MGAB01H3 Chapter Notes -Cash Cash, Retained Earnings, Cash Flow

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20 Nov 2012

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MGAB01H3 Full Course Notes

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Liabilities sources of financing for the economic resources from creditors. Shareholders" equity sources of financing for the economic resources from shareholders. Investors individuals who buy small percentages of large corporations. Dividents portion of what the company earns which is given to investors. Financing activities when money is exchanged between lenders and owners of a firm. Investing activities when a firm buys or sells property. Cash flow from investing activities cash flows related to the acquisition or sale of the company"s productive assets. Cash flow from financing activities - cash flows related to the financing of the company itself. Share capital investment of cash and other assets in the business by owners in exchange for shares. Retained earnings amount of earnings reinvested in the business (and thus not distributed to shareholders in the form of dividends). Other components reflects the changes in the values of assets and liabilities over time.

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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

The following events occurred last year at DorderCorporation:

Purchase of plant and equipment	$20,000
Sale of long-term investment	$8,000
Dividends received on long-term investments	$5,000
Paid off bonds payable	$11,000
Depreciation expense	$6,500

Based on the above information, the cash provided (used) byinvesting activities for the year on the statement of cash flowswould net to:

$(11,000)

$(12,000)

$(24,500)

$(6,500)

Last year Burch Corporation's cash account decreased by $16,000.Net cash provided by investing activities was $7,100. Net cash usedin financing activities was $14,000. On the statement of cashflows, the net cash flow provided by (used in) operating activitieswas:

$6,900

$(16,000)

$(9,100)

$(22,900)

McCorey Corporation recorded the following events last year:

Repurchase by the company of its own commonstock	$39,000
Sale of long-term investment	$58,000
Interest paid to lenders	$14,500
Dividends paid to the company's shareholders	$68,000
Collection by McCorey of a loan made to anothercompany	$44,000
Payment of taxes to governmental bodies	$24,500

On the statement of cash flows, some of these events areclassified as operating activities, some are classified asinvesting activities, and some are classified as financingactivities.

Based solely on the information above, the net cash provided by(used in) investing activities on the statement of cash flows wouldbe:

$102,000

$(9,500)

$34,000

$(19,500)

Financial statements of Rukavina Corporation follow:

Rukavina Corporation Comparative Balance Sheet
	Ending Balance	Beginning Balance
Assets:
Cash and cash equivalents	$24	$21
Accounts receivable	77	72
Inventory	33	31
Property, plant and equipment	528	480
Less: accumulated depreciation	326	299
Total assets	$336	$305
Liabilities and stockholders'equity:
Accounts payable	$42	$52
Bonds payable	95	110
Common stock	71	72
Retained earnings	128	71
Total liabilities and stockholders' equity	$336	$305

Income Statement
Sales	$705
Cost of goods sold	448
Gross margin	257
Selling and administrative expenses	151
Net operating income	106
Income taxes	38
Net income	$68

Cash dividends were $11. The company did not dispose of anyproperty, plant, and equipment. It did not issue any bonds payableor repurchase any of its own common stock. The following questionspertain to the company's statement of cash flows.

The net cash provided by (used in) investing activities for theyear was:

$(11)

$(15)

$(48)

periwinkleserval695

Which of the following characteristics may result in theclassification of a liability being changed from current tononcurrent:

a) violation of a subjective acceleration clause

b) violation of a objective acceleration clause

c) a demand provision for payment

d) refiancing after the balance sheet date

Pending litigation would generally be considered:

a) nonmonetary liabilty

b) contingent liability

c) estimated liability

d) current liability

Barrons Co. current ratio is 2:1. Which of the followingtransactions would normally increase Barney's current ratio?

a) purchasing inventory on account

b) borring money by signing a long-term note

c) collecting an account receivable

d) purchasing land for cash

On multiple step income statement, gains or losses on sale ofequipment would be shown

a) before gross profit on sales

b) after gross profit on sales but before income from conitnuingoperations

c) after income from continuing operations but before incomefrom extraordinary items

d) after income before extraordinary items but before netincome

A single step income statement is a format that

a) compares the current years income with last year's income

b) recongnizes subtotals at intermediate stages such as grossmargin

c) combines revenues and gains and subtracts from them expensesand losses, resulting in income from operations

d) reports sales revenue, cost of goods sold, gross margin, andall other expenses

In contrast with a multiple-step income statement, a single stepincome statement does NOT show the amount of

a) income taxes on continuing operations

b) cost of goods sold

c) gross profit

d) earnings per share

The amount of income reported for tax purposes

a) is nomally greater than the net income reported tostockholders

b) must be computed according to GAAP

c) is used to compute earnings per share

d) may differ from the amount of income detemined for financialreporting purposes

Under the general rule of revenue recognition, revenue isrecognized when

a) marketability and market price are assured

b) a contractual agreement exists, and cash collection isassured

c) the earnings process is complete, and a valid promise ofpayment has been received

d) all related expenses have been incurred

Seaworth Company's gross sales in 2014 were 3930000. Assumingsales returns and allowances were 74000 sales discounts were 35000and freight-out was 28000 what were Seaworthy's net sales in2014?

a) 3792000

b) 3821000

c)3856000

d) 3930000

On June 30, 2014 Sonata COmpanys operating facilities inNebraska were detroyed by a flood. The loss of $700000 was notcovered by insurance. Sonata's tax rate for 2014 is 40 percent. InSonatas income statement for the year ended sept 30 2014 this eventshould be reported as an extraordinary loss of

a) 0

b) 280000

c) 420000

d) 700000

In a statement of cash flows, payments to acquire debtinstruments of other entities would typically be classified as cashoutflows for

a) financing activities

b) equity activities

c) operating activities

d) investing activities

A gain on the sale of a plan asset in the ordinary course ofbusiness should be presented in a staement of cash flows preparedusing the indirect method as

a) a cash inflow from investing activities

b) a cash inflow from financing activities

c) a deduction from net income

d) a addition to net income

In a statement of cash flows, proceeds from issuing equityinstruments should be classified as cash inflows from

a) brokerage activities

b) financing activities

c) investing activites

d) operating activities

When preparing a statement of cash flows using the indirectmethod, the amortization of trademarks should be reported as a

a) increase in cash flows from investing activities

b) reduction in cash flows from investing activities

c) increase in cash flows from operating activities

d) reduction in cash flows from operating activites

A loss in the sale of machinery in the ordinary course ofbusiness should be presented in a statement of cash flows( indirectmethod) as

a) an addition to net income

b) a deduction from net income

c) an inflow and outflow of cash

d) an outflow of cash

In preparing a statement of cash flows, which of the followingtransactions would be considered an investing activity?

a) sale of a business segment

b) Issuance of bonds payable at a discount

c) purchase of treasury stock

d) sale of capital stock

In a statement of cash flows (indirect method), depreciation istreated as an adjustment to reported net income becausedepreciation

a) is an inflow of cash to reserve account for assetreplacement

b) reduces the reported net income and involves an inflow ofcash

c) reduces the reported net inome but does not involve anoutflow of cash

d) usually represents a significant portion of operatingexpense

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MGAB01H3 Chapter Notes -Cash Cash, Retained Earnings, Cash Flow

MGAB01H3 Full Course Notes

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