Financial and Managerial Accounting Study Set 1

Business

Quiz 15 :
Statement of Cash Flows

Quiz 15 :
Statement of Cash Flows

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Ethics and professional conduct in business Lucas Hunter, president of Simmons Industries Inc., believes that reporting operating cash flow per share on the income statement would be a useful addition to the company's just completed financial statements. The following discussion took place between Lucas Hunter and Simmons' controller, John Jameson, in January, after the close of the fiscal year: Lucas : I've been reviewing our financial statements for the last year. I am disappointed that our net income per share has dropped by 10% from last year. This won't look good to our shareholders. Is there anything we can do about this? John : What do you mean? The past is the past, and the numbers are in. There isn't much that can be done about it. Our financial statements were prepared according to generally accepted accounting principles, and I don't see much leeway for significant change at this point. Lucas : No, no. I'm not suggesting that we "cook the books." But look at the cash flow from operating activities on the statement of cash flows. The cash flow from operating activities has increased by 20%. This is very good news-and, I might add, useful information. The higher cash flow from operating activities will give our creditors comfort. John: Well, the cash flow from operating activities is on the statement of cash flows, so I guess users will be able to see the improved cash flow figures there. Lucas: This is true, but somehow I feel that this information should be given a much higher profile. I don't like this information being "buried" in the statement of cash flows. You know as well as I do that many users will focus on the income statement. Therefore, I think we ought to include an operating cash flow per share number on the face of the income statement-someplace under the earnings per share number. In this way, users will get the complete picture of our operating performance. Yes, our earnings per share dropped this year, but our cash flow from operating activities improved! And all the information is in one place where users can see and compare the figures. What do you think? John: I've never really thought about it like that before. I guess we could put the operating cash flow per share on the income statement, under the earnings per share. Users would really benefit from this disclosure. Thanks for the idea-I'll start working on it. Lucas: Glad to be of service. How would you interpret this situation? Is John behaving in an ethical and professional manner?
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In the given situation, the financial statements of current fiscal year of SI. Inc., discloses that the net income per share is declined by 10% from last year. The statement of cash flows shows 20% increment of cash flow from operating activities, when compared with last year. The president of the company, Lucas Hunter and the controller of the company, John Jameson decided to show operating cash flow per share on income statement, under earnings per share to comfort their creditors.
The income statement shows only net income or net loss for the year ended along with earnings per share. The statement of cash flows of a firm shows cash flow from operating activities, investing activities and financing activities
But in the given situation President and controller decision to show operating cash flow per share on income statement, it is a misrepresentation and misleading of financial statements and it is unethical and not in professional manner, as it may influence the decisions of users of the financial statements and put the company in bad situation by financially as well as socially.

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What is the principal disadvantage of the direct method of reporting cash flows from operating activities?
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1. The principal disadvantage of the direct method is that the data may not be readily available in the accounting records and, thus, cost more to obtain.

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Cash flows from operating activities-net loss On its income statement for a recent year, United Continental Holdings, Inc. , the parent company of United Airlines, reported a net loss of $723 million from operations. On its statement of cash flows, it reported $935 million of cash flows from operating activities. Explain this apparent contradiction between the loss and the positive cash flows.
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Non-cash and non-operating incomes and expenses such as depreciation, Income/loss on sale of fixed assets, should be adjusted to net income and changes in current operating assets and liabilities are also to be adjusted to net income to arrive net cash flows from operating activities.
The United Continental Holdings reported a net loss of $723 million from operations and according to its cash flow statement, its cash flow from operating activities is $935 million.
The possible reasons for this apparent contradiction are as follows.
1. There might be huge amount depreciation on its fixed assets, which might be the reason for the contradiction between loss and positive cash flows.
2. Loss on sale of fixed assets also contributes to the reason for the contradiction.
3. Significant decrease in current operating assets and significant increase in current operating liabilities also might be the reasons for the contradiction.
Any one or all of the above would be the reasons for the apparent contradiction between the loss and positive operating cash flow.

