Exam 12: The Statement of Cash Flows

Where would you tell someone to find the information needed to compute the cash flow adequacy ratio?

The accrual-based income statement is considered to be a good indicator of current cash inflows and outflows.

A friend of yours says: "Its easy to look at the statement of cash flows and see that a company has been profitable,because positive cash flows are equal to profitability." Is your friend right? Explain.

Depreciation is a noncash expense that is added back to net income in determining cash provided from operating activities under the indirect method.

Use the selected data from the consolidated statements of cash flows for College Corporation for the years ended December 31,2018 and 2017,to answer the questions that follow. $\begin{array}{lrr}\text { (in thousands)}&\underline{2018}&\underline{2017}\\\text { Operating Activities:}\\\text { Net income}&\$ 6,328 & \$ 6,093 \\ \text { Adjustments to reconcile net income to net cash provided by}\\\text { operating activities:}\\\text { Depreci ation } & 4,475 & 4,018 \\\text { Amortization of so ftware } & 517 & 983 \\\text { Effect of restructuring charges } & (355) & (445) \\\text { Deferred income taxes } & (606) & 358 \\\text { Gain on the disposal of fixed assets and other assets } & (261) & (273) \\\text { Changes in assets and liabilities (net of businesses acquired) } & &\\\text { Accounts receivable } & (2,736) & (3,727) \\\text { Inventories } & 73 & 432 \\\text { Other assets } & 880 & (1,087) \\\text { Accounts payable and accrued li abilities } & 362 & 699 \\\text { Other liabilities } & \underline{596} & \underline{1,814} \\\text { Net cash provided by operating activities } & \underline{9,273} & \underline{\$ 8,865} \\\text { Net cash used by investing activities } & \underline{ \$(6,131) }&\underline{ \$(6,155)} \\\text { Net cash provided by financing activities } & \$(4,993) & \$(3,090) \\\text { Cash and cash equival ents at end of year } & \underline{\$ 5,375 }&\underline{ \$ 7,106 }\\\end{array}$ - Required (A)What is the significance of the positive amounts shown above,for both years,for accounts payable and accrued liabilities? (B)At the end of each year,College's cash balance was approximately $5 to $7 million.What does this indicate about College's cash management techniques?

Washington Corp.reported the following information for 2017 and 2018: Accounts receivable Prepaid expenses \ 101,000 \ 93,000 Accounts payable 5,000 6,000 Salaries payable 71,000 76,000 Net income 5,000 4,000 Depreciation expense 80,000 Gain on sale of equipment 9,000 5,000 If Washington uses the indirect method to prepare the Operating Activities section of the statement of cash flows,what amount will be reported as net cash inflow from operating activities for 2018?

Issuance of stock results in cash inflows that appear in the Financing section of the statement of cash flows.

When using the direct method,how is depreciation expense recorded on the statement of cash flows?

Because the cash received from the sale of long-term assets is reported in the Investing Activities section of the statement of cash flows,any gain or loss is built into the cash received under the direct method.

A company generated $1,830,000 from its operating activities and spent $1,200,000 on additions to its plant and equipment during the year.The total amount of debt that matures in the next five years is $900,000.Compute the company's cash flow adequacy ratio for the year.

__________ are items that are readily convertible into a known amount of cash and have an original maturity to the investor of three months or less.

A decrease in retained earnings represents dividends that were __________ during the period,not necessarily those that were paid.

Eastern Corp. Use the following selected data and additional information from the records of Eastern Corp.to answer the questions that follow. ​ ​ Bal ance Sheet Data 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 eamings 38,000 20,000 ​ Additional information: Income Statement Data 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 ​ (1) Equipment with a cost of $\$ 15,000$ and a book value of $\$ 3,000$ was sold for $\$ 5,000$ during 2018 . (2) Common stock was issued to retire bonds payable during 2018 . (3) The only items affecting retained eamings in 2018 were net income and dividends declared and paid. ​ -Review the data for Eastern Corp. ​ Required (A)What amount was paid to retire bonds payable during 2018? (B)How would the transaction to retire bonds by issuing common stock be reported on the statement of cash flows for 2018 for Eastern Corp.?

Which of the following operating activities results in a cash outflow?

Use the equation presented below to answer the question that follows: Cash = CL + LTL + CS + RE - NCCA - LTA where: CL = Current li abilities LTL = Long-term liabilities CS = Common stock RE = Retained earnings NCCA = Noncash current assets LTA = Long-term assets - Which of the following activities results in a cash inflow?

Iowa Industries Inc. Selected data from the financial statements of Iowa Industries Inc.for the years ended December 31,2018 and 2017,are presented below.Also,certain assumptions are presented.Use these data and assumptions to answer the questions that follow. Assumptions: (In millions) Property, pl ant and equipment \ 11,142.3 \ 10,868.4 Accumulated depreciation 3,519.0 3,461.0 Investments 375.1 394.4 Long-term debt 1,440.2 1,242.6 Short-term debt 44.0 45.2 Common stock 594.5 567.2 Treasury - common stock (20.6) (20.6) Reinvested income (retained earnings) 3,522.9 3,425.9 Net income 770.4 712.7 ? (1) Cash additions to property, plant, and equipment during 2018 were $\$ 550.0$ . An additional $\$ 86.2$ of plant assets were acquired through debt in a noncash transaction. Depreciation expense for 2018 was $\$ 343.3$ . Gains on disposals of property, plant, and equipment during 2019 were $\$ 27.7$ . (2) The cash proceeds from the sale of investments in 2018 were $\$ 82.7$ . There was a $\$ 17.8$ gain on the sale of the investments. (3) Proceeds from long-term debt issued during 2018 were $\$ 167.7$ . (4) The issuance of common stock totaled $\$ 28.6$ in 2018 . (5) During $2018 , \$ 389.4$ in cash was used to purchase and retire common stock. A total of $\$ 365.4$ of the cost was recorded as an increase to Reinvested Income. (6) Net income, dividends declared/paid, and the $\$ 365.4$ amount in (5) were the only items that affected reinvested income during 2018. ? -Review the data and assumptions for Iowa Industries Inc. ? Required (A)What was the cost of the property,plant,and equipment that was disposed of during 2018? ? (B)What was the amount of accumulated depreciation on the property,plant,and equipment disposed of during 2018? ? (C)Assuming that the book value of the property,plant,and equipment disposed of during 2018 was $76.9,what were the cash proceeds from the disposal of property,plant,and equipment for 2018?

Under the indirect method,the first line in the Operating Activities section of the statement of cash flows is the net income or loss for the period.

Under certain conditions,an investment in common stock can be considered a cash equivalent.

To be classified as a cash equivalent,an item must be readily convertible to a known amount of cash and have an original maturity to the investor of three months or more.

The basic accounting equation can be restated in terms of cash by the following equation: Cash = current liabilities + long-term liabilities + capital stock - retained earnings - noncash current assets + long-term assets.