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Exam 12: Accounting for Cash Flows

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Question 71

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Investments that are readily convertible to a known amount of cash and are sufficiently close to their maturity so that the market value is unaffected by interest rate changes are ______________________________.

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Question 72

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Explain the what value separating cash flows into operating activities, investing activities, and financing activities has to financial statement users when it comes analyzing cash flows and the company's financial condition.

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By separating cash flows into three cate...

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Question 73

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The payment of cash dividends to shareholders is classified as a financing activity.

Depreciation expense is not reported on the statement of cash flows when the direct method is used.

Based on the following income statement and balance sheet for Montego Bay Corporation, determine the cash flows from operating activities using the direct method. MONTEGO BAY CORPORATION Income Statement For Year Ended December 31, 2013 $\begin{array}{|l|r|r|}\hline \text { Sales } & & \$ 504,000 \\\hline \text { Cost of goods sold } & 327,600 & \\\hline \text { Depreciation } & 42,000 & \\\hline \text { Other operating expenses } & 125,500 & (495,100) \\\hline \text { Other gains (losses): } & & \\\hline {\text { Gain on sale of equipment }} & & 7,200 \\\hline \text { Income before taxes } & & 16,100 \\\hline \text { Income tax expense } & & (4,800) \\\hline \text { Net income } & & \$ 11,300\\\hline\end{array}$

The FASB requires a reconciliation of net income to net cash provided or used by operating activities when the direct method is used.

The cash flow on total assets ratio is calculated by:

The FASB requires the reporting of cash flows per share as a measure of earnings performance.

A purchase of land in exchange for shares of stock is disclosed on the statement of cash flows or in a note to the statement.

Most managers stress the importance of understanding and predicting cash flows for business decisions.

Use the following company information to prepare a schedule of significant noncash investing and financing activities: (a) Sold a building with a book value of $125,000 for $195,000 cash and land with a book value of $32,000 for $65,000 cash. (b) Issued 10,000 shares of $10 par value common stock in exchange for equipment with a market value of $135,000. (c) Retired a $100,000, 10% bond by issuing another $100,000, 12% bond issue. (d) Acquired land by issuing a 10-year, 9%, $44,000 note payable.

A company purchased equipment for $150,000 by paying $50,000 and signing a $100,000 note payable. The entire transaction is disclosed to users on the statement of cash flows and/or in its notes.

A company had wage expense of $750,000 during a given period. Compute cash paid for wages during this period given the following data: $\begin{array} { | l | c | c | } \hline & \begin{array} { c } \text { Beginning } \\\text { Balance }\end{array} & \begin{array} { c } \text { Erding } \\\text { Balance }\end{array} \\\hline \text { Wages Payable } & \$ 100,000 & \$ 25,500 \\\hline\end{array}$

Explain the purpose and format of the statement of cash flows. Also, describe its use to decision makers.

The direct method of reporting operating cash flows:

Assume the following information was available for the current year's operations of the shoe company founded by Blake Mycoskie, TOMS. Use these data to calculate the cash paid for merchandise. $\begin{array}{|l|r|}\hline \text { Cost of goods sold } & \$ 226,000 \\\hline \text { Merchandise inventory, January 1 } & 54,800 \\\hline \text { Merchandise inventory, December 31 } & 57,400 \\\hline \text { Accounts payable, January 1 } & 54,400 \\\hline \text { Accounts payable, December 31 } & 59,800\\\hline\end{array}$

A company reported operating cash flows of $23,400 in 2012 and $26,220 in 2013. The average total assets for the company in 2012 was $262,000 and $285,000 in 2013. Calculate the cash flow on total assets ratio for both years. Comment on the results.

The cash flow on total assets ratio reflects the company's actual cash flows and, therefore, is affected by the accounting constraints of recognition and measurement for net income.

Information to prepare the statement of cash flows usually comes from three sources: (1) __________________________, (2) _______________________ and (3) ____________________.

When preparing the operating section of the statement of cash flows using the indirect method, a decrease in accounts receivable is subtracted from net income.