ACC 925 Chapter Notes - Chapter 12: Cash Flow, Net Income, Income Statement

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12 Oct 2016

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Explain the uses of the statement of cash flows. Cash flows provide relative information about a company operating, investing and financing activities. The statement of cash flows reports how managers got cash and how they used the cash to run the business: determine ability to pay dividends and interest: shareholders want dividends on their investments. Creditors collect interest and principle on their loans. However, it can differ: compare the operating performance of different companies: the statement of cash flows, allows to better compare the operating performance of multiple companies. Cash equivalents: short term investments that are readily convertible to known amounts of cash, and which are unlikely to change in value. Operating activities: are generally made up of other events and transactions that determine net income. Fo(cid:396) e(cid:454)a(cid:373)ple, whe(cid:374) teelus pa(cid:455)s apple fo(cid:396) ipho(cid:374)e to it"s (cid:272)usto(cid:373)e(cid:396)s, this pa(cid:455)(cid:373)e(cid:374)t is k(cid:374)ow(cid:374) as a (cid:272)ash outflow. When a customer buys an iphone from teelus this is known as a cash inflow.

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Choose the correction answer

15. The statement of cash flowsprovides information to help investors and creditors assess thecash and noncash investing and financing transactions during theperiod.

T F

16. The net increase(decrease) in cash reported on the statement of cash flows shouldreconcile the beginning and ending cash balances reported in thecomparative balance sheets.

T F

17. Anobjective of the statement of cash flows is to

a. disclose changes during the period in all assetand all equity accounts.

b. disclose the change in working capital during theperiod.

c. provide information about the operating,investing, and financing activities of an entity during aperiod.

d. None of these answers are correct.

18. Theprimary purpose of the statement of cash flows is to provideinformation

a. about the operating, investing, and financingactivities of an entity during a period.

b. that is useful in assessing future cash flowprospects.

c. about the cash receipts and cash payments of anentity during a period.

d. about the entity's ability to meet itsobligations and to pay dividends.

19. Cash equivalents are

a. treasury bills, commercial paper, and moneymarket funds purchased with excess cash.

b. investments with original maturities of threemonths or less.

c. readily convertible into known amounts ofcash.

d. All of these answers are correct.

20. Xanthe Corporation had the following transactions occur in thecurrent year:

1. Cash sale of merchandise inventory.

2. Sale of delivery truck at book value.

3. Sale of Xanthe common stock for cash.

4. Issuance of a note payable to a bank forcash.

5. Sale of a security held as anavailable-for-sale investment.

6. Collection of loan receivable.

How many of the above items willappear as a cash inflow from investing activities on a statement ofcash flows for the current year?

a. Five items

b. Four items

c. Three items

d. Two items

erinchimpanzee626

1. A creditor is reviewing Hoffman Electronicsâ statements ofretained earnings for the last 3 years. The creditor is trying todetermine whether a substantial loan should be given to HoffmanElectronics. Which question will most likely be answered byreviewing the statement of retained earnings?

a. Does Hoffman Electronics make risky investments that impedethe cash flow of the firm?

b. What was the ending permanent account balance for HoffmanElectronics last quarter?

c. What assets owned by Hoffman Electronics are valuable enoughto cover debt repayment?

d. Does Hoffman Electronics have enough earnings to pay bothdividends and debts?

2. True or false. By reviewing a companyâs statement of retainedearnings over multiple reporting periods, an investor can evaluatethe companyâs future growth potential based on net incomechanges.

3. A creditor would most likely be interested in reviewing afirmâs statement of retained earnings to determine if the firm

a. exhibits liquidity.

b.can repay its debt obligations.

c.makes risky investments.

d.has sufficient receivables.

4. On statement of cash flow, the repayment of loans iscategorized as a cash flow from ____activities.

a. operating

b. financing

5."Fill in the blank" question: select the correct answer.

In a statement of cash flows, cash inflows that result fromproviding goods to customers are included in the section calledâcash flows from_______ activities.

a. investing

b. operating

c. sales

d. investing

6. Creditors want to know whether Photon, Inc. uses itsavailable cash to purchase new equipment. Which section of thestatement of cash flows would provide this information?

a.Cash flows from operating activities

b.Cash flows from sales activities

c.Cash flows from financing activities

d.Cash flows from investing activities

7. Creditors are examining the statement of cash flows forPhoton, Inc. Which of the following questions can be answered byreviewing the statement of cash flows?

a. What is the average net income of Photon?

b.What type of assets does Photon possess?

c.Does Photon reset its temporary accounts?

d.Does Photon pay its bills when they are due?

ochreyak725

1. In preparing the Statement of Cash Flows

	a	deprecation is added to net income when calculating Cash FromOperations (under the Indirect Method).
		B.deprecation is added to net income when calculating Cash FromOperations (under the Indirect Method) because depreciation is anon-cash expense.
		C. Investing Activities and Financing Activities do not requireany adjustments to net income.
	d	All of the above.

Why do some companies prefer the use of residual income overreturn on investment in decision making?

	a.	The concept.
	b.	ROI can motivate managers to make investment decisions that arenot necessarily in the companyâs best interest.
	c.	The calculations for economic profit are easier.
	d.	The data needed to calculate return on investment are not alwaysavailable.

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ACC 925 Chapter Notes - Chapter 12: Cash Flow, Net Income, Income Statement

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