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A ? Classifying cash flows Identify whether each of the following would be reported as an operating, investing, or financing activity on the statement of cash flows: a. Repurchase of common stock b. Cash received from customers c. Payment of accounts payable d. Retirement of bonds payable e. Purchase of equipment f. Purchase of inventory for cash B ? Classifying cash flows Identify whether each of the following would be reported as an operating, investing, or financing activity on the statement of cash flows: a. Purchase of investments b. Disposal of equipment c. Payment for selling expenses d. Collection of accounts receivable e. Cash sales f. Issuance of bonds payable
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Statement of cash flows-indirect method The comparative balance sheet of Cromme Inc. for December 31, 2016 and 2015, is shown as follows: img Additional data obtained from an examination of the accounts in the ledger for 2016 are as follows: a. The investments were sold for $280,000 cash. b. Equipment and land were acquired for cash. c. There were no disposals of equipment during the year. d. The common stock was issued for cash. e. There was a $199,540 credit to Retained Earnings for net income. f. There was a $96,000 debit to Retained Earnings for cash dividends declared. Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
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Statement of cash flows-indirect method The comparative balance sheet of Merrick Equipment Co. for December 31, 2016 and 2015, is as follows: img Additional data obtained from an examination of the accounts in the ledger for 2016 are as follows: a. Equipment and land were acquired for cash. b. There were no disposals of equipment during the year. c. The investments were sold for $91,800 cash. d. The common stock was issued for cash. e. There was a $141,680 credit to Retained Earnings for net income. f. There was a $102,000 debit to Retained Earnings for cash dividends declared. Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
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Using the statement of cash flows You are considering an investment in a new start-up company, Giraffe Inc., an Internet service provider. A review of the company's financial statements reveals a negative retained earnings. In addition, it appears as though the company has been running a negative cash flow from operating activities since the company's inception. How is the company staying in business under these circumstances? Could this be a good investment?
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What are the major advantages of the indirect method of reporting cash flows from operating activities?
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Effect of transactions on cash flows State the effect (cash receipt or payment and amount) of each of the following transactions, considered individually, on cash flows: a. Retired $500,000 of bonds, on which there was $5,000 of unamortized discount, for $525,000. b. Sold 6,000 shares of $20 par common stock for $30 per share. c. Sold equipment with a book value of $98,200 for $117,500. d. Purchased land for $322,000 cash. e. Purchased a building by paying $75,000 cash and issuing a $62,500 mortgage note payable. f. Sold a new issue of $300,000 of bonds at 101. g. Purchased 2,500 shares of $40 par common stock as treasury stock at $50 per share. h. Paid dividends of $2.00 per share. There were 50,000 shares issued and 10,000 shares of treasury stock.
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A ? Adjustments to net income-indirect method Pearl Corporation's accumulated depreciation-furniture account increased by $8,400, while $3,080 of patent amortization was recognized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a loss of $4,480 from the sale of land. Reconcile a net income of $120,400 to net cash flow from operating activities. B ? Adjustments to net income-indirect method Ya Wen Corporation's accumulated depreciation-equipment account increased by $8,750, while $3,250 of patent amortization was recognized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $18,750 from the sale of investments. Reconcile a net income of $175,000 to net cash flow from operating activities.
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Statement of cash flows-indirect method The comparative balance sheet of Del Ray Enterprises Inc. at December 31, 2016 and 2015, is as follows: img Additional data obtained from the income statement and from an examination of the accounts in the ledger for 2016 are as follows: a. Net income, $332,000 b. Depreciation reported on the income statement, $83,400 c. Equipment was purchased at a cost of $162,800 and fully depreciated equipment costing $44,800 was discarded, with no salvage realized. d. The mortgage note payable was not due until 2018 but the terms permitted earlier payment without penalty. e. 10,000 shares of common stock were issued at $20 for cash. f. Cash dividends declared and paid, $153,600 Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
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Statement of cash flows-indirect method The comparative balance sheet of Harris Industries Inc. at December 31, 2016 and 2015, is as follows: img An examination of the income statement and the accounting records revealed the following additional information applicable to 2016: a. Net income, $524,580. b. Depreciation expense reported on the income statement: buildings, $51,660; machinery and equipment, $22,680. c. Patent amortization reported on the income statement, $5,040. d. A building was constructed for $579,600. e. A mortgage note for $224,000 was issued for cash. f. 30,000 shares of common stock were issued at $13 in exchange for the bonds payable. g. Cash dividends declared, $131,040. Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
