ADMS 1500 Lecture Notes - Lecture 4: Cash Flow Statement, Cash Flow, Net Income

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apricotlizard912

22 Oct 2016

School

York University

Department

Administrative Studies

Course

ADMS 1500

Professor

N/ A

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Document Summary

Business process flow: role of cash: running out of cash is a serious threat to the continuation of the business, managing cash well can contribute to profitability. Liquidity can be accessed through liquidity ratios such as the current ratio and the quick ratio. Liquidity can also be monitored through the statement of cash flows. The cash flow statement is a classified summary of cash transactions in the year showing how cash is received or spent in: Operating activities - operations related to revenue and expense. Investing activities - purchase or sale of capital assets. Financing activities - changes in debt and in shareholders" equity (other than operations) The cash flow statement reveals the strategic choices the company has made in the period just ended. All other things being equal, net income increases cash. These are expenses deducted in calculating net income, but they do not require any cash flow. Decreasing inventory, receivables etc frees up cash flow.

Related Questions

Accounts receivables turnover(times)

Average Collection Period (days)

Inventory turnover (times)

Average days in inventory (days)

Current ratio (times)

Quick or Acid-test ratio (times)

Times interest earned (times)

Gross profit ratio (%)

Profit margin (%) [before tax]

Return on assets (%) [before tax]

7.5%

9.0%

8.0%

Return on equity (%) [before tax]

Price to earnings ratio

Cash, beginning of year

Minus increase in accounts receivable

$ (4,034.00)

$ (5,648.00)

Minus increase in inventory

$ (3,302.00)

$ (4,732.00)

Minus increase in prepaid expenses

$ (1,360.00)

$ (1,700.00)

Plus increase in accounts payable

$ 2,388.00

$ 3,997.00

Plus increase in income taxes payable

$ 252.00

$ -

Plus increase in accruals & other cur.Liab.

$ 1,365.00

$ 1,656.00

Net Cash from operating activities

$ (2,156.00)

$ (2,308.00)

Investment Activities

Fixed asset acquisitions

$ (2,780.00)

$ (3,838.00)

Change in intangible assets

$ (21.00)

$ (17.00)

Change in all other noncurrent activities

$ (467.00)

$ (195.00)

Net Cash from investing activities

$ (3,268.00)

$ (4,050.00)

Financing Activities

Change in notes payable

$ 2,038.00

$ 3,080.00

Change current maturities--L.T.D.

$ 452.00

$ 786.00

Change in long-term debt

$ 3,160.00

$ 3,250.00

Change in Com Stock & paid-in cap

Net Cash from financing Activities

4. What is your assessment of the manner in which HTCM ismanaging its assets? Pay attention to both trends and industryaverages.

SOLVENCY (Financing of Assets)

5. What is your assessment of the manner in which HTCM isfinancing its assets? Pay attention to both trends and industryaverages. What is the relationship between the debt to equity ratioand times interest earned as these relate to HTCM? And is there anyother possible explanation (outside of the firmâs financialstatements) for the observed trend in times interest earned?

PROFITABILITY

6. What can you say about HTCMâs gross profit ratio and netprofit ratio? Explain any patterns observed.

7. How are HTCMâs net profit ratio, and asset turnover ratioaffecting the firmâs pre-tax return on assets (ROA) and return onequity (ROE)? What is your overall assessment of the firmâsprofitability, including its earnings per share (EPS)?

CASH FLOW

8. Referring to HTCMâs statement of cash flow for 2016 and 2017,assess HTCMâs cash flow situation noting both inflows andoutflows?

OVERALL EVALUATION

9. Based on your answers to the questions above, what is youroverall evaluation of HTCMâs financial condition? (Pull all youranalysis together in answering this question.)

10. What is the marketâs assessment of HTCMâs financialcondition? Explain. Does the marketâs assessment confirm or refuteyour analysis?

