Question 1

How does the statement of cash flows helps readers understanding?

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Question 2

Given the following information, indicate the cash flow amounts in the blanks provided.(Note that the ABCCompany uses a just-in-time inventory system and there is no beginning or ending inventory).
 $\begin{array}{llcc}
\text {ABC Company}\
\text {Income Statement}\
\text {For the Year Ended December 31, Year 2}\
&&\underline{\text { Cash Flow }}\
  \text {Sales revenue, \( 75 \% $ on credit  } &\$200,000&\$\underline{\quad\quad}\
 \text { Accounts receivable balance } &\
 \text { December 31, Year 1, $ \$ 50,000 $} &\
 \text { December 31, Year 2, $ \$ 60,000 $ } &\
 \text {Cost of good sold. $ 100 \% $ on credit  } &\$60,000&\$\underline{\quad\quad}\
 \text {Accounts payable balance   } &\
  \text {December 31, Year $ 1, \$ 15,000 $   } &\
 \text {December 31 , Year $ 2, \$ 12,000 $   } &\
 \text {  Expenses:} &\
 \text { Salaries and Wages } &\$26,000&\$\underline{\quad\quad}\
 \text { Accrued wages payable balance } &\
 \text { December 31, Year 1, $ \$ 1,500 $ } &\
  \text {December 31, Year 2, $ \$ 1,600 $  } &\
 \text {  Depreciation expense} &\$2,500&\$\underline{\quad\quad}\
 \text { Rent expense } &\$1,500&\$\underline{\quad\quad}\
 \text {No accruals  } &\
 \text {Income tax expense  } &\underline{\$5,500}&\$\underline{\quad\quad}\
 \text {Taxes payable balance  } &\
  \text {  December 31, Year 1, $ \$ 1,000 $} &\
 \text { December 31 , Year $ 2, \$ 2,000 $ } &\
 \text {Total expenses  } &\underline{\$35,500}\
 \text {Net income  } &&\underline{\$104,500}\
 \text {  Cash flow from operating activities} &&\$\underline{\quad\quad}\
\end{array}\)

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Question 3

Given the following information, prepare the cash flows from operations section of the statement of cash flows using the indirect method.
 $\begin{array}{lll}
\text { The Wayne Corporation}\
\text { Income Statement}\
\text { For the Year Ending December 31, Year 2}\
\text { Sales } & & \$ 500,000 \
\text { Expenses: } & & \
\text { Cost of goods sold } & \$ 150,000 & \
\text { Depreciation expense } & 15,000 &\
\text { Salary expense}&\underline{35,000}&\underline{200,000}\
\text { Net income}&&\underline{\$300,000}\
\text { Additional Information: } & & \
\text { Accounts receivable } & \$ 6,000 & \text { Decrease } \
\text { Merchandise inventory } & 12,000 & \text { Increase } \
\text { Accounts payable } & 900 & \text { Increase } \
\text { Salaries payable } & 600 & \text { Decrease }
\end{array}$

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Question 4

The statement of cash flows provides information that helps the reader in (1) assessing the impact of operations on liquidity and (2) assessing the relations among cash flows from operating, investing, and financing activities.Explain.

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Question 5

Cash flows do not always fit unambiguously into only one of the three categories: operating, investing and financing. Explain.

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Question 6

Based on the following information, prepare a statement of cash flows for Year 2.Use the indirect method.

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Question 7

If a statement of cash flow showed that a firm had a small cash loss from operating activities, a large cash outflow from investing activities, and a large cash inflow from financing activities, you would expect the firm to be at what stage of development?.
A)a new, rapidly growing firm
B)a profitable, growing firm
C)a mature, stable firm
D)a firm in early decline
E)an unprofitable, long-term declining firm

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Question 8

Given the following changes in the balance sheet for Year 2 of the Cotton Company, prepare a statement of cash flows using the indirect method.
 $\begin{array}{ll}\text { Change In }&D R(C R)\
\text { Cash } & 90,000 \
\text { Accounts receivable } & 10,000 \
\text { Inventory } & (20,000) \
\text { Accounts payable } & 10,000 \
\text { Notes payable } & (50,000) \
\text { Equipment } & 40,000 \
\text { Accumulated depreciation } & (20,000) \
\text { Retained eamings } & (50,000) \
\text { Common stock } & (10,000)
\end{array}$ No dividends were paid during the year and no equipment was sold during the year.

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Question 9

Describe the various presentation formats for the Statement of Cash Flows.

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Question 10

Why is a Statement of Cash Flows needed?

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Question 11

For each of the following independent cases, solve for the unknown factor.
 $\begin{array}{lll}
& \underline{\text { CASE I }}& \underline{\text { CASE 2} }& \underline{\text { CASE 3}}\
\text {Cost of goods sold}&\$ 25,000 & \$ 20,000 & \text { C } \
\text {Inventory, beginning}&8,000 & 80,000 & \$ 25,000 \
\text {Inventory, ending}&3,000 & \text { B } & 60,000 \
\text {Accounts payable, beginning}&6,000 & 8,000 & 15,000 \
\text {Accounts payable, ending}&5,000 & 8,000 & 2,000 \
\text {Cash payments to suppliers}&\text { A } & 44,000 & 123,000
\end{array}$

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Question 12

How does the statement of cash flows explain the reasons for the change in cash between balance sheet dates?

