Accounting 201: Intermediate Financial Accounting I Ch 6. Evaluating Cash Flows & Time Value of Money

cash receipts journal

• a record of all of the cash that a business takes in

• debt & credit entries

• a debit is posted to cash in the amount of money received

• any important tool to keep of cash collected by a business

What type of posting is necessary to keep a cash receipt transaction balanced?

1. The only posting is a debit to cash.

2. Since cash received is posted as a debit, a credit must be posted to the appropriate account.

3. A posting must be made to inventory as a credit and accounts receivable as a debit.

4. Since cash received is posted as a credit, a debit must be posted to the appropriate account.

Since cash received is posted as a debit, a credit must be posted to the appropriate account.

In a situation when a company takes in $50 cash for payment on a customer account, what accounting transaction is reported in the cash receipts journal?

1. Cash as a $50 credit posting, and inventory has a $50 debit posting

2. Cash as a $50 credit posting, and accounts receivable has a $50 debit posting

3. Cash has a $50 debit posting, and inventory has a $50 credit posting

4. Cash has a $50 debit posting, and accounts receivable has a $50 credit posting

Cash has a $50 debit posting, and accounts receivable has a $50 credit posting

Why is it important to post cash receipts in a cash receipts journal?

1. To keep track of payments that customers make to their accounts

2. To keep an accurate accounting of cash that is received, lowering the risk of theft and missing money

3. When cash is received, it should be posted as a credit in the cash receipts journal

4. To verify stock amounts when inventory is taken annually

To keep an accurate accounting of cash that is received, lowering the risk of theft and missing money

What type of account may be affected when cash is received?

1. Sales, accounts receivable, or inventory

2. Cash only

3. Sales, owner's equity, and balance sheet

4. Balanced scorecard, inventory, sales

Sales, accounts receivable, or inventory

What is a cash receipts journal?

1. A record of all cash (currency) a business receives

2. A reporting of money earned by a business

3. A list of business projections

4. A way to keep track of money that is owed to a company

A record of all cash (currency) a business receives

cash payment journal

special journal that allows you to record all cash payment

What kind of purchases go into a cash payment journal?

1. Cash

2. Loans

3. Every purchase

4. IOUs

Cash

In which column do you write the name of whom you paid cash to?

1. Account debited

2. Discount

3. Sundry

4. Folio

Account debited

Which column is used to record special cash payments that do not fit into any other column?

1. Cash

2. Creditor

3. Sundry

4. Discount

Sundry

Which of the following is not recorded in a cash payments journal?

1. Loans

2. Commission

3. Creditor payments

4. Interest

Loans

Which one is not a column in a cash payments journal?

1. Date

2. Purchases

3. Supplies

4. Discount

Supplies

cash flow statement

shows how money moves in and out of the organization

direct method

gives you a much more detailed image of how cash is moving through the organization

indirect method

can be calculated from information found in published financial statements

Which document is used to show how money moves through a company?

1. W2

2. Cash flow statement

3. CEO expense report

4. Incorporation statement

Cash flow statement

Which of the following describes the indirect method of preparing the cash flow statement?

1. It focuses on actual cash flow, with money collected from customers and going out through costs.

2. It focuses on amortization and depreciation.

3. It details the CEO's expenses.

4. It focuses on spending from the previous year only.

It focuses on amortization and depreciation.

Which section of the cash flow statement has different methods of preparation?

1. Investing

2. Operating

3. Financing

4. Overall concluding statement

Operating

Which of the following describes the direct method of preparing a cash flow statement?

1. It focuses on spending from the previous year only.

2. It details the CEO's expenses.

3. It focuses on amortization and depreciation.

4. It focuses on actual cash flow, with money collected from customers and going out through costs.

It focuses on actual cash flow, with money collected from customers and going out through costs.

You need to convert a direct cash flow statement to an indirect one. The direct cash flow statement shows net cash flow of $200,000. If net income is $350,000, depreciation is $10,000, and inventory expense is $110,000, what is the cash flow on the indirect statement?

1. $250,000

2. $430,000

3. $140,000

4. $350,000

$250,000

statement of cash flows

provides details on incoming and outgoing cash transactions and explains net increases or decreases in cash

cash flow statement

purpose is to explain this reduction in cash

operating activities

the actions the business undertakes as a normal course of doing business

investing activities

include buying and selling securities as well as property, plant, and equipment

financing activities

involve borrowing cash

debt financing

• obtaining loans or selling bonds

• borrowers pays periodic investment payments and the principle

equity financing

selling stock to the public and in return paying the stockholders dividends

How are mortgage or rent payments classified on the statement of cash flow?

