Exam 7: Cash Flow Analysis

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

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

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

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.

Schwerin Corporation reports the following on its 2005 financial statements. Gross P, P \& E \ 550 Accumulated depreciation \ 400 \ 380 Net P, P \& E \ 300 \ 270 From statement of cash flows: Cash proceeds from sale of equipment \ 100 Cash outflow for purchase of equipment \ 170 Depreciation \ 50 Gain from sale of equipment \ 40 -The net book value of equipment sold was:

An increase in assets would usually show as an outflow in the statement of cash flows.

GAAP requires that the Statement of Cash Flows (SCFs) is prepared in a specific manner. For the following items, discuss in which section (operating, investing or financing) of the SCFs they are found, where they might more appropriately be placed and why. a. dividends received b. interest paid c. income taxes

Cash flow from financing is normally negative during the start-up phase for a company.

Amortization of goodwill reduces net income and is a cash outflow.

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: Accounts Receivable Inventory \ 400 \ 380 Accounts Payable \ 250 \ 290 -An increase in accounts payable would be considered:

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

The following information should be used according to the provisions of SFAS 95 (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 operations?

An increase in a liability is a use of 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 in accordance with SFAS 95 b. Discuss, from an analyst's viewpoint, the purpose of classifying cash flows into the categories required by SFAS 95

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?

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

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

The following information should be used according to the provisions of SFAS 95 (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?

What is change in cash?

What is net cash flow from investing?