Ch 17 - The Cash Flow Statement

Question 1

Operating Activities

Answer 1

Include the cash effects of transactions that create revenues and expenses. ie sales leading to profit

Question 2

Investing avtivities

Answer 2

Non current asset accounts. Include:

• Buying and selling of long-lived assets
• Buying and selling of long-term debt or equity investments
• Lending money and collecting loans

Question 3

Financing activities

Answer 3

Non-current liability and shareholder’s equity accounts and include:

• obtaining cash from issuing debt and repaying the amounts borrowed
• obtaining cash from shareholders
• paying shareholders dividends

Question 4

How is the reporting of interest and dividends different for IFRS and ASPE?

Answer 4

IFRS - can be classified as either an operating activity or an investing activity. (received and paid)
ASPE must classify interest (received and paid) and dividends received as operating activities. Dividends paid are classified as financing activities.

Question 5

Where are non cash activities reported?

Answer 5

Anything not effecting cash is reported in a note to the financial statements

Question 6

Indirect:

What is the first step for the statement?

Answer 6

Operating activities - adjust profit to a cash basis.

Question 7

Indirect - what adjustments are made to the profit to figure out net cash provided/used?

Answer 7

• Add back non-cash expenses, ie depreciation expense and amortization expense
• deduct gains and add losses that resulted from investing and financing activities
• analyze changes to non-cash current asset and current liability accounts

Question 8

When selling long-lived assets like equipment, where is the gain/loss recorded? What about actual cash amount received?

Answer 8

Gain/loss is deducted/added from profit to determine net cash used by operating activities.

The actual amount of cash received is reported in the investing activities section of the cash flow statement.
Not operating since it is not a normal day to day thing.

Question 9

Accounts receivable (indirect) how do you calculate a change in it?

Answer 9

If accounts receivable increase, deduct the increase from the profit in the operating section.
If AR decreases, add the decrease to profit

Question 10

How about for inventory changes?

Answer 10

If inventory increases, deduct the increase from profit in the operating section
If Inventory decreases, add the decrease to profit.
When inv. increases, more inventory was purchased during the period than the amount sold.

Question 11

Prepaid expenses?

Answer 11

If prepaid items increase, deduct the increase from profit in operating section.
If prepaid items decrease, add the decrease to profit

Question 12

Accounts payable? How would you calculate cash paid to suppliers for inventory?

Answer 12

If AP increase, add the increase to profit in operating section.
If AP decrease, deduct from profit
Beginning AP balance + inv. purchases - ending AP balance = Cash paid to suppliers for inventory.

Question 13

How to find out Cash paid for goods?

Answer 13

Cost of goods sold +/- change in inventory = cost of goods purchased. + decrease in AP/ - increase in AP = cash paid to suppliers

Question 14

Income tax payable effect on the cash flow statement?

Answer 14

If Income tax payable increases, add the increase to profit in the operating section.
If ITP decreases, deduct from profit

Question 15

Prepare operating activities section of the Cash flow statement using the indirect method:
2017 2016 Increase (dec)
Current assets
Cash $54,000 $37,000 $17,000
AR 68,000 26,000 42,000
Inventory 54,000 10,000 44,000
Prepaid exp 4000 6000 (2000)
Current liabilities
AP 23,000 50,000 (27,000)
Accrued exp payable 10,000 0 10,000
\
Income Statement
Sales revenue 890,000
Cost of goods sold 465,000
Gross profit
Operating expenses 188,000
Depreciation expenses 33,000
Loss on sale of equipment 2000 223,000
Profit from operations 202,000_
Other expenses
Interest expense 12,000_
Profit before income tax 190,000
Income tax expense 65,000_
Profit $125,000

Answer 15

Statement of Cash flow
Operating Activities
Profit $125,000
Adjustments to reconcile profit to net cash
provided (used) by operating activities:
Depreciation expense $33,000
Loss on sale of equipment 2,000
Increase in accounts receivable (42,000)
Increase in inventory (44,000)
Decrease in prepaid expenses 2,000
Decrease in accounts payable (27,000)
Increase in accrued exp pay 10,000_ (66,000)
Net cash provided by operating activities $59,000

Question 16

What is the only section that changes between direct and indirect method?

Answer 16

Operating section. Everything else is the same process.

Question 17

Indirect - Summary of conversion to net cash provided (used) by operating activities
Add/Deduct
noncash expenses Depreciation expense (a)
Amortization expense (b)
Gains/losses Gain on sale of asset (c)
Loss on sale of asset (d)
Changes in noncash current asset and current liability
accounts Increase in current asset account (e)
Decrease in current asset account (f)
Increase in current liability account (g)
Decrease in current liability account (h)

Answer 17

A) add
B) Add

C) Deduct
D) Add

E) Deduct
F) Add
G) Add
H) Deduct

Question 18

For sale of equipment, what is reported in the investing section?

Answer 18

Cash proceeds. Not cost of equipment sold.

