HBX- Accounting 5 Flashcards

Question

Money made from the sale of a truck would we included in which cash flow statement section?

Answer 1

Investing.

Answer 2

**Decrease by $1,000** The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The gain itself is a non-cash item. To eliminate this gain, the $1,000 amount should be subtracted from Net Income in the Operating Section of the Statement of Cash Flows. Since the gain would have increased Net Income, this subtraction ensures that the net effect on cash flow from operations is zero.

Answer 3

Increase by $12,000 The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The loss itself is a non-cash item. To eliminate this loss, the $12,000 amount should be added to Net Income in the Operating Section of the Statement of Cash Flows. Since the loss would have decreased Net Income, this addition ensures that the net effect on cash flow from operations is zero.

Answer 4

* **_If an asset account increases_,** it must be that the company acquired an additional asset. Acquisitions of assets generally require a cash payment, so the general inference is that if an asset account increased (for example, inventory was purchased, or more sales were on account), **_then the cash account decreased._** * **_If an asset account decreases**_, it must be that the company sold or disposed of an asset. The sale of assets is generally accompanied by a receipt of cash. So the general inference is that if an asset account decreased (for example, inventory was sold, or accounts receivable was collected), _**then the cash account increased._** * **_If a liability (such as accounts payable) increases_** during the period, it indicates that a benefit was received, such as receiving inventory, before the actual cash was paid out. To adjust for this **_we add that increase to net income_**. Consider this to be similar to spending less cash than we incurred for the related expenses, hence we have saved cash. * **_If a liability decreases_**, it means we paid cash to reduce the liability previously created, so we expensed less than we paid and **_we subtract the difference from net income_**. Consider this to be similar to spending more cash than we incurred for the related expenses. The same rule applies to all operating liability accounts.

Answer 5

The correct answer is: Decrease of $104,205 for Accounts Receivable and increase of $92,348 for Inventory Since Accounts Receivable increased during the year, it means that the cash collected was less than the revenue recognized, so the adjustment is to record a decrease related to Accounts Receivable. Since Inventory decreased it means that the COGS expense recognized was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventory.

Answer 6

The correct answer is: Decrease of $973 for Inventory and decrease of $1,071 for Other Current Assets Since Inventory increased, it means the cash paid for purchasing inventory was more than the COGS expense recognized, so the adjustment is to record a decrease related to Inventory. Since Other Current Assets increased, it means the cash paid to acquire these assets was more than the expenses incurred in the period, so the adjustment is to record a decrease related to Other Current Assets.

Answer 7

Increase of $87 for Accounts Receivable and increase of $172 for Inventory Since Accounts Receivable decreased, it means that the cash collected was more than the revenue recognized, so the adjustment is to record an increase related to Accounts Receivable. Since Inventory decreased it means that COGS expense was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventory.

Answer 8

* An increase in operating current assets is **subtracted** from net income. * A decrease in operating current assets is **added** to net income. * An increase in operating current liabilities is **added** to net income. * A decrease in operating current liabilities is **subtracted** from net income. * \*\*\*IFRS ONLY - Under the IFRS, the under has the option of whether to include interest in the operating OR financing section. Under the indirect method, if the preparer decides not to include interest in the operating section, an adjustment must be made to **remove** it since it’s included in the net income for the period.

Answer 9

Increase of $32,593 for Accounts Payable and increase of $70,977 for Accrued Expenses Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.

Answer 10

Increase of $1,192 for Accounts Payable and increase of $2,442 for Accrued Expenses Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.

Answer 11

Increase of $259 for Accounts Payable and increase of $491 for Other Current Liabilities Since Accounts Payable and Other Current Liabilities increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Other Current Liabilities.

Answer 12

Decrease of $491 for Accounts Payable and decrease of $852 for Accrued Expenses Since Accounts Payable and Accrued Expenses decreased, it means that the cash paid was more than the expense recognized, so the adjustment is to record a decrease related to both Accounts Payable and Accrued Expenses.

Answer 13

The investing section of the statement of cash flows contains cash flows relating to long-lived assets, such as property, plant, and equipment, intangible assets, and financial investments. This includes expenditures, or cash outflows, related to the purchase of long term assets and receipts, or cash inflows, from the sale of long term assets. *For F.C. Barcelona, this could include money spent building stadiums, upgrading dressing rooms, and improving pedestrian and auto access to the stadiums. It also includes the fixed payments for player acquisitions that we mentioned earlier. Likewise, if property or building, or even players are sold to other entities, the cash receipts from those transactions is recognized in the investing section as well.* **_The presentation of this section is simple:_** * first we list the cash that was paid out to purchase long-lived assets. * Then we list any cash that was received through selling or disposing of long-lived assets. Remember, negative numbers (in parentheses) represent cash outflows, and positive numbers represent cash inflows. Additional inflows and outflows that would be included in this section relate to loans made to another entity, called loans receivable, and certain investment securities.

