Exam 7: Cash Flow Analysis

On a statement of cash flows that uses the indirect approach, calculation of cash flow from operations treats depreciation as an adjustment to reported net income because:

The financing section of the statement of cash flows (prepared in accordance with GAAP) contains all cash inflows and cash outflows, relating to the financing of a company.

Depreciation expense decreases net income, but is not a use of cash.

Over an extended period of time average cash flow from operations would be expected to be higher than average net income.

Which of the following would be considered a use of cash?

Identify whether each of the following is an operating, investing, or financing cash outflow or inflow or if it is a noncash flow, under GAAP. Purchase marketable equity securities Dividends on marketable equity securities Wages to employees Depreciation Issuance of new stock Interest paid Goodwill amortization Acquisition of company using purchase accounting Sale of land Tax paid on sale of land Cash paid by customers

Schwerin Corporation reports the following on its 2005 financial statements. 2004 2005 From statement of cash flows: Cash proceeds from sale of equipment \ 100 million Cash outflow for purchase of equipment 170 million Depreciation 50 million Gain from sale of equipment 40 million -The net book value of equipment sold was:

JEM Company's comparative balance sheets for 2004 and 2005 appear below. JEM Company Comparative Balance Sheets December 31, 2001 and 2005 Assets Cash and cash equivalents \ 30,500 \ 10,000 Accounts receivable (net) 64,500 51,000 Inventory 100,000 115,000 Equipment 55,000 30,000 Accumulated depreciation-equipment Total assets \ 228,500 \ 192,000 Accounts payable \ 52,500 \ 46,000 Long-term notes payable 70,000 50,000 Capital stock 60,000 60,000 Retained earnings Total liabilities and stockholder' equity \ 228,500 \ 192,000 The following additional information is available: net income for the year 2005 (as reported on the income statement) was $50,000; dividends of $40,000 were declared and paid; and equipment that cost $8,000 and had a book value of $1,000 was sold during the year for $2,500. Based on the information provided, answer the following: a. What was cash provided by operations? b. What was cash provided by investing activity? c. How much was cash provided by financing activity? d. What is the total change in cash for 2005?

An increase in accounts receivable does not require adjusting net income, if preparing the statement of cash flows using the indirect method.

The following information should be used according to the provisions of GAAP (Statement of Cash flows) and using the following data. Net income \ 80,000 Amortization of goodwill 2,000 Decrease in accounts receivable 2,000 Increase in inventory 3,000 Purchase of marketable securities 13,000 Sale of land for \ 10,000 gain 11,000 Depreciation expense 4,000 Repayment of debt 8,000 Payment of dividend 3,000 Interest payment 2,000 -What is change in cash?

The following cash flow data of Signet Sales for the year ended December 31, 2005 are as follows: Cash payment of dividends \ 70,000 Purchase of land 28,000 Cash payments for interest 20,000 Cash payments for salaries 90,000 Sale of equipment 76,000 Retirement of common stock 50,000 Purchase of equipment 60,000 Cash payment to suppliers 170,000 Cash collection from customers 500,000 Cash at beginning of year 100,000 a. Prepare a statement of cash flows for Signet Sales in accordance using the direct method. b. Discuss, from an analyst's viewpoint, the purpose of classifying cash flows into the categories required by GAAP

Beginning and ending accounts receivable are $76,000 and $42,000, respectively. Sales for the period total $384,000, of which $40,000 was directly for cash. How much cash was collected from making sales and collecting accounts receivable?

Firms report payments for capital leases in the cash flow statement:

Interest income is recorded as an operating inflow of cash.

The following information should be used according to the provisions of GAAP (Statement of Cash flows) and using the following data. Net income \ 80,000 Amortization of goodwill 2,000 Decrease in accounts receivable 2,000 Increase in inventory 3,000 Purchase of marketable securities 13,000 Sale of land for \ 10,000 gain 11,000 Depreciation expense 4,000 Repayment of debt 8,000 Payment of dividend 3,000 Interest payment 2,000 -What is net cash flow from financing?

The following information is given for Building Inc.: As of 12/31 2005 2004 PPE \ 570,000 \ 530,000 Accumulated depreciation 102,000 92,000 Depreciation expense 30,000 32,000 During 2005 new assets were purchased for of $78,000, and plant assets were sold at a $10,000 loss. -What were the cash proceeds from the sale?

A decrease in liabilities would usually show as an outflow in the statement of cash flows.

Under the accrual basis of accounting, which of the following statements is true? I. Reported net income provides a measure of operating performance. II. Revenue is recognized when cash is received, and expenses are recognized when payment is made. III. Cash inflows are recognized when they are received, and cash outflows are recognized when they are made.

Use the following selected data about Tiles Ltd. and prepare the operating activities section of a statement of cash flows for the company for 2005 using the indirect method. Accounts receivable \ 36,000 \ 42,000 Inventories 28,000 25,000 Accounts payable 31,000 35,000 Salaries payable 2,000 1,000 Equipment 60,000 40,000 Accumulated depreciation 12,000 16,000 Bonds payable 50,000 100,000 Common stock 150,000 100,000 Retained earnings 38,000 20,000 Net sales \ 420,000 Cost of goods sold 300,000 Operating expenses (excluding depreciation expense) 84,000 Net income 30,000 Gain on sale of equipment (included in net income above) 2,000

Users sometimes compute net income plus depreciation and amortization (for example EBITDA) as a crude proxy for operating cash flows.