1. Outgoing cash flow, financing section

2. Incoming cash flow, operating section

3. Outgoing cash flow, operating section

4. Incoming cash flow, investing section

Outgoing cash flow, operating section

Issuing bonds are noted in which section of the statement of cash flow?

1. Financing

2. There is not enough information to determine the correct answer.

3. Investing

4. Operating

Financing

Don's Drones had $15,400 at the start of the year. During the year he had $40,000 in cash from operations, minus $25,000 in cash from investing and positive $35,800 in cash from financing. What is the end cash balance?

1. $116,000

2. $66,200

3. $100,800

4. $50,800

$66,200

Developers are interested in building a major complex near Corporation XYZ. The news sparks Corporation XYZ to purchase a few acres. However, they sell it to Corporation ABC at a loss the same year. How is the net effect of this transaction classified on the statement of cash flow for Corporation XYZ?

1. Cash outflow, financing section

2. Cash outflow, investing section

3. Cash inflow, financing section

4. Cash inflow, operating section

Cash outflow, investing section

Martha's business had $35,500 cash in the bank at the start of the year. She had $125,000 in cash from customers during the year, $25,000 in net income and issued stock worth $35,000. She bought new equipment for $150,000. How much cash does she have after these transactions?

1. $35,500

2. $70,500

3. $45,500

4. $370,500

$45,500

balance sheet

a financial statement

assets

items that it owns

liabilities

items that it owes

equity

the owner’s investments in the business

cash flow statement

identifies sources and uses of cash as a result of three activities

• operating activities

• investing activities

• financing activities

operating activities

represent the main source of cash for a company and arise out of regular business operations

investing activities

relate to increases and decreases in long-term assets which are used by the company over a period of time to generate revenue

financing activities

relate to activities that impact the long-term liabilities (items that a company owes) and shareholders’ equity

dividends

represent a distribution of profit to the owners of a company, e.g., its shareholders

Which of the three components of a cash flow statement represents the main source of a company's cash?

1. Capital activities

2. Investing activities

3. Financing activities

4. Operating activities

Operating activities

On a cash flow statement, which of the following categories would collections from customers be classified as?

1. Financing activities

2. Cash activities

3. Operating activities

4. Investing activities

Operating activities

Which of the following is the BEST description of cash provided by financing activities?

1. The business is efficient in collecting money from its customers.

2. The business paid dividends to its shareholders.

3. The business purchased some new long-term assets, such as machinery.

4. The business received a loan from the bank.

The business received a loan from the bank.

If a company were acquiring long-term assets due to an expansion, in which category would cash be used?

1. Cash activities

2. Financing activities

3. Operating activities

4. Investing activities

Investing activities

What are financing activities?

1. Activities that impact the long-term liabilities (items that a company owes) and shareholders' equity

2. Sources and uses of cash as a result of three activities

3. Activities that relate to increases and decreases in long-term assets which are used by the company over a period of time to generate revenue

4. The main source of cash for a company and arise out of regular business operations

Activities that impact the long-term liabilities (items that a company owes) and shareholders' equity

time value of money

money that you have right now will be worth more over time

future value

how much money put in the bank today will turn into at some point in the future with the interest

present value

how much you need to save today to have a specific amount at some point in the future

annuity

a stream of equal payments

future value of an annuity

how much a stream of A dollars invested each year at r interest rate will be worth in n years

present value of an annuity

how much you will need today to receive a stream of payments A each year for n years if the money is invested at r interest rate

Which of these is an annuity?

1. Betty gets $50 in six months and $20 six months later

2. Bob gets $10 this year and $20 next

3. Joan gets $100 every year for the rest of her life

4. Jack gets $10 in three months and $10 six months later

Joan gets $100 every year for the rest of her life

If Martha puts $100 in the bank today at 6%, how much will she have in three years?

1. $106.00

2. $112.10

3. $124.10

4. $119.10

$119.10

How much will Bill and Mary need to put in the bank today at 4% interest to have $20,000 in five years for a down payment on a house?

1. $20,000

2. $16,000

3. $17,439

4. $16,439

$16,439

If a couple saves $5,000 a year for five years at 5% interest, what is the future value of this annuity after those 5 years?

