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Chapter 14: Q14-1SE (page 769)

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal.

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions:

a. Predict future cash flows.

b. Evaluate management decisions.

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

Short Answer

Expert verified

Answer

The statement of cash flows reports cash inflow and cash outflow from the business during a specified period.

Step by step solution

01

How investors and creditors can predict future cash flows

With the help of statement of cash flows, free cash flowcan be easily calculated that can help investors and creditors to predict future cash flows.

02

How investors and creditors can evaluate management decisions

Mainly the investing and financing decisions are taken by the management of the company so, if the cash flow of investing and financing activity is positive it means management take decisions wisely.

03

How investors and creditors can predict the ability to make debt payments to lenders and pay dividends to stockholders.

The consistency in making debt payment and dividends to stockholdersby the company help investors and creditors to predict the ability to make debt payments to lenders and pay dividends to stockholders.

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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

The 2018 comparative balance sheet and income statement of Appleton Group, Inc. follow. Appleton disposed of a plant asset at book value during 2018

Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method. A plant asset was disposed of for \(0. The cost and accumulated depreciation of the disposed asset was \)11,600. There were no sales of land, no retirement of common stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.

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?

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

Question: Classifying items on the indirect statement of cash flows

The statement of cash flows categorizes like transactions for optimal reporting. Identify each item as a(n):

鈥� Operating activity鈥攁ddition to net income (O+) or subtraction from net income (O-)

鈥� Investing activity鈥攃ash inflow (I+) or cash outflow (I-)

鈥� Financing activity鈥攃ash inflow (F+) or cash outflow (F-)

鈥� Non-cash investing and financing activity (NIF)

鈥� Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

  1. Loss on sale of land.
  2. Acquisition of equipment by issuance of note payable.
  3. Payment of long-term debt.
  4. Acquisition of building by issuance of common stock.
  5. Increase in Salaries Payable.
  6. Decrease in Merchandise Inventory.
  7. Increase in Prepaid Expenses.
  8. Decrease in Accrued Liabilities.
  9. Cash sale of land (no gain or loss).
  10. Issuance of long-term note payable to borrow cash.
  11. Depreciation Expense.
  12. Purchase of treasury stock.
  13. Issuance of common stock.
  14. Increase in Accounts Payable.
  15. Net income.
  16. Payment of cash dividend
See all solutions

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