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Chapter 14: Q14-10RQ (page 769)

Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

Short Answer

Expert verified

Answer

If current liabilities increase it is an increased adjustment to the net income. If there is a decrease in current liabilities it causes a decreasing adjustment from the net income.

Step by step solution

01

If current liabilities increase it is an increased adjustment to the net income

An increase in current liabilities means cash is not yet paid only expenses are recorded. Therefore, an increase in current liabilities causes an increased adjustment to the income.

02

If current liabilities decrease it is a decreasing adjustment from the net income

Decrease in current liabilities is the opposite of an increase in current liabilitiesand hence it causes a decreasing adjustment to the net income.

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Most popular questions from this chapter

Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

1. Cash receipt from the sale of equipment

2. Cash payment for salaries

3. Cash receipt from the collection of long-term notes receivable

4. Purchase of equipment in exchange for notes payable

5. Cash receipt from the issuance of common stock

Preparing the statement of cash flows-indirect statement This problem continues the Canyon Canoe Company situation from Chapter 13. Canyon Canoe Company's comparative balance sheet is shown below. 2019 amounts are assumed, but include several transactions from prior chapters.

Additional data fellow:

  1. The income statement for 2019 included the following items: Net income, \(417,000. Depreciation expense for the year, \)34,330. Amortization on the bonds payable, \(254.
  2. There were no disposals of property, plant and equipment during this year. All acquistions of PP&E were for cash except the land, which was acquired by issuing preferred stock.
  3. The company issued bonds payable with a face value of \)210,000, receiving cash of \(208,476.
  4. The company distributed 4,000 shares of common stock in a stock dividend when the market value was \)4.50 per share. All other dividends were paid in cash.
  5. The common stock, except for the stock dividend, was issued for cash.
  6. The cash receipt from the note payable in 2019 is considered a financing activity because it does not relate to operations. Requirements Prepare the statement of cash flows for the year ended December 31, 2019, using the indirect method.

Computing cash flow items鈥攄irect method Consider the following facts:

  1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000.
  2. Cost of goods sold is \)77,000.
  3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000.
  4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively.

Requirements

  1. Compute cash collections from customers.
  2. Compute cash payments for merchandise inventory

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

Preparing the statement of cash flows鈥攊ndirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset were $13,240. Plant asset was acquired for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?
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