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Question 13

For each of the following activities, identify where the activity would be reported on the statement of cash flows.
 O	-Operating
I	-Investing
F	-Financing

1.	Change in accounts receivable
2.	Acquisition of fixed assets
3.	Change in short-term borrowing
4.	Change in inventories
5.	Change in long-term borrowing
6.	Purchase of municipal bonds with the intention of holding the bonds to maturity
7.	Purchase of supplies inventory
8.	Issue of capital stock
9.	Change in trade accounts payable
10.	Payment of interest expense

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Question 14

Describe the various sections of the statement of cash flows.

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Question 15

In the first month of operations (April Year 1) of the QuickClean Company, a service business, the following events occurred.
 events occurred.

a.	Issued stock for $100,000; 20,000 shares with a $1 par value.
b.	Purchased equipment with a useful life of ten years for $12,000.
c.	Purchased a building with a useful life of 20 years for $24,000.
d.	Bought office supplies for $2,400. Supplies are expected to last one year.
e.	Paid salaries of $10,000.
f.	Borrowed $15,000 from bank on last day of the month. 12% interest rate payable in 90 days.
g.	Sold services for $20,000 on account.
h.	Collected $15,000 of receivables.
i.	Recorded expense accruals of $4,000 at end of month.

Required:
Prepare a balance sheet and statement of cash flow using the indirect method for the first month of operations.

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Question 16

The inflows and outflows of cash during the year appear in the statement of cash flows in one of three categories: operating, investing, and financing.Explain each category.

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Question 17

At different points in their existence, companies will have different cash inflow and outflow requirements.Such differences make intercompany comparisons difficult, even within the same industry.
Required:
 a. Consider a start-up company in the software development industry. What might its operating, investing, and financing cash flows look like in general? Provide examples where appropriate.
b. Consider a mature auto dealership. What might its operating, investing, and financing cash flows look like in general? Provide examples where appropriate.

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Question 18

Some analysts focus attention on cash flow from operations, thinking it as important as, or more important than, net income as a performance measure.Interpreting cash from operations as a measure of operating performance requires considering cash flows along two dimensions: (1) their timing and (2) their classification and disclosure in the statement and related notes.Explain.

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Question 19

A growing firm that delays payments at the end of each period reports larger cash flow from operations each period than if it had not delayed making the cash payments at the end of each period.Which of the following is true?
A)The firm is, in effect, obtaining short-term financing from its suppliers.
B)Absent contracts or other agreements that preclude delayed payments, this business practice is legal.
C)Sufficiently delayed payments might harm a firm's reputation.
D)Sufficiently delayed payments might harm a firm's credit rating.
E)All of the above are true.

Accepted Answer

A) This is true because the firm is effectively using its suppliers as a source of short-term financing by delaying payments.

B) This is also true because delayed payments are not necessarily illegal, unless there are contracts or agreements that explicitly require payments to be made on a certain timeline.

C) Delayed payments could harm a firm's reputation if suppliers become dissatisfied with the practice and decide to stop doing business with the firm.

D) Similarly, delayed payments could harm a firm's credit rating if suppliers report the late payments to credit agencies or if the firm's inability to pay on time becomes a pattern.

Therefore, all of the above options are true.

Question 20

Below is an Income Statement and a Statement of Cash Flows for Morgan Corporation for Year 8.
 $\begin{array}{ll}
\text { Morgan Corporation}\
\text { Income Statement}\
\text { For the Year Ended December 31 , Year 8}\
\text { Sales Revenue } & \$ 11,400 \
\text { Gain on Sale of Equipment } & 60 \
\text { Interest Revenue } & \underline{16} \
\text { Total Revenues } &{11,476} \
\text { Cost of Goods Sold } & (7,070) \
\text { Selling and Administrative Expense } & (2,240)  \
\text { Interest Expense } & (210)\
\text { Income Tax Expense } & \underline{(752)} \
\text { Net Income } &\underline{\$ 1.204} 
\end{array}$
  Required:
Respond to each of the following questions.
 a.	Compute the amount of cash collected from customers during Year 8.
b.	Compute the amount of cash paid to suppliers for merchandise during Year 8.
c.	Compute the amount of income taxes paid to governmental agencies during Year 8.
d.	Property, plant and equipment (at cost) had a balance of $3,700 on January 1, Year 8 and $3,940 on December 31, Year 8. Accumulated depreciation had a balance of $1,290 on January 1, Year 8 and $1,540 on December 31, Year 8. Give the journal entry that Morrissey Corporation made in its accounting records during Year 8 to record the sale of the equipment.
e.	The balance in the retained earnings account on December 31, Year 8 after closing entries was $1,154. Compute the balance in the retained earnings account on January 1, Year 8.

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Quiz 6: Statement of Cash Flows