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Exam 12: Statement Cash Flows

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Question 21

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Which of the following would be included in calculating net cash flows from investing activities?

A) Cash proceeds from sales.
B) Cash received from an issuance of bonds.
C) Dividends paid to shareholders.
D) Cash used for purchases of equipment.

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Question 22

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Your company owned equipment with a book value of $120,000 that was sold during this accounting period for $30,500 in cash,and purchased new equipment for $148,000.Your company would record:

A) a credit of $30,500 and a debit of $148,000 to the cash account for a net cash outflow of $117,500.
B) a debit of $148,000 and a credit of $89,500 to the cash account for a net cash outflow of $58,500.
C) a debit of $30,500 and a credit of $148,000 to the cash account for a net cash outflow of $117,500.
D) a debit of $89,500 and a credit of $148,000 to the cash account for a net cash outflow of $58,500.

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Question 23

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Match the term and the definition.Not all definitions will be used. _____ Operating activities _____ Indirect method _____ Capital acquisitions ratio _____ Cash equivalent _____ Investing activities _____ Quality of income ratio _____ Direct method _____ Financing activities A.Measures the percent of net income that comes from high-margin products. B.Includes such events as the receipt of dividends and interest on investment assets. C.Includes assets that are very liquid and have original maturities of three months or less. D.The percent of total debt represented by a company's cash account. E.These activities include only purchases made with borrowed funds. F.Where cash flows from operating activities are calculated by converting each revenue and expense item from an accrual to a cash basis. G.This ratio multiplies net income by the average rate of interest the company receives on its investments. H.This ratio uses net income instead of operating cash flow to analyze a company's ability to finance the cost of its debt. I.Measures the ability of a company to finance its interest payments with its operating cash flow before taxes and interest. J.Measures the extent to which net income is in sync with operating cash flows. K.These activities include money lent by a company as well as money borrowed by a company. L.Measures the degree to which the purchases of property,plant,and equipment are funded by operating activities. M.The purchases and sales of investment assets. N.Measures the proportion of property,plant,and equipment a company replaces in an accounting period. O.These activities include changes in a company's debt or its shareholders' equity accounts. P.Where cash flows from operating activities are calculated by making adjustments to net income.

Which of the following ratios should you use if you want to assess whether a company's operating cash flows are sufficient to pay for PPE purchases?

Changes in all current assets are used in determining net cash flows from operating activities. BT: Comprehension

$\begin{array}{lrlr}\text { Sales revenue } & \$ 909,272 & \text { Amortization expense } & \$ 3,206 \\\text { Cost of goods sold } & 445,563 & \text { Selling. general and administrative } & 91,316\\&&\text { expenses }\\\text { Interest expense } & 12,402 & \text { Income tax expense } & 143,126 \\\text { Accounts receivable 12/31/06 } & 65,305 & \text { Accounts receivable } 12 / 31 / 07 & 67,810 \\\text { Accounts payable 12/31/06 } & 16,540 & \text { Accounts payable } 12 / 31 / 07 & 17,261\\\text { Prepaid expenses 12/31/06 } & 4,107 & \text { Prepaid expenses 12/31/07 } & 3,875 \\\text { Inventory } 12 / 31 / 06 & 7,852 & \text { Inventory } 12 / 31 / 07 & 6,491\end{array}$ -Use the information provided above to calculate the net cash flow from operating activities in 2007 using the direct method.

Indirect method is more detailed as it shows the operating cash receipts and cash payments and is thus more time-consuming and costly. BT: Knowledge