1. $35,680

2. $30,000

3. $27,628

4. $32,680

$27,628

The time value of money means that:

1. A dollar received tomorrow is worth more than a dollar received today

2. A dollar received two years from now is worth more than a dollar received today

3. A dollar received today is worth the same as a dollar received tomorrow

4. A dollar received today is worth more than a dollar received tomorrow

A dollar received today is worth more than a dollar received tomorrow

annuity

• a series of future cash payments that occur at a regular interval

• most occur regularly - usually monthly, quarterly, or annually

mortgage payment

a regularly occurring series of payments, or annuity, on a real estate loan

other examples of annuities

• life insurance payments

• pension payments

• regular savings account deposits

• some investments

time value of money

money loses its value over time

inflation

during which prices rise and money loses its value

present value of annuity

the value today of a stream of future payments

Which of the following examples is an annuity?

1. A lump sum lottery payment

2. A robust portfolio with a lot of volatility

3. Mortgage loan payments

4. These are all examples of annuities

Mortgage loan payments

Which of the following statements regarding inflation are true?

1. During inflation, money gains value

2. Inflation is independent of supply and demand

3. During inflation, prices rise

4. Recession is the reason a candy bar cost a nickel fifty years ago and now costs more than a dollar

During inflation, prices rise

What is the definition of an annuity?

1. A loan with a defined payoff date and regular payments due to the lender

2. Any type of insurance policy that is offered over a long period of time

3. A life insurance policy that pays a claim in payments instead of lump sums

4. A series of future cash payments occurring at regular intervals

A series of future cash payments occurring at regular intervals

What is the present value of an annuity if the interest rate is 5% per year for 5 years, and the annual payments are $25,000?

1. $108,237

2. $125,000

3. $244,441

4. $500,000

$108,237

Which of the following statements is true regarding annuities?

1. Annuities are always lump sum payments.

2. Annuities can occur regularly or irregularly, but must have equal payments.

3. Annuities can have either equal payments or different-amount payments, but they must occur regularly.

4. Annuities can occur regularly or irregularly, and they can have equal payments or different-amount payments.

Annuities can have either equal payments or different-amount payments, but they must occur regularly.

opportunity cost

lost opportunity to invest money differently

inflation

the rate at which money loses its value due to increases in the cost of goods and services

future value

FV = PV (1+i)ⁿ

• FV is the future value, PV is the lump sum, i is the rate at which it grows, and n is the number of periods into the future

present value (PV)

PV = FV/(1 + I)²

time of value of money

money loses its value over time

If you want to compare investment opportunities, what must you calculate to ensure you are comparing apples-to-apples?

1. Gross domestic product

2. Future value of cash flows

3. Opportunity cost

4. Present value of cash flows

Present value of cash flows

What is the present value of an annuity that will make a fixed payment $30 each year for three years? Assume that the interest rate is 2%.

1. $87

2. $66

3. $30

4. $90

$87

Which of the following is the formula to calculate the present value of a future payment?

1. PV = FV / i

2. PV = FV / (1 + i)ⁿ

3. PV = (I / n) * FV

4. PV = (FV / i) * n

PV = FV / (1 + i)ⁿ

Calculating present values can require a lot of step-by-step math, or you can use which of the following?

1. Estimation

2. Accounting information systems

3. Calculators

4. Spreadsheets

Spreadsheets

Which of the following answers have two terms that are synonyms?

1. Inflation and future value

2. Inflation and time value of money

3. Today's dollars and time value of money

4. Future value and present value

Inflation and time value of money

time value of money

most basic principle in building wealth

inflation

the gradual increase of prices over time

net present value (NPV)

adjusts the future annual cash flows of each investment to today’s value using a discount rate

discount rate

the rate by which the value of the future cash flows is reduced

least cost principle

Penny should select the investment property that gives her more value for the money she invests

project profitability index (PPI) calculation

which project follows the least cost principle and gives the biggest bang for the buck

How does the discount rate impact the value of future cash flows when calculating net present value?

1. It increases the value.

2. It decreases the value.

3. It has no effect on the value.

4. It is multiplied by the value to calculate the return.

It decreases the value.

Investing money in a savings account or other investment opportunity instead of burying it in a hole in your backyard is consistent with which wealth building concept?

1. Project profitability index

2. Inflation

3. Time value of money

4. Depreciation

Time value of money

What is the discounting of future cash flows from an investment opportunity called?

1. Project profitability index

2. Inflation

3. Return

4. Net present value

Net present value

When you select an investment opportunity with the highest project profitability index exceeding 1.0, it has which of the following?

1. Least cost

2. Highest cash flow

3. Highest cost

4. Lowest return

Least cost

What calculation is used to evaluate the profitability of viable investment opportunities?

1. TVM

2. PPI

3. NPV

4. DCF

PPI