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Analysis of statement of cash flows Dillip Lachgar is the president and majority shareholder of Argon Inc., a small retail store chain. Recently, Dillip submitted a loan application for Argon Inc. to Compound Bank. It called for a $600,000, 9%, 10-year loan to help finance the construction of a building and the purchase of store equipment, costing a total of $750,000. This will enable Argon Inc. to open a store in the town of Compound. Land for this purpose was acquired last year. The bank's loan officer requested a statement of cash flows in addition to the most recent income statement, balance sheet, and retained earnings statement that Dillip had submitted with the loan application. As a close family friend, Dillip asked you to prepare a statement of cash flows. From the records provided, you prepared the following statement: img After reviewing the statement, Dillip telephoned you and commented, "Are you sure this statement is right?" Dillip then raised the following questions: 1. "How can depreciation be a cash flow?" 2. "Issuing common stock for the land is listed in a separate schedule. This transaction has nothing to do with cash! Shouldn't this transaction be eliminated from the statement?" 3. "How can the gain on the sale of investments be a deduction from net income in determining the cash flow from operating activities?" 4. "Why does the bank need this statement anyway? They can compute the increase in cash from the balance sheets for the last two years." After jotting down Dillip's questions, you assured him that this statement was "right." But to alleviate Dillip's concern, you arranged a meeting for the following day. a. How would you respond to each of Dillip's questions? b. Do you think that the statement of cash flows enhances the chances of Argon Inc. receiving the loan? Discuss.
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A corporation issued $2,000,000 of common stock in exchange for $2,000,000 of fixed assets. Where would this transaction be reported on the statement of cash flows?
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Classifying cash flows Identify the type of cash flow activity for each of the following events (operating, investing, or financing): a. Net income b. Paid cash dividends c. Issued common stock d. Issued bonds e. Redeemed bonds f. Sold long-term investments g. Purchased treasury stock h. Sold equipment i. Issued preferred stock j. Purchased buildings k. Purchased patents
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A ? Changes in current operating assets and liabilities-indirect method Alpenrose Corporation's comparative balance sheet for current assets and liabilities was as follows: img Adjust net income of $207,000 for changes in operating assets and liabilities to arrive at net cash flow from operating activities. B ? Changes in current operating assets and liabilities-indirect method Huluduey Corporation's comparative balance sheet for current assets and liabilities was as follows: img Adjust net income of $160,000 for changes in operating assets and liabilities to arrive at net cash flow from operating activities.
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Statement of cash flows-indirect method The comparative balance sheet of Whitman Co. at December 31, 2016 and 2015, is as follows: img The noncurrent asset, noncurrent liability, and stockholders' equity accounts for 2016 are as follows: img img img Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
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Statement of cash flows-indirect method The comparative balance sheet of Coulson, Inc. at December 31, 2016 and 2015, is as follows: img The noncurrent asset, noncurrent liability, and stockholders' equity accounts for 2016 are as follows: img img Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
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Analysis of cash flow from operations The Commercial Division of Tidewater Inc. provided the following information on its cash flow from operations: img The manager of the Commercial Division provided the accompanying memo with this report: From: Senior Vice President, Commercial Division I am pleased to report that we had earnings of $945,000 over the last period. This resulted in a return on invested capital of 8%, which is near our targets for this division. I have been aggressive in building the revenue volume in the division. As a result, I am happy to report that we have increased the number of new credit card customers as a result of an aggressive marketing campaign. In addition, we have found some excellent merchandise opportunities. Some of our suppliers have made some of their apparel merchandise available at a deep discount. We have purchased as much of these goods as possible in order to improve profitability. I'm also happy to report that our vendor payment problems have improved. We are nearly caught up on our overdue payables balances. Comment on the senior vice president's memo in light of the cash flow information.
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A retail business, using the accrual method of accounting, owed merchandise creditors (accounts payable) $320,000 at the beginning of the year and $350,000 at the end of the year. How would the $30,000 increase be used to adjust net income in determining the amount of cash flows from operating activities by the indirect method? Explain.
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