Answer 14

\*Most businesses around the world use the indirect method (because if not, you’ll have to do ANOTHER statement that shows how you get your $$ from net income) \*Indirect method is easier cause it comes from initial statements- direct method uses transactional data.

Answer 15

* Payment of Dividends - Financing * Receipt of Capital from an Owner - Financing * Payments Received from Loan Receivable - Investing * Shares buyback - Financing * Sales Proceeds from Equity Investment - Investing * Payment of Long-Term Bonds Payable - Financing * Dividends Paid to Shareholders - Financing * Proceeds from Issuing Stock - Financing * Loan made to a 3rd Party - Investing

Answer 16

$6,000 would be shown as an increase in the funds in the Investing Section and the $1,000 gain would be shown as a decrease in the Operating Section The $6,000 received for the equipment should be an increase in the Investing Section and, because the $1,000 gain is a non-cash item which would have been included in net income, it has to be deducted from the Operating Section.

Answer 17

The $150,000 would be shown as a decrease in the funds in the Investing Section but the $10,000 would be shown as an increase in the Operating Section. The $150,000 paid to purchase common shares should be a decrease in the Investing Section and, under US GAAP, the $10,000 cash dividend received should be included in the Operating Section.

Answer 18

$19 million net increase in cash from Investing Activities All the transactions are part of the GMCR Investing Section. As a result, the section will show a positive cash flow effect of 19 million (sum of $30M inflow, $10M outflow, and $1M outflow).

Answer 19

The $100,000 would be shown as an increase in the funds in the Investing Section but the $12,000 would be shown as an increase in the Operating Section The $100,000 received should be an increase in the Investing Section and, under U.S.GAAP, the $12,000 interest received should be included in the Operating Section.

Answer 20

**Included here are the cash flows associated with raising and paying back money to investors and creditors.** If a business takes out a new loan or pays off an existing one, it would be reflected in this section. Also, if a business receives contributions from owners it is shown in this section. Dividends paid are included in this section under US GAAP, but as we mentioned earlier, under IFRS dividends paid may be included in the operating rather than the financing section. Also, while interest paid is included in the operating section under US GAAP, it can sometimes be included here under IFRS.

Answer 21

* Proceed from Issuing bonds- Financing * Cash Received from issuing Stocks - Financing * Cash Paid for Interest - Operating * Principal received from Loan Made to Others - Investing * Acquisition of Equity Investment - Investing * Payments to Require stock - Financing * Principal Paid on Notes Payable - Financing

Answer 22

Raising Debt: In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. The other way to raise capital in the debt markets is to issue shares of stock in a public offering; this is called equity financing. (google definition- not sure if we really need to know this)

Answer 23

Another way for a business to keep track of its cash is to create a statement of sources and uses of funds. These are informal, simple to prepare, and keep things in order! They avoid distinctions of the three sections of the cash flows statement & also skip many steps in the deaccrual process for the operating sections. **To create a statement of sources and uses of funds.** * Take 2 balance sheets. One from the beginning of the period and one from the end. * Find the difference * Categorize each change as a source of funds or a use of funds. * A decrease in liability or owner’s equity account represents a use of funds. * An increase in these accounts represents a source of funds. * A decrease in assets is a source of funds. * An increase in assets is a use of funds. * Changes in cash are ignored. * Accounts with no change during the year are also ignored. HINT: The "Net Changes in Cash" as well as "Cash Balance Beginning of Year" and "Cash Balance End of Year" on the Statement of Sources and Uses should match the Cash line on the Balance Sheet.

Answer 24

**How Red Cross Uses info:** 1. To look at their financing and investing activities to understand- are we appropriately investing in capital? So they look at, are our assets depreciating at the same level that they’re reinvesting in the organization? 2. To make sure that they’re managing their working capital appropriately. That they have alignment with their investment cycle in inventory and their receivables receivables and payables are aligned. (They don’t want to use donor dollars for additional working capital) 3. Cash flow requirements for their long-term liabilities. (Pension plan, insurance organization)

Answer 25

* **Operating:** This often leads to _negative or very low cash flows_ from operations. This is especially true if it takes a business longer to collect cash from sales than it has to pay its suppliers. In this situation, even if the business has a positive gross profit and net income, it could still have negative cash flows from operations. Some businesses spend years in this phase before achieving positive cash flows from operations. * **Investing:** The investing section is also _likely to be negative_ for a startup. These businesses will be purchasing equipment and buildings, and since they are just getting started, they won’t often have equipment to dispose of to provide cash inflow. * **Financing**: The financing section can have _large fluctuations_ for a startup. When a business has negative cash flow from operations and investments, it needs a source of cash to fund both of these activities as it grows and becomes more profitable. This money comes from the financing section. However, a company in the startup phase will often have difficulty raising funds from a bank because there is so much risk involved in a startup. Much of the financing will likely come from equity investments, either by the founders or outside equity investors. In some cases, a business may not need to raise money every year; it could raise a lot of money one year and then use it to purchase equipment and assets over multiple periods.

