Chapter 5
Statement of Cash Flows
Learning Objectives
1. Identify the purposes of the statement of cash flows 2. Classify activities affecting cash as operating, investing, or financing activities 3. Compute and interpret cash flows from financing activities 4. Compute and interpret cash flows from investing activities 5. Use the direct method to calculate cash flows from operations 6. Use the indirect method to explain the difference between net income and net cash provided by (used for) operating activities 7. Understand why we add depreciation to net income when using the indirect method for computing cash flow from operating activities 8. Show how the balance sheet equation provides
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a. True b. False
L.O.: 3 Type: Easy Solution: b
20. The purchase of treasury stock would be considered a financing activity. a. True b. False
L.O.: 3 Type: Easy Solution: a
21. Payment of dividends is a financing activity. a. True b. False
L.O.: 3 Type: Moderate Solution: a
22. Receipt of loan repayments is a financing activity. a. True b. False
L.O.: 3 Type: Moderate Solution: b
23. The indirect method of determining cash from operations is most often used as this method produces larger positive cash flows. a. True b. False
L.O.: 4 Type: Easy Solution: b
24. The Financial Accounting Standards Board (FASB) prefers the indirect method of determining cash flows from operations. a. True b. False
L.O.: 4 Type: Easy Solution: b
25. Net income is always used in determining a company 's cash flow from operations. a. True b. False
L.O.: 4 Type: Easy Solution: b
26. Wages and salaries expense plus the increase in wages and salaries payable equals cash paid for wages and salaries. a. True b. False
L.O.: 4 Type: Difficult Solution: b
27. Both the direct and indirect methods yield the same cash flow from operations. a. True b. False
L.O.: 4 Type: Easy Solution: a
28. The indirect
The net income was negative from 1989 to 1991. The net income is negative due to the depreciation costs. Operating
1. The first step to evaluating the cash flows is to conduct the depreciation tax flow analysis. Depreciation is not a cash flow, but the depreciation expense lows the taxes payable for the company. As a result, the tax effect of deprecation needs to be calculated as a cash flow. There are two depreciable items on the company's balance sheet the building and the equipment. The equipment is known to have a seven year depreciable life, which will be assumed to be straight line. The building is also assumed to be subject to straight line depreciation, this time of forty years. The tax saving reflects the depreciation expense multiplied by the tax rate, which in this case is assumed to be 28%. The following table illustrates the tax effect in future dollars of the depreciation expense:
In this example we have a case in which years 89, 90 and 91 net income is less than net cash provided by operating activities. One of the major reasons for this appears to have been depreciating high cost of equipment. The depreciation is trending downward over the three-year period indicating less long-term assets are being purchased/capitalized to run operations. While depreciation does not involve cash, it does impact net income. In addition, account payables have been decreasing over the last two years and significant cash has been used in the last year to pay the liability. In 1990 there are significant costs associated with restructuring activities. There
A firm has an expected dividend next year of $1.20 per share, a zero growth rate
The cash flows of each year during the lifetime of the project are derived by net operating income plus depreciation and minus the change in net working capital. Depreciation is included in the net income because it is tax deductible, and then it is added back because depreciation is a non-cash expense and should be added back to the cash flow statements. The change in net working capital is also taken into account in OCF since it is the change in cash flows.
31. To arrive at net cash provided by operating activities, the statement of cash flows prepared by the indirect method starts with net income and
The statement of cash flow is the combination of cash that is created from operating, investing, and financial activities of a business. Kohl's Corporation displays a positive trend of cash flows mainly due to an increase in cash from operating and financials activities while reducing negative cash from investing activities. In the operating activities, there is an increase in depreciation costs due to Kohl's active expansion of existing stores while building new stores throughout the country. This expansion has increased the amount of depreciation that is added back as cash flow from $57,724,000 in 1998 to $127,491,000 in 2001. This depreciation cost as a percentage of net sales increased from 1.9% in 1998 to 2.1% in 2001. Another
This method may results in multiple answers or not deal with non conventional cash flow
Since the net income reported in the statement of cash flows is transferred from the profit and loss account which is the difference between revenue and expenditures all of two types;
Q.During 2010, Smith Corporation had an increase in total assets of $70,000 and an increase in total liabilities of $90,000. Assuming that capital introduced by $5,000 and no money withdrawn, calculate Smith’s net income or net loss for 2010. a. Net loss of $15,000 b. Net loss of $20,000 c. Net loss of $25,000 d. Net income of $15,000 ANS: Q. The "rules" of accounting are called a. income tax regulations. b. SEC regulations. c. Internet rules. d. Generally Accepted Accounting Principles. ANS:
Amounts earned from transactions with related parties shall be disclosed as required under § 210.4–08(k).
2. Magnetronics had $7,380 invested in accounts receivables at year-end 1999. Its average sales per day were $133,614 during 1999 and its average collection period was 55.23 days. This represented an improvement from the average collection period of 58.68 days in 1995.
class he had missed had been devoted to a lecture and discussion of the statement of cash flows, and
The Statement of Cash flows is a very useful financial statement that can benefit investors, managers and even auditors. The statement of cash flows has not been around as long as the other financial statements such as the balance sheet or income statement. It basically “illustrates the way accounting evolves to meet the requirements of users of financial statements.” (Marshall, 2003) The statement of cash flows is designed to provide important information about the cash that a company has received or has paid out during a certain time period. It provides a reason for the changes of cash received and paid by a company by taking into
| Below is an excerpt from the cash flow statement of a firm for fiscal year 2003: Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Amortization of software Tax benefits of employee stock plans Special charges (Gains)/losses on investments Change in operating assets and liabilities: Receivables Inventories Pension assets Other assets Accounts payable Pension liabilities Other liabilities Net cash provided by operating activities Cash flows from investing activities: Payments for plant and other property Proceeds from disposition of plant and other property Investment in software