ACC202 Exam 1

what does a statement of cash flows do

shows where cash came from and how it was spent

what does a statement of cash flows report

what caused cash to increase or decrease during the period

is a statement of cash flows a required statement

yes

income statement reports

profit

balance sheet shows

balance in cash

what is the usefulness of the cash flow statement

it helps financial statement users assess a company’s cash flows and financial health

what does the cash flow statment help users assess future cash flows

the company’s ability to pay dividends and debts

what does the cash flow statement show

cash investing and financing transactions

what are the three cash flow categories

operating, investing, financing

what is the most important cash flow category

operating activities

operating activities reflect

day-to-day transactions

in operating activities, income statement items are converted to

cash basis

what is an example of an operating activity

cash receipts from customers

current assets

less than a year

long-term assets

more than a year

investing activities

cash transactions that increase and decrease long-term assets

what is an example of an investing activity involving the sale of plant assets

selling computers, land, buildings, or equipment

what type of investing activity involves long-term investments

buying and selling long-term investments

what investing activity involves long-term notes receivable

making and collecting long-term notes receivable

companies obtain its resources through

financing activities

items related to certain investing and financing activities are reportede

in the operating sections

what are examples of items related to certain investing and financing activities are reported in the operating section

investment revenue received and interest paid on notes payable and bonds

what is an example of investment revenue received

interest and dividend revenue

why are certain investing and financing activities reported in the operating section

these items are included in net income

what cash flow is current assets

operating cash flows

what cash flow is long-term asseets

investing cash flows

what cash flow is current liabilities

operating cash flows

what cash flow is long-term liabilities

financing cash flows

what cash flow is stockholders’ equity

financing cash flows

what is significant noncash activities

major investing and financing transactions that affect a company's assets, liabilities, or equity without involving any actual exchange of cash

what is an example of a noncash activity involving common stock

issuing common stock other than purchase plant assets

what is an example of a noncash activity that converts debt into equity

converting bonds payable into common stock

how can a company purchase plant assets without paying cash immediately

by signing a long-term note payable

significant noncash activities are not reported in the body of

the cash flow statements

significant noncash activities are reported in

a separate schedule at the bottom of the statement or in the disclosure notes

what are all the items needed to preprare the cash flow statement

comparative balance sheets, current year income statement, and other information like PP&E or dividends

why do you need comparative balance sheets to prepare a cash flow statement

to compute changes in asset, liability, and equity accounts

why do you need current year income statement to prepare a cash flow statement

to help determine net cash provided by operating activities

what other information do you need to prepare a cash flow statement

purchases of PP&E and payment of dividends

what are the two methods for preparing the operating section of the statement of cash flow

the indirect and direct method

what does the indirect method do

it converts net income into cash provided by operating activities

which method is used by most companies

the indirect method

why is the indirect method so popular

it is easier to prepare

what does the indirect method focus on

the differences between net income and cash flow from operating activities

what does the direct method show

operating cash receipts and cash payments

what does the direct method do to income statement items

it adjusts each income statement from accrual basis to cash basis

which method does the FASB prefer

the direct method but it allows either method

what does GAAP require

accrual basis of accounting

how are revenues recorded in accrual basis of accounting

revenue is recorded when it is earned

what is included within revenue under accrual basis of accounting

items where cash has not yet been collected

when do you record revenue in accrual basis of accounting

when the service is provided or the product is delivered

how are expenses recorded in accrual basis of accounting

expenses are recorded when incurred

what is included within expenses in accrual basis of accounting

items that have not yet been paid

under accrual accounting, revenues are recorded

when earned, not necessarily when cash is received

under accrual accounting, expenses are recorded

when incurred, not necessarily when cash is paid

what current assets and liabilities do you put on an income statement

sales, COGS, rent expense, and salaries expense

what current assets and liabilites do you put on a balance sheet

accounts receivable, inventory & accounts payable, prepaid rent, and salaries payable

what does the indirect method of operating cash flows begin with

net income which is an accrual-based number

why are adjustments made to net income under the indirect method

to convert income into a cash amount

what happens to depreciation and amortization expense under the indirect method

they are added back to net income

what happens to gains on the sale of long-term assets

gains are subtracted from net income

what happens to losses on the sale of long-term assets

losses are added to net income

what else is adjusted under the indirect method

changes in current assets and current liabilities

depreciation and amortization expenses reduce

net income

depreciation and amortization expense do not result in

a cash outflow

depreciation and amortization expense are added

back to net income

gains increase net income while

losses decrease net income

amount of gain or loss does not represent

cash received

gains are subtracted from net income while

losses are added

what relationship do current assets have for operating activities

inverse relationship

how does current assets inverse relationship with operating activities work

subtract increases and add decreases

what falls under current assets

accounts receivable, inventory, and prepaid expenses and supplies

what relationship do current liabilities have for operating activities

direct relationship

how does current assets inverse relationship with operating activities work

add increases and subtract decreases

what falls under current liabilities

accounts payable, accruded expenses payable, salaries payable, interest payable

cash flows from investing activities

sales and acquisitions of long-term assets

what are examples of sales and acquisitions of long-term assets

plant assets, investments, and loaning or receiving payment

if gain or loss appears on the income statement

a long-term assets has been sold

to comput cash received from sales of plant asset

compare book value to gain or loss

cash flows from financing activities

relate to long-term liabilities and stocholders’ equity

cash flows from financing activities include

issuance and redemption of bonds payable and long-term notes payable

how does stock relate to financing activities

issuance of stock and purchases of treasury stock or payment of cash dividends

after preparing operating, investing, and financing sections, the subtotals

of each section are combined

when you combine the subtotals of each section it should

equal the change in cash

the increase or decrease in cash is

added or subtracted to or from the beginning cash

after you add the increase or decrease in cash with beginning cash it should equal

ending cash

free cash flow

determines amount of cash company generated to expand operatings and/or pay down debt

purpose of statement analysis

to make informated decisions about a company

intracompany comparative financial data

year-to-year

intercompany comparative financial data

with a competing company

what are the tools of analysis

horizontal, vertical, and ratio

horizontal analysis

provides year-to-year comparison

vertical analysis

provides way to compare different companies

ratio analysis

measures intercompany performance and financial positions

what does ratio anlysis show

trends within the company

what does horizontal analysis compare

two years of financial statement line items to highight changes

how does horizontal analysis work

compute dollar amount of changes and compute percentage changes

what is the first step of horizontal analysis

current year balance minus prior year balance = dollar change

what is the second step of horizontal analysis

dollar change divided by prior year balance = % change

what does vertical analysis show

the relationship of each item to base amount on the financial statement