Answer 26

**A negative cash flow from operating activities** A startup will generally have a negative cash flow from operating activities as it buys inventory and supplies and may take longer to collect cash from customers than it has to pay its suppliers.

Answer 27

**A negative cash flow from investing activities** A startup is likely to have a negative cash flow from investing activities as the business will be purchasing equipment and buildings, since they are just getting started.

Answer 28

At this stage, the business has moved past the startup phase and become profitable, but it still is trying to grow and expand. * **Operating:** Cash flow from operating activities will _usually be positive_. These businesses are generating cash receipts large enough to cover regular operating cash outflows and are growing at a slow enough rate that internally generated cash can cover the growth. * **Investing:** Continued growth means that machinery and equipment will need to be purchased. So, investing cash flows will _usually be negative_ for growing companies because more is spent to purchase new equipment than is received from disposing of old equipment. * **Financing:** Financing cash flows _could easily be positive or negative_ depending on how fast the business is growing and how much cash flow from operations it generates. If cash flow from operations is sufficient to cover purchases of new equipment and other investing activities, then financing cash flows could be negative as the business uses excess cash flow to pay down loans. If a business is growing faster than its cash flow from operations can finance, then it will have positive cash flow from financing activities as it receives more money from investors and creditors. Cash flows from financing could also be neutral or close to zero as the company is generating enough cash from operations to cover investments, but is not generating enough to begin to pay dividends.

Answer 29

**A positive cash flow from operating activities** A profitable/growing company will generally have positive cash flow from operating activities as these businesses are generating revenues large enough to cover regular operating expenses.

Answer 30

**A positive or negative cash flow from financing activities** A profitable/growing company could very likely have either positive or negative cash flow from financing activities depending on how fast the company is growing.

Answer 31

A mature business is one that has become well established in its field and is no longer experiencing rapid growth. This includes companies such as Apple or F.C. Barcelona. * **Operating:** Operating cash flows will _generally be positive_ for these businesses. They will have a consistent and steady stream of cash from revenue and will generally be one of the major players in their market. * **Investing:** Because they aren’t looking to grow or expand rapidly, cash flow from investing activities will generally be _slightly negative_ as the new equipment being purchased replaces the equipment that has worn out. * **Financing:** Although it can fluctuate, cash flow from financing activities will _generally be negative_ for mature companies. This is because they are generating cash through operations that is sufficient to cover their investment needs. Because any excess cash generated isn’t needed to fund growth, the money can be used to pay down loans or give money back to shareholders through dividends.

Answer 32

A positive cash flow from operating activities A profitable/growing company will generally have positive cash flow from operating activities as these businesses are generating revenues large enough to cover regular operating expenses.

Answer 33

**A positive or negative cash flow from financing activities** A profitable/growing company could very likely have either positive or negative cash flow from financing activities depending on how fast the company is growing.

Answer 34

A business in decline is becoming less profitable due to competition, higher material costs, or any other reason. They could likely be headed towards bankruptcy. * **Operating:** Operating cash flows will _generally be negative_ as business conditions have deteriorated and the business hasn’t adapted to a changing environment. * **Investing:** Cash flow from investing activities for a business in decline is _likely to be positive_. Fewer customers and less revenue means less work to be done, which means lower investments in new equipment. The business could also sell off existing assets that aren’t being used, creating positive cash from investing activities. * **Financing:** Financing cash flow _could be positive or negative._ These businesses could find it difficult to obtain new loans due to their deteriorating circumstances. On the other hand, they likely won’t be generating excess cash flow to be able to pay down their loans.

Answer 35

A negative cash flow from operating activities A declining company will generally have negative cash flow from operating activities as business conditions have deteriorated and the business hasn’t adapted to a changing environment.

Answer 36

A positive cash flow from investing activities A declining company will generally have a positive cash flow from investing activities as it is not purchasing new equipment but is disposing of old equipment.

HBX- Accounting 5 Flashcards

(70 cards)