Question 19

How would you calculate purchases of equipment if you did not have the information available?

ie Equipment balance 2016 was $10,000
balance 2017 was 27,000.
Sold 8,000 of equipment.

Answer 19

Change in account was +17,000
Equipment
Opening balance 10,000
Cost of assets purchases (x) 8,000 cost of E sold
___________________________
Ending balance 27,000

$10,000 + cost of purchase (x) - 8000 = $27,000
(x) = 25,000

Question 20

How would you calculate the accumulated depreciation for equipment if it wasn’t provided?

Answer 20

accumulated depreciation
Opening balance
- acc. dep on asset sold + depreciation expense
or disposed of (x)
Ending balance

Question 21

Do a partial Statement for Investing activities.
2017 2016
Land 130,000 20,000
Building $160,000 40,000
Accumulated dep - building
(11,000) (5,000)
Equipment 27,000 10,000
Ac. Dep equip (3000) (1000)

• Land was purchased by issuing long-term bonds
• Equipment costing $25,000 was purchased for cash
• Equipment with a carrying amount of $7000 (cost of $8000, less accumulated dep of 1000 was sold for $4000 cash)
• Depreciation expense consists of $6000 for the building and 3000 for equipment

Answer 21

Investing activities
Purchase of building $(120,000)
Purchase of equipment (25,000)
Sale of equipment 4,000*
Net cash used by investing activities (141,000)

*10,000 + 25,000 - 8000 = 27,000. Since it was sold for 4000 cash that’s what is reported.

Cash 4000
Accum dep - equip 1000
Loss on sale of equip 3,000
Equip 8000

Question 22

Step 3 - financing activities. Do finance section:

Liabilities and shareholders equity
Non-Current liabilities 2017 2016
Bonds payable 130,000 20,000
Shareholder equity
Common shares 70,000 50,000
Retained earnings 164,000 48,000

Profit for the year was $145,000
A $29,000 cash dividend was paid

Answer 22

Bonds payable inc $110,000 (from buying land).
Common shares account in 20,000. assumed for cash.
RE inc by 116,000.

                               RE
                                      48,000 opening balance - (x) declared dividends   + 145,000 profit
                                      164,000 ending balance

x = 29,000 = dividends declared. To find out how much was paid:
Dividends declared +decrease in dividends payable
- increase in dividends payable
29,000 dividend was paid which = amount declared.

Financing activities
Issue of common shares 20,000
Payment of cash dividend (29,000)
Net cash used by financing activities $(9000)

Question 23

Western corp reported an opening balance of $146,000 and an ending balance of $135,000 in its equipment account and an opening balance of $47,000 and an ending balance of $62,000 in its Accumulated depreciation - equipment account. During the year it sold equipment for with a cost of $21,000 for cash with a gain of $1000 on the sale. It also purchased equipment for cash. It recorded depreciation expense of 31,000. (a) calculate the cash received from the sale of the equipment (b) the cash paid for equipment

Answer 23

Accumulated dep - equipment
47,000 opening balance
(x) sale of equip +31,000 depreciation expense
62,000 ending balance
(x) = 16,000 = the accumulated depreciation of equipment sold

Original cost of equip 21,000
Less: accumulated dep (16,000)
Carrying amount 5,000
Cash proceeds (xx)
Gain of sale of equipment $1000
xx = 6,000

B)              Equipment
146,000 opening balance
\+ equipment purchased (x)    - 21,000 equip sold
135,000 closing balance
(x) = $10,000

Question 24

How do you calculate the net increase in cash?

If you add this with the cash at the beginning of the year, what should this number match?

Answer 24

Net cash provided by operating activities $172,000
Net cash provided by investing activities (141,000)
Net cash provided by financing activities (9000)
Net increase in cash 22,000

Should equal the cash account balance in the year end balance sheet.
Net increase + Cash from previous year (beg year) = the 2017 year balance.

Question 25

Select info for Reynolds Inc at Dec 31. Prepare a cash flow statement using the indirect method.
2017 2016 Inc/Dec
Cash $54,000 $37,000 $17,000
Property, Plant, Equip
Land 45,000 70,000 (25,000)
Buildings 200,000 200,000 0
Accum dep - build (21,000) (11,000) 10,000
Equipment 193,000 68,000 125,000
Acc dep - equip (28,000) (10,000) 18,000
Long-term liabilities and shareholders equity
Bonds payable 110,000 150,000 (40,000)
Common shares 220,000 60,000 160,000
Retained earnings 206,000 136,000 70,000

Additional info:

• cash provided from operating activities was $59,000
• equip was bough for cash. Equip with a cost of $41,000 and a carrying amount of $36,000 was sold at a loss of 2000.
• bonds of 40,000 were redeemed at their face value for cash
• profit was $125,000 and a cash dividend was paid

