Exam 7: Cash Flow Analysis

Hupta Corporation reports for the year ended December 31, 2005, sales of $9,430 and cost of goods sold of $6,500. Other information as of December 31 is as follows: 2004 2005 Accounts receivable \ 500 \ 550 Inventory \ 400 \ 380 Accounts payable \ 250 \ 290 -Cash paid to suppliers for year ended December 31, 2005, is:

Beginning accounts receivable are $76,000. Sales for the period total $384,000, of which $40,000 was directly for cash. $418,000 was collected from making sales and collecting accounts receivable. What is the ending balance for accounts receivable?

In firms that are experiencing tremendous growth, it is rare that net income will exceed cash generated by all activities.

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct. $\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000)\\&\$53,000\\\\ \text { Cash from investing activities } &\\ \text { Purchase of marketable securities} &(\$48,000)\\ \text {Dividends paid } &(\$46,5000)\\\\\text { Cash from financing activities } & \\\text { Increase in short-term debt } & \$(500) \\\text { Increase in long-term debt } & (2,500) \\& \$(3,000) \\\text { Increase in cash } & \$ 3,500\end{array}\end{array}$ -The correct cash flows from financing activities is:

Taxes paid on capital gains from the sale of marketable securities are recorded as cash outflows from operations.

The cash adequacy ratio is normally measured over an extended period of time to remove the effect of random disturbances.

Which of the following represents an investing activity in the statement of cash flows?

Which of the following is true of depreciation?

Beginning and ending plant assets are $325,000 and $370,000 respectively. Beginning and ending accumulated depreciation are $82,800 and $95,000 respectively. Depreciation expense for the period was $30,000, and new assets of $76,000 were purchased. Plant assets were sold at a $10,500 loss. What were the cash proceeds from the sale?

The cash flow adequacy ratio:

a. Is it possible to have a positive net income and negative cash flow from operations? If your answer is no, explain fully. If your answer is yes, provide two examples when one might find this. b. Is it possible to have a negative net income and positive cash flow from operations? If your answer is no, explain fully. If your answer is yes, provide two examples when one might find this.

Below is the income statement and balance sheet of Closely Held Corporation. From this information prepare a statement of cash flows for the year ended September 30, 2005. $\text {Income Statement for year ended September 30 , (in thousands)}$ 2004 2005 Revenues \ 500,000 \ 512,000 Cost of sales (395,000) (404,480) Gross margin 105,000 107,520 Selling and administrative (60,000) (61,440) Income before interest and taxes 45,000 46,080 Interest expense (9,900) (12,320) Income before income taxes 35,100 33,760 Income tax (12,812) (12,322) Net income \ 22,288 \ 21,438

Practice requires separate disclosure of cash flows in the statement of cash flows.

Cash flow from operations is usually less volatile than net income.

Which of the following would require an adjustment in the computation of cash flow from operations using the indirect method? I. Sale of machinery for $50,000 with a net book value of $35,000 II. Purchase of supplies for cash III. Remittance by customer in payment of goods purchased this accounting period IV. Acquisition of land with simultaneous issuance of long-term note

The management of a company wishes to window-dress its cash flow from operations. Which of the following will improve cash flow from operations? I. Factoring accounts receivable II. Paying suppliers more quickly III. Selling of some excess marketable securities IV. Deferring payment of taxes

The following information should be used to according to the provisions of GAAP (Statement of Cash flows) and using the following data. Net income \ 50,000 Provision for bad debts 2,000 Increase in inventory 1,000 Increase in accounts payable 2,000 Purchase of new equipment 15,000 Sale of equipment for \ 10,000 gain 20,000 Depreciation expense 5,000 Repurchase of common stock 10,000 Payment of dividend 4,000 Interest payment 3,000 -What is net cash flow from investing?

The following information should be used to according to the provisions of GAAP (Statement of Cash flows) and using the following data. Net income \ 50,000 Provision for bad debts 2,000 Increase in inventory 1,000 Increase in accounts payable 2,000 Purchase of new equipment 15,000 Sale of equipment for \ 10,000 gain 20,000 Depreciation expense 5,000 Repurchase of common stock 10,000 Payment of dividend 4,000 Interest payment 3,000 -What is net cash flow from operations?

Companies can construct the statement of cash flows using either the direct method or the indirect method.

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct. $\begin{array}{l}\text { Cash from operating activities }\\\begin{array}{lr}\text { Net income } & \$ 60,000 \\\text { Depreciation } & (4,000) \\\text { Increase in accounts receivable } & (2,000) \\\text { Increase in deferred tax liability } & (1,000)\\&\$53,000\\\\ \text { Cash from investing activities } &\\ \text { Purchase of marketable securities} &(\$48,000)\\ \text {Dividends paid } &(\$46,5000)\\\\\text { Cash from financing activities } & \\\text { Increase in short-term debt } & \$(500) \\\text { Increase in long-term debt } & (2,500) \\& \$(3,000) \\\text { Increase in cash } & \$ 3,500\end{array}\end{array}$ -The correct change in cash for the year is: