ACCT 301 Lecture Notes - Cash Flow Statement, Cash Flow, Book Value

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bronzealpaca588

25 Feb 2013

School

University of Calgary

Department

Accounting

Course

ACCT 301

Professor

All

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Document Summary

Cash flow statements concentrate on the sources and uses of cash and are a useful indicator of a company"s liquidity and solvency. In other words it is about a page long and it summarizes the inflows and outflows of cash under specific sections. Most importantly though, a cash flow statement distinguishes between profit and cash. As such, the survival of a business depends not so much on profits as on its ability to pay its debts when they fall due. Obviously a company"s net cash flow within a specific period may be measured by deducting the opening cash balance from the closing cash balance. Operating activities operating activities refer to the company"s trading activities and day-to-day operations, such as selling, distribution, administration expenses, etc. The cash flow statement attempts to summarize the net cash flow of these transactions, and this may be done in two distinct ways: the direct method, the indirect method.

Related Questions

Balance Sheet

2015

2016

2017

Assets

Cash

807,000

628,000

612,000

Accounts Receivables

2,582,000

2,896,000

4,605,000

Inventories

2,870,000

5,181,000

7,319,000

Total Current Assets

6,259,000

8,705,000

12,536,000

Net Fixed Assets

2,216,000

2,423,000

5,538,000

Total Assets

8,475,000

11,128,000

15,074,000

Liabilities and Equity

Accounts Payable

961,000

1,648,000

3,137,000

Notes Payable

400,000

800,000

2,860,000

Accruals

440,000

800,000

1,150,000

Total Current Liabilities

1,801,000

3,248,000

7,147,000

Long Term Debt

1,350,000

1,908,000

1,867,000

Common Stock

3,650,000

Retained Earnings

1,674,000

2,322,000

2,410,000

Total Equity

5,324,000

5,972,000

6,060,000

Total Liabilities and Equity

8,475,000

11,128,000

15,074,000

Income Statement

2015

2016

2017

Sales

26,820,000

28,966,000

30,703,000

Cost of Sales

21,216,000

23,550,000

26,140,000

Gross Profit

5,604,000

5,416,000

4,563,000

Operating Expenses

2,574,000

3,225,000

3,866,000

Operating Profit

3,030,000

2,191,000

697,000

Interest

91,000

275,000

469,000

Earnings Before Taxes

2,939,000

1,916,000

228,000

Taxes (48%)

1,411,000

919,000

110,000

Net Income

1,528,000

997,000

118,000

Liquidity	2015	2016	2017	Average
Current Ratio	3.475	2.68	1.754	2.5x
Quick Ratio	1.882	1.085	0.73	1.0x

Asset Management
Average Collection Period	35.139	36.492	54.745	32.0 (days)
Inventory Turnover	7.392	4.545	3.572	7.0x Fixed
Asset Turnover	3.165	2.603	2.037	12

Debt Management
Total Debt to Total Assets	0.372	0.463	0.598	50.00%
Times Interest Earned	33.297	7.967	1.486	7.7x

Profitability
Profit Margin	0.057	0.034	0.004	2.90%
Return on Equity (ROE)	0.287	0.167	0.019	17.50%

ABC Company, a toy manufacturer, believes the coming holiday season (between Thanksgiving in late November and Christmas on the 25^thof December) will be a very good one, expecting an increase of 20% in its sales. Outside economic analysts believe the effects of the recent recession are over. Consumer confidence is high. To meet that 20% increase, however, inventories must be built up so, to finance that expansion, ABC wants to borrow $1,000,000 from its bank.

You are the loan officer who must make the decision as to whether or not to give ABC the money. You are going to prepare ratios for 3 years, the Cash Conversion Cycle for the same period and operating cash flow for the years for which you have figures.

Review the Balance Sheets and Income Statements for ABC over the 3 years and answer the following questions (20 points each).

3) Operating Cash Flow is the first of the 3 parts to the Statement of Cash Flows.

a) Define operating cash flow. What does it tell us?
b) Calculate ABCâs operating cash flows for those years for which figures are available.
c) Does your analysis of ABCâs operating cash flows change your conclusions listed in 1) and 2) above?

4) Do you believe ABCâs cash position and its management of cash needs improvement? If so, how would you recommend they do it?

Answer Questions in Bold!

burgundyelephant640

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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ACCT 301 Lecture Notes - Cash Flow Statement, Cash Flow, Book Value

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