at a gain, why is the gain deducted from net income when computing the net cash provided by operating activities under the indirect method
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Net Cash Provided by Operating Activities For the just completed year. Strident Company had net income of $84,000. Balances in the company's current asset and current liability accounts at the beginning and end of the year were as follows: img The Accumulated Depreciation account had total credits of $50,000 during the year. Required: Using the indirect method, determine the net cash provided by operating activities for the year.
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How do the direct and the indirect methods differ in their approach to computing the net cash provided by operating activities
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What are the three major sections on a statement of cash flows, and what are the general rules that determine the transactions that should be included in each section
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Prepare a Statement of Cash Flows: Free Cash Flow Foxboro Company's income statement for Year 2 follows: img Its balance sheet amounts at the end of Years 1 and 2 are as follows: img Equipment that had cum 530.000 and on which there w as accumulated depreciation of SlO.Ouo was sold during Year 2 for 526.000. The company declared and paid a cash dividend during Year 2 li did not retire an\ bonds or repurchase any of its ow n stock. Required: 1. Using the indirect method, compute the net cash provided by operating activities for Year 2. 2. Prepare a statement of cash flows for Year 2. 3. Compute the free cash llow for Year 2. 4. Briefly explain why cash declined so sharply during the year.
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Net Cash Provided by Operating Activities Changes in various accounts and gains and losses on the sale of assets during the year for Weston Company are given at the top of the next page. img Required: For each item, place an X in the Add or Subtract column to indicate whether the dollar amount should be added to or subtracted from net income under the indirect method when computing the net cash prov ided by operating activities for the year. Use the following column headings in preparing your answers: img
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What general guidelines can you provide for interpreting the statement of cash flows
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Prepare a Statement of Cash Flows The following changes took place last year in Herald Company's balance sheet accounts: img Long-term investments that had cost the company $50 were sold during the year for $45. and land that had cost $30 was sold for $70. In addition, the company declared and paid $35 in cash dividends during the year. Besides the sale of land, no other sales or retirements of plant and equipment took place during the year. Herald did not issue any bonds during the year or repurchase any of its own stock. The company's income statement for the year follows: img The company's beginning cash balance was $100 and its ending balance was $120. Required: 1. Use the indirect method to determine the net cash provided by operating activities for the year. 2. Prepare a statement of cash flows for the year.
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Calculating Free Cash Flow Paisley Company prepared the following statement of cash flows for the current year: img Required: Compute Paisley Company's free cash flow for the current year.
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What is the purpose of a statement of cash flows
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A business executive once stated. "Depreciation is one of our biggest sources of cash." Do you agree that depreciation is a source of cash Explain.
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Classifying Transactions Below are certain events that took place at Hazzard. Inc., last year: a. Paid bills to insurers and utility providers. b. Purchased equipment with cash. c. Paid wages and salaries to employees. d. Paid taxes to the government. e. Loaned money to another entity. f. Sold common stock. g. Paid a cash dividend to stockholders. h Paid interest to lenders. i. Repaid the principal amount of a debt j. Paid suppliers for inventory purchases k. Borrowed money from a creditor. l. Paid cash to repurchase its own stock, m. Collected cash from customers. Required: Prepare an answer sheet with the following headings: img Enter the cash inflows and outflows above on your answer sheet and indicate how each of them would be classified on a statement of cash flows. Place an X in the Operating. Investing, or Financing column as appropriate.
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