Accounting Exam 2 (statement of cash flows)

What are the two methods of making the statement of cash flows?

Direct and Indirect (note: for this class we’re only doing indirect)

3 Uses for the Statement of cash flows

1. It’s required for each period

2. Provides info about cash transactions

3. Helpful in assessing future profitability, liquidity, LT Solvency

The statement of cash flows is helpful in assessing future____, ____, and _____

Profitability, liquidity, and LT solvency

This method of Statement of Cash Flows is derived from starting with net income and working backwards to convert that amount into a cash basis

Indirect method

Sort the following balance sheet/income statement items into the Statement of Cash Flows. Operating, Investing, Financing, or Non-Cash

Income statement

• Revenues

• Expenses

Balance sheet

Assets

• Change in cash

• Changes in other current assets

• Changes in LT assets & PPE

Liabilities

• Changes in current liabilities

• Changes in LT liabilities

Stockholder’s equity

• Changes in Common Stock

• Changes in Retained earnings (our dividends paid)

1. Operating

• Change in revenues/expenses

• Changes in current assets

• Changes in current liabilities

1. Investing

• Changes in LT assets & PPE

1. Financing

• Changes in LT liabilities

• Changes in Common Stock

• Changes in our dividends paid

How is non-cash reported on the Statement of cash flows?

It is disclosed at the bottom

After finishing a Statement of Cash Flows, you’ll get a “net cash flows” number. How is it related to “Change in Cash”?

It should equal

How would you classify a gain/loss on a sale of a LT asset? Operating, Investing, or Financing? 

Operating because it’s a deduction/addition to net income.

Changes to cash related to revenues, expenses, current assets, or current liabilities
a. Operating
b. Investing
c. Financing
d. Noncash

A

Changes in cash related to the purchase/sell of LT assets or when you’re loaning someone else money (note receivable)
a. Operating
b. Investing
c. Financing
d. Noncash

B

Changes in cash related to LT liability (when you’re borrowing money) or equity accounts
a. Operating
b. Investing
c. Financing
d. Noncash

Financing

Changes that don’t involve cash but still need to be disclosed
a. Operating
b. Investing
c. Financing
d. Noncash

D

Which of the following are non-cash activities. Select all that apply.
a. Purchase of LT assets by issuing debt
b. Purchase of LT assets for cash
c. Purchase of LT assets by issuing stock
d. Gain/Loss on sale of equipment
e. Exchange of LT assets for other assets
f. Conversion of bonds into common stock

A, C, E, F

If you receive dividend revenue from an investment in another company, it is what kind of activity?
a. Operating
b. Investing
c. Financing
d. Noncash

A because it’s dealing with revenue

How is net increase/decrease in cash calculated?

Beginning cash balance ± net cash change

What is the formula for net cash change?

Net income ± Operating ± Investing ± Financing = net change

Classify this account as either Operating, Investing, Financing, or Noncash

Cash proceeds from notes payable

Financing (LTL → Financing)

Classify this account as either Operating, Investing, Financing, or Noncash

Sale of equipment for cash

Investing (LTA → investing)

Classify this account as either Operating, Investing, Financing, or Noncash

Payment of interest on notes payable

Operating (interest exp./interest pay. → effects net income → Operating)

Classify this account as either Operating, Investing, Financing, or Noncash

Issuance of bonds payable in exchange for land & building

Noncash

Classify this account as either Operating, Investing, Financing, or Noncash

Payment of principal on notes payable

Financing (LTL)

Classify this account as either Operating, Investing, Financing, or Noncash

Sale of a building at a loss

Operating AND Investing (expense on income statement and LTA)

Classify this account as either Operating, Investing, Financing, or Noncash

Conversion of bonds into stock

Noncash

Classify this account as either Operating, Investing, Financing, or Noncash

Amortization expense

Operating (it’s depreciation for intangibles and thus effects NI)

Operating

What do I do with Depreciation/Amortization Expense in the Operating section?
a. add it back
b. subtract it

Add it back (originally decreased NI, so get rid of it by adding

Operating

What do I do with a Loss on Sale of a LT Asset? what about gain?
Loss:
Gain:

Loss: Add it back (originally decreased NI, so undo it by adding)

Gain: subtract it (originally increased NI, so undo it by subtracting)

Operating

What do I do with an increase in a current asset? decrease?
Increase:
Decrease:

Increase: subtract it (assets move opposite of NI, so - )
Decrease: add it (assets move opposite of NI, so + )

Operating

What do I do with an increase in current liability? decrease?
Increase:
Decrease:

Increase: add it (liabilities move with NI, so +)
Decrease: subtract it (Liabilities move with NI, so - )

What are the 3 rules for adjustments in operating activities regarding non-cash items, assets, and liabilities?

1. Reverse the effect non-cash items had on NI

2. Assets run opposite of NI

3. Liabilities run with NI

Investing

What do I do with the purchase of long-term investments? sale?

Purchase:
Sale:

Purchase: Subtract it (cash goes down with a purchase, so - )

Sale: Add it (cash goes up with a sale, so + )

Investing

What do I do with the issuing of a Notes receivable? what about collection?
1. Issuing:
2. Collection:

1. Issuing: subtract (we loaned money, so -)

2. Collecting: add (we are collecting cash, so +)

Financing

What do I do with an issuing of bonds or notes payable? what about repayment?

1. Issuing:

2. Repayment:

1. Issuing: add it (cash goes up when you borrow, so +)

2. Repayment: subtract it (cash goes down when you repay, so -)

Financing

What do I do with paying dividends to our stockholders? Do I add it or subtract it?

Subtract it (you’re paying stockholders, so -)

A helpful tip for the SOCF is to think about it from the _______

cash perspective

Classify the following as Operating, Investing, Financing, or Non-cash

Purchase of equipment for cash

Investing

Classify the following as Operating, Investing, Financing, or Non-cash

Payment of employee salaries

Operating

Classify the following as Operating, Investing, Financing, or Non-cash

Collection of cash from customers

Operating

Classify the following as Operating, Investing, Financing, or Non-cash

Purchase of common stock of another company for cash

Investing

Classify the following as Operating, Investing, Financing, or Non-cash

Issuance of common stock for cash

Financing

Classify the following as Operating, Investing, Financing, or Non-cash

Payment of cash dividends to shareholders

Financing

Classify the following as Operating, Investing, Financing, or Non-cash

Purchase of treasury stock

Financing

Dividends are related to changes in ____, ____, and ____.

current assets, current liabilities, and dividends received

Sort the following into Operating, Investing, or Financing

1. Cash proceeds → ____
2. Gains/losses → _____

1. Investing

2. Operating