Four basic financial statements

Income statement

Balance sheet

Statement of stockholders equity

Statement of cash flows

Classification of cash flowsThree types of activities that generate and use cash

Operating activities

Investing activities

Financing activities

Discuss two methods of presenting operating activities

Direct method

Indirect method

Statement of cash flows using the indirect method

Information needed to prepare the statement of cash flows

Income statement for the current year

Comparative balance sheets

Miscellaneous additional information concerning investing and financing transactions

Operating activities (reconcile accrual-based net income back to a cash basis)

Noncash expenses

Noncash revenues

Changes in noncash current asset accounts

Changes in current liability accounts

Interpreting cash flows from operating activities

Investing activities (reconcile all long-term asset accounts)

Property, plant, and equipment

Accumulated depreciation

Investments

Financing activities (reconcile all long-term liability and owners equity accounts)

Long-term liabilities

Common stock

Retained earnings

Interpreting the statement of cash flowsfree cash flow

Prepare the statement of cash flows using the direct method (Exhibit 13-16)

Operating activities

Determine cash receipts

Determine cash payments

Investing and financing activitiessame regardless of method used for operating activities (see 3c and 3d)

Comparison of direct and indirect methods

MyAccountingLab.com algorithmic homework assignments: S13-2, S13-4, E13-11A, E13-12A, E13-19A.

Extra Credit Homework

Which of the following statements is TRUE regarding a statement of cash flows?

A statement of cash flows measures the profitability of a company using the cash basis of accounting.

Two different methods may be used to compute the net cash flows from operating, investing, and financing activities.

Noncash investing and financing activities need to be disclosed under other activities.

The statement of cash flows reports the changes in cash and cash equivalents.

Which of the following is a cash equivalent?

Accounts receivable

Certificates of deposit that mature in less than three months

Certificates of deposit that mature in one year or less

Prepaid expenses

Which of the following activities is an operating activity?

Payment on the principal portion of a bank loan

Collection of cash from issuing stock

Payment of interest on a bank loan

Payment of cash dividends

Which of the following activities would NOT be considered an investing activity?

Issuance of common stock

Purchase of used equipment

Sale of land

Sale of a long-term investment

Which of the following activities is a financing activity?

Purchase of land by issuing stock

Payment of cash dividends

Purchase of land for cash

Purchase of inventory for cash

On a statement of cash flows, the net increase in cash was $24,000. Cash provided from operations was $30,000. If the net cash outflow from investing activities was $7,000, then what was the net cash flow from financing activities?

A net inflow of $1,000

A net outflow of $1,000

A net inflow of $13,000

A net outflow of $13,000

Using the following information for Stewart Auto, Inc., calculate the net cash flow from operating activities using the indirect method.

Net income $150,000

Depreciation expense 10,000

Increase in accounts receivable 4,000

Decrease in inventory 5,000

Increase in accounts payable 8,000

Loss on sale of equipment 7,000

The net cash provided by operating activities is:

$142,000.

$144,000.

$160,000.

$176,000.

Which of the following statements is TRUE regarding the indirect method of preparing a statement of cash flows?

A decrease in inventory is subtracted from net income.

A loss on the sale of an investment is added to net income.

Depreciation expense is subtracted from net income.

An increase in wages payable is subtracted from net income.

Which of the following statements is TRUE regarding the direct method of preparing a statement of cash flows?

Depreciation expense is added as a reconciling item.

It is easier and less costly to prepare than the indirect method.

A supplementary schedule reconciling net income to the cash basis must also be provided.

All of the statements above are correct.

Which of the following is an example of noncash investing and financing activity that is disclosed in a supplementary schedule accompanying the statement of cash flows or in a footnote to the financial statements?

Selling goods on credit

Paying the amount due a creditor

Purchasing equipment in exchange for a long-term note

Gain on the sale of land

1. Which of the following is correct?

All capital budgeting methods produce the same decision and their use is based on the information available.

Payback period ignores the cash flows after the original investment is recovered.

The accounting rate of return method considers the time value of money.

The cost of capital is the companys desired rate of return.

Which of the following capital budgeting methods uses accrual accounting rather than net cash flows, as a basis for calculations?

Payback method

Internal rate of return

Net present value

Accounting rate of return

Which of the following may be useful when comparing potential investments of different sizes?

Accounting rate of return

Profitability index

Future value of net cash inflows

Payback method

The internal rate of return is:

the interest rate at which the net present value of the investment equals the cost of the investment.

the interest rate at which the net present value of the investment exceeds the companys desired rate of return.

equal to the accounting rate of return.

none of the above

Which of the following capital budgeting methods ignores the time value of money?

Accounting rate of return

Internal rate of return

Net present value

Profitability index

Eagle Corporation is considering the purchase of a new machine. The machine cost $550,000 and will generate an annual net cash inflow of $100,000. What is the payback period?

4 years and 6 months

5 years

5 years and 6 months

6 years and 1 month

7. Cardinal Company purchased a new machine for $125,000. The machine will last eight years and will be depreciated using the straight-line method. The estimated residual value of the machine is zero and should generate a yearly cash inflow of $30,000. Ignoring taxes, what is the accounting rate of return?

3.65%

11.50%

23.00%

24.00%

8. Which of the following decision rules is a correct statement?

If the net present value is positive, do not invest in the capital asset.

If the internal rate of return is less than the required rate of return, invest in the asset.

Investments with longer payback periods are more desirable, all else being equal.

If the net present value is positive, invest in the capital asset.

9. Which of the following is NOT a factor when considering the time value of money?

The interest rate

The principal amount

The payback period

The number of periods

10. The final step in the capital budgeting process is to:

identify potential capital investments.

engage in capital rationing, if necessary, to choose among alternative investments.

utilize decision rules when screening out undesirable investments.

perform post-audits after making capital investments.