11. Based on your evaluation of HTCM and the marketâs assessmentof the firm, would you accept employment with the company?Explain.

coraldinosaur635

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the âfull faith and creditâ of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartnerâs level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterpriseâs:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the companyâs performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholderâs equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

byzantiummoose662

1. Which of the following statements is true about apartnership?

a. One capital and one drawings account is used for eachpartnership.

b. The capital account is used to record each partner'sinvestment and that partner's designated share of the earnings.

c. Partnerships are subject to separate income taxes.

d. The drawings account is closed to retained earnings at theend of the period.

2. Which of the followingstatements does not correctly describe preferred stock?

a. Preferred shareholders have a preference with respect todividend payments.

b. Preferred shareholders have a preference with respect toassets in the event of dissolution.

c. Preferred shareholders have voting rights on a per sharebasis.

d. Preferred stock typically has a fixed dividend rate.

3. Which of the followingstatements is false?

a. Common stockholders have a residual claim on assets in theevent of liquidation.

b. Shares of stock held in the treasury are subtracted from thenumber of issued shares in the determination of the number ofoutstanding shares.

c. Common stockholders have voting rights at annual stockholdermeetings.

d. Corporations are governed by their stockholders.

4. Which of the following would not be reportedas a financing activities cash flow?

a. Issuing common stock for cash.

b. Cash dividend payments.

c. Purchasing treasury stock.

d. Purchase of a building by signing a note payable.

5. Which of the following is not reported as acash flow from investing activities?

a. Sale of a depreciable asset for cash.

b. Purchasing land in exchange for common stock.

c. Selling a long-term investment at a loss for cash.

d. Purchase of a patent in exchange for cash.

6. Which of the following transactions would be reported withinthe investing section of the cash flow statement?

a. The cash sale of land at a loss.

b. The purchase of a building in exchange for common stock.

c. The receipt of a stock dividend from a stock investment.

d. The cash receipt of a dividend from a stock investment.

7. Which of the following would be subtracted from net incomewhen determining cash flows from operating activities under theindirect method?

a. A decrease in utilities payable.

b. Patent amortization expense.

c. A decrease in prepaid rent.

d. A loss on the sale of a depreciable asset.

7. Which of the following would be added to net income whendetermining cash flows from operating activities under the indirectmethod?

a. A decrease in accounts payable.

b. Patent amortization expense.

c. An increase in prepaid insurance.

d. A gain on the sale of a depreciable asset.

8. Which of the following would not be a cashflow from financing activities?

a. Issuance of common stock for cash.

b. Borrowing cash on a long-term note payable.

c. Collection of a cash dividend.

d. Repayment of principal on a long-term note payable.

9. The cash payment of a previously declared dividend increaseswhich of the following ratios?

a. Debt-to-equity.

b. Earnings per share.

c. Price/earnings ratio.

d. Asset turnover.

10. The debt-to-equity ratio measures which of thefollowing?

a. Liquidity.

b. Solvency.

c. Profitability.

d. Market strength.

11. Negative financial leverage occurs when the:

a. Average net (after tax) interest rate on borrowed funds isless than the company's earnings rate on its assets.

b. Return on assets is more than return on equity.

c. Return on equity is more than return on assets.

d. Operating expenses exceed gross profit.

12. Which of the following ratios is notconsidered to be a test of profitability?

a. Current ratio.

b. Profit margin.

c. Return on assets.

d. Earnings per share.

13. Home Depot's operating strategy is to offer a broadassortment of high-quality merchandise and services at competitiveprices using highly knowledgeable service-oriented personnel andaggressive advertising. Which of the following isnot as critical to achieving Home Depot'sstrategy?

a. Cost control

b. Product differentiation

c. High level of customer service

d. High sales volume

13. Which of the following ratios is not partof the DuPont model?

a. Asset turnover.

b. Debt-to-equity.

c. Net profit margin.

d. Return on equity.

Which of the following statements is notcorrect?

Purchasing fixed assets through debt financing decreases thefinancial leverage ratio.

Accruing an expense will affect the net profit margin ratio.

Return on equity may increase even when the financial leverageratio decreases.

Purchasing treasury stock results in a decrease in assetturnover.

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ADMS 1500 Lecture Notes - Lecture 4: Cash Flow Statement, Cash Flow, Net Income

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