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The document provides study questions and problems related to analyzing statements of cash flows. It defines key terms like operating, investing, and financing activities. It also explains the difference between the direct and indirect methods for preparing statements of cash flows. Finally, it provides sample problems asking the reader to identify activities as operating, investing or financing; calculate cash flows using indirect method; and analyze differences between sample company cash flows.
The document provides study questions and problems related to analyzing statements of cash flows. It defines key terms like operating, investing, and financing activities. It also explains the difference between the direct and indirect methods for preparing statements of cash flows. Finally, it provides sample problems asking the reader to identify activities as operating, investing or financing; calculate cash flows using indirect method; and analyze differences between sample company cash flows.
The document provides study questions and problems related to analyzing statements of cash flows. It defines key terms like operating, investing, and financing activities. It also explains the difference between the direct and indirect methods for preparing statements of cash flows. Finally, it provides sample problems asking the reader to identify activities as operating, investing or financing; calculate cash flows using indirect method; and analyze differences between sample company cash flows.
4.1 Why is the statement of cash flows a useful document? The statement of cash flows is important because it shows how cash has been generated during a year or a quarter, and how it has been used. 4.2 Define the following terms as they relate to the statement of cash flows: cash, operating activities, investing activities, and financing activities. Cash includes cash and highly liquid short-term marketable securities, also called cash equivalents. They include U.S. Treasury bills, certificates, notes, and bonds; negotiable certificates of deposit at financial institutions; and commercial paper. Operating activities include delivering or producing goods for sale and providing services and the cash effects of transactions and other events that enter into the determination of income. Investing activities include 1) acquiring and selling or otherwise disposing of a) securities that are not cash equivalents and b) productive assets that are expected to benefit the firm for long periods of time and 2) lending money and collecting on loans. Financing activities include borrowing from creditors and repaying the principal and obtaining resources from owners and providing them with a return on the investment. 4.3 How does the direct method differ from the indirect method? The direct method shows cash collections from customers, interest and dividends collected, other operating cash receipts, cash paid to suppliers and employees, interest paid, taxes paid, and other operating cash payments. The indirect method is the most common and starts with net income and adjusts for deferrals; accruals; noncash items, such as depreciation and amortization; and nonoperating items, such as gains and losses on asset sales. 4.4 What can creditors, investors, and other users learn from an analysis of cash flows statement? It helps them determine the firm’s ability to generate cash flows in the future, its capacity to meet obligations for cash, its future external financing needs, its success in productively managing investing activities, and its effectiveness in implementing financing and investing strategies. 4.5 Identify the following as financing activities (F) or investing activities (I): (a) Purchase of equipment - I (b) Purchase of treasury stock – F (c) Reduction of long-term debt – F (d) Sale of building – I (e) Resale of treasury stock - F (f) Increase in short-term debt - I (g) Issuance of common stock - F (h) Purchase of land - I (i) Purchase of common stock of another firm - I (j) Payment of cash dividends - F (k) Gain on sale of land - I (l) Repayment of debt principal – I 4.6 Indicate which of the following current assets and current liabilities are operating accounts (O) and thus included in the adjustment of net income to cash flow from operating activities and which are cash (C), investing (I), or financing (F) accounts. (a) Accounts payable - O (b) Accounts receivable - O (c) Notes payable (to bank) - F (d) Marketable securities - C (e) Accrued expenses - O (f) Inventory - O (g) Prepaid expenses - I (h) Current portion of long-term debt - F (i) Dividends payable - F (j) Income taxes payable - O (k) Interest payable - O (l) Certificates of deposit – C 4.7 Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. (a) Decrease in accounts payable - L (b) Depreciation expense - H (c) Decrease in inventory - H (d) Gain on sale of assets - L (e) Increase in accounts receivable - L (f) Increase in deferred tax liabilities - H (g) Decrease in accrued liabilities - L (h) Increase in prepaid expenses - L (i) Increase in deferred revenue - H (j) Decrease in interest receivable – H 4.8 Indicate whether each of the following events would cause an inflow or an outflow of cash and whether it would affect the investing (I) or financing (F) activities on the statement of cash flows. (a) Repayments of long-term debt – Outflow, F (b) Sales of marketable securities – Inflow, I (c) Repurchase of company’s common stock – Outflow, F (d) Sales of common stock to investors – Inflow, F (e) Purchase of equipment – Outflow, I (f) Payment of dividends – Outflow, F (g) Purchase of marketable securities – Outflow, F (h) Borrowing from bank – Outflow, I (i) Sale of building – Inflow, I (j) Acquisition of company – Outflow, I 4.9 Condensed financial statements for Dragoon Enterprises follow. (a) Calculate the amount of dividends Dragoon paid using the information given. $5,500 (b) Prepare a statement of cash flows using the indirect method. Dragoon Enterprises Consolidated Statements of Cash Flows for the Year Ended December 31, 2012 2012 Cash Flows from Operating Activities – Indirect Method Net income $ 1,050 Adjustments to reconcile net income to cash provided (used) by operating activities Depreciation 1,200 Cash provided (used) by current assets and liabilities Accounts receivable (550) Inventories 110 Accounts payable (300) Income taxes payable (150) Net cash provided (used) by operating activities $ 1,360 Cash Flows from Investing Activities Additions to property, plant, and equipment (700) Net cash provided (used) by investing activities $ (700) Cash Flows from Financing Activities Sales of common stock (60) Increase (decrease) in short-term borrowings (140) (includes current maturities of long-term debt) Dividends paid 3,400 Net cash provided (used) by financing activities $ 3,200 Increase (decrease) in cash and cash equivalents (350) Cash and cash equivalents, beginning of year 850 Cash and cash equivalents, end of year $ 1,200 Supplemental cash flow information: Cash paid for interest $ 50 Cash paid for taxes (150) 4.10 The following income statement and balance sheet information are available for 2 firms, Firm A and Firm B. (a) Calculate the amount of dividends Firm A and Firm B paid using the information given. Firm A: $5,000; Firm B: $35,000 (b) Prepare a statement of cash flows for each firm using the indirect method. Operating Firm A Firm B Net income $75,000 $75,000 Depreciation Expense 10,000 30,000 Accounts Receivable (40,000) (5,000) Inventory (40,000) 10,000 Accounts Payable (20,000) (5,000) Net Cash Provided by Operating activities $(15,000) $105,000
Investing Firm A Firm B
Property, Plant, and Equipment $(20,000) $(70,000) Net Cash Provided by Investing activities $(20,000) $(70,000)
Financing Firm A Firm B
Note Payable $17,000 $ 2,000 Debt 20,000 (10,000) Tax 3,000 18,000 Dividends (5,000) (35,000) Net Cash Flow from Financing activities $35,000 $(25,000) (c) Analyze the differences in the 2 firms. Firm A has a negative operational cash flow showing that the company cannot cover operations solely from running the business. Firm B is doing very well in this aspect. Both firms have a negative investing cash flow. This is not very good for either firm but is especially not good for Firm A since its operational cash flow is also negative. Firm A shows a positive financial cash flow which means that the company is most likely struggling and they may be selling assets in order to cover operations and debt repayments. In other words, Firm B is doing much better than Firm A. 4.11 The following comparative balance sheets and income statement are available for Little Bit Inc. Prepare a statement of cash flows for 2012 using the indirect method and analyze the statement. Little Bit, Inc. Statement of Cash Flows For Year Ended December 31, 2012
Cash flow from operating activities
Net income $ 5,500 Non-cash expenses included in net income: Depreciation 18,000 Deferred income taxes 500 Cash provided (used for) current assets and liabilities Accounts receivable (6,500) Inventory (8,500) Prepaid expenses (4,000) Accounts payable 2,000 Accrued liabilities (16,000) Net cash used by operating activities $ (9,000) Cash flows from investing activities Purchase of plant and equipment (6,000) Purchase of long-term investments (1,000) Net cash used by investing activities $ (7,000) Cash flows from financing activities Additions to long-term debt 17,000 Sale of common stock 15,000 Net cash provided by financing activities $ 32,000 4.12 The following cash flows were reported by Techno Inc. in 2012 and 2011. (a) Explain the difference between net income and cash flow from operating activities for Techno in 2012. Net income differs from operating activities for various reasons. One reason includes non-cash expenses that occur from the depreciation and amortization of intangible assets. The statement reports net income figures of around $242,000 for 2011 and $316,000 in 2012. However after including depreciation, amortization, and deferred taxes those balances elevated to around $328,000 in 2011 and $400,000 in 2012. This is because depreciation and amortization reduce income, but have no effect on net cash flows. Another reason net income differs from operating cash flows is due to the various time differences that exist between the recognition of revenue and expense, as opposed to the actual occurrence of cash inflows. The 2012 accounts receivable figures reveal an increase from the 2011 figures and are calculated as deductions. This indicates that further revenue from sales was included in the net income figures than had been collected from consumers in the form of cash. (b) Analyze Techno Inc.’s cash flows for 2012 and 2011. In Techno’s cash flows for years 2011 and 2012, we can see that during this accounting period the company generated enough cash from operations to cover their investing activities. In Techno’s financial and cash flow statements we can see that they can generate positive cash flows that pay their dividends while they continue to experience financial growth.