The statement of cash flows of Aqua Company for the current year includes the following information: The company's income statement for the current year is as follows: The balance sheet reports that the beginning balances in interest payable and income taxes payable were the same as their respective ending balances.Use the financial information above to calculate and interpret the: a.Capital Acquisitions Ratio, b.Quality of Income Ratio. $\begin{array}{lr}\text { Net Income } & \$ 77,125 \\\text { Adjustments } & \\\text { Add amortization } & 6,585 \\\text { Add the decrease in accounts receivable } & 4,860 \\\text { Add the decrease in inventory } & (667) \\\text { Subtract the increase in prepaid expenses } & (1,202) \\\text { Subtract the decrease in accounts payable } & \$ 87,085\\\\\text { Cash provided by sale of property, plant, and equipment }&\$ 1,165 \\\text { Cash provided by sale of short-term investments } & 1,393\\\text { Cash used for purchases of property, plant, and equipment }&(8,950) \\\text { Cash used for purchases of short-term investments }&(778)\\\text { Net cash used by investing activities }&(\$7,170)\end{array}$ $\begin{array} { l r } \text { Sales revenue } & \$ 159,131 \\\text { Cost of goods sold } & 60,360 \\\text { Gross profit } & 98,771 \\\text { Selling, general and administrative expenses } & 8,800 \\\text { Amortization } & 6,585 \\\text { Total operating expenses } & 15,385 \\\text { Operating income } & 83,386 \\\text { Interest expense } & 2,847 \\\text { Net income before taxes } & 80,539 \\\text { Income tax expense } & 3,414 \\\text { Net income } & \$ 77,125\end{array}$

The capital acquisitions ratio is often calculated as an average over a number of years for better comparison between companies in the same industry. BT: Knowledge

When the direct method is used to determine the net cash flow from operating activities,if accounts receivable increase over the accounting period,the change in accounts receivable is:

A company has net income of $43,560 with a net cash flow from operations of $91,476 and a net change in cash of $84,942.The company spent $72,600 on property,plant,and equipment during the year.The company's capital acquisitions ratio is: approximately:

Which of the following would be used to determine the ability of a company to pay dividends and interest on borrowings?

Cash transactions relating to the purchase and sale of which types of assets affect a company's cash flows from investing activities?

When the direct method is used,each revenue and expense account on the income statement is individually adjusted to calculate net cash flow from operating activities. BT: Comprehension

When the indirect method is used,changes in current liabilities are subtracted while changes in current assets are added to convert net income to net cash flow from operating activities. BT: Comprehension

Two years ago,your company bought $40,000 in bonds from another company.This month,it sold half of those bonds for $20,640 and lent $1,000 to an employee with a promissory note.On the statement of cash flows for this accounting period,your company would report a net cash:

Brighton,Inc.,uses the indirect method to determine its net cash flow from operating activities.During the course of the year,Brighton,Inc.'s accounts receivable increased by $10,000 and its accounts payable decreased by $5,000.As a result of these two items,the calculation of cash flow from operations will be:

A toy store with a calendar year-end is likely to have:

The calculation of the capital acquisitions ratio uses the cash expenditures for property,plant,and equipment that are reported in the financing activities section of the Statement of Cash Flows. BT: Knowledge

Match the term and the definition.Not all definitions will be used. _____ Cash inflow _____ Property,plant,and equipment _____ Comparative balance sheet _____ Free cash flow _____ Noncash investing and financing activities _____ Net income _____ Statement of cash flows _____ Cash outflow _____ Amortization add back A.A financial statement that tracks the flow of cash into and out of a company according to the three types of activities that generate the flows. B.Cash flows in excess of net income. C.These are reported in a supplement or in the notes section rather than within the body of the statement of cash flows. D.A balance sheet that shows the financial results of several companies in an industry; it is used to calculate the quality of income ratio. E.Results from activities such as sales of goods and assets,receipt of dividends and interest. F.Cash a company receives that is not subject to income tax. G.Purchases and sales of this are classified as investing activities. H.Is the starting point for calculating operating cash flows with the direct method. I.Positive net cash flows in excess of property,plant,and equipment replacement and dividends. J.The percent of a company's net cash flow that comes from investing and financing activities. K.An adjustment made when using the indirect method of calculating cash flows from operating activities. L.Is the starting point for calculating operating cash flows with the indirect method. M.Purchases and sales of this are classified as operating activities. N.A balance sheet that shows the starting and ending balance of the different accounts; it is used to calculate the net cash flow from operating activities. O.Results from activities such as purchases of goods and assets,payment of debt,dividends and taxes.