Answer 25

REYNOLDS INC
Cash flow statement
Year ended Dec 31, 2017
Operating activities
Net cash provided by op act $59,000
Investing activities
Sale of land $25,000
Sale of equipment 1 34,000
Purchase of equipment 2 (166,000)
Net cash used by investing activities (107,000)
Financing activities
Redemption of bonds (40,000)
Issue of common shares 160,000
Payment of dividends 3 (55,000)
Net cash used by financing activities 65,000
Net increase in cash 17,000
Cash, January 1 37,000
Cash, December 31 $54,000

1) Sale of equip: $36,000 (carrying amount) – 2000 loss = 34,000
2) purchase of equip: $68,000 (opening bal) - $41,000 (equip sold) – 193,000 (ending balance) = $166,000.
3) Payment of dividends: $136,000 (RE opening) + $125,000 (profit) - $206,000 (RE ending) = $55,000 (dividends)

Question 26

DIRECT Method - how is net cash provided (used) by operating activities calculated?

Answer 26

By adjusting each individual revenue and expense item

Question 27

1st calculate cash receipts from customers.

Sales revenue = $507,000
AR beginning of year was 30,000; end of year 20,000

Answer 27

30,000 + 507,000 - 20,000

= 517,000 Cash receipts from customers

Question 28

Cost of goods sold was $150,000.
Beg inventory was 10,000 and ending 15,000.
Beg Accounts payable was 12,000 and ending 28,000
How would you calculate how much was paid to suppliers?

Answer 28

$10,000 - $150,000 - $150000
= $155,000 was purchased in inventory.

AP $12,000 + 155,000 - 28,000
= $139,00 = payment to suppliers

Cost of + increase in inv. + decrease in AP
Goods - decrease in inv. - increase in AP
Sold

Question 29

How to calculate for cash payments for operating expenses?

Answer 29

Operating expenses + increase in prepaid expenses
- decrease in prepaid expenses
+decrease in accrued expenses payable
- increase in accrued expenses payable

Question 30

How is depreciation expense calculated for direct method? Also true for?

Answer 30

Not shown for direct method because it is a noncash charge. Also true for amortization of intangible assets, depletion expense, and bad debt expenses.

Question 31

Calculation for cash payments for income taxes?

Answer 31

Income tax expense + decrease in Income tax payable

- increase in income tax payable

Question 32

Calculate the operating activities section using the direct method:
2017 2016 Inc/dec
Current assets
Cash $54,000 $37,000 $17,000
Acc Rec 68,000 26,000 42,000
Inv 54,000 10,000 44,000
Prepaid exp 4000 6000 (2000)
Current liabilities
Acc pay 23,000 50,000 (27,000)
Accrued exp pay 10,000 0 10,000

Sales revenue 890,000
Cost of goods sold 465,000
Gross profit = 425,000
Operating expenses 188,000
Depreciation expense 33,000
Loss on sale of equip 2,000
Profit from operations = 202,000
Other expenses
Interest expense 12,000
Profit before income tax = 190,000
Income tax expense 65,000
Profit = $125,000

Answer 32

Operating activities
Cash receipt from customers 1 $848,000
Cash payments
To suppliers 2 (536,000)
For operating expenses 3 (176,000)
For interest (12,000)
For income tax (65,000) (789,000)
Net cash provided by operating
activities 59,000

1) 890,000 (Sales rev) - 42,000 (AR) = 848,000
2) 465,000 (COGS) + 44,000 (inv) + 27,000 (AP)
3) 188,000 (op ex) - 2000 (equip loss) - 10,000 (acc exp pay)

Question 33

Free cash flow is what

Answer 33

How much cash is available to expand, repay debt, pay dividends, etc.

Cash used by operating activities - cash used by investing activities = free cash flow.

Question 34

Which of the following is an example of a cash flow from an operating activity?
A) A payment of cash for income tax
B) A receipt of cash from the sale of common shares
C) A payment of cash for the purchase of equipment used in operations
D) A receipt of cash from the issue of a mortgage payable

Answer 34

A)

Question 35

A company had profit of $215,000. Depreciation expense is $27,000. During the year, accounts receivable increased by $25,000. Accounts payable decreased by $2000. Net cash provided by operating activities is
A) 213,000 B) 215,000 C) 267,000 D) 265,000

Answer 35

B)

Question 36

Retained earnings were $197,000 at the beginning of the year and $386,500 at the end of the year. Profit was $200,000. Dividends payable were $2000 at the beginning of the year and $2500 at end of year. What amount should be reported in the financial activities section for dividend payments?
A) 500 B) 10,000 C) 10,500 D) 11,000

Answer 36

B) 10,000
386,500 - 200,000 - 197,000 = 10,500 (dividends declared)
10,500 - 500 (increase in payable) = 10,000

Question 37

The beginning balance in AR is $44000. Ending is 42,000. Sales were 149,000. Cash receipts from customers are:
A) 151,000 B) 149,000 C) 147,000 D) 107,000

Answer 37

149,000 + 2000 (inc in AR)

A) 151,000