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Chapter 5: Q21Q. (page 238)

What is the purpose of a statement of cash flows? How does it differ from a balance sheet and an income statement?

Short Answer

Expert verified

A cash flow statement is prepared to provide thorough information on all the cash transactions and their classification. It is different from the income statement and balance sheet becauseit is prepared using the cash basis of accounting.

Step by step solution

01

Definition of Income Statement

The statement depicting the profitability of the business entity by reporting all the sacrifices made by the business and the benefits generated from the business operations is known as an income statement.

02

Purpose of Statement of Cash Flow

The primary purpose of the cash flow statement is to provide detailed information on all the cash receipts and disbursement of the business entity.

03

Difference Between Cash Flow and Income Statement and Balance Sheet

  1. Cash flow differs from the income statement and balance sheet because it categorises all the cash transactions into three activities: financing, operating, and investing.
  2. Cash flow differs from the income statement and balance sheet because it is prepared using the cash basis of accounting. In contrast, balance sheets and income statements are prepared using the accrual basis of accounting.

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Most popular questions from this chapter

(Preparation of a Corrected Balance Sheet) Uhura Company has decided to expand its operations. The bookkeeper recently completed the balance sheet presented below in order to obtain additional funds for expansion.

UHURA Company

Balance Sheet

For the year ended 2017

Current assets

Cash

\(230,000

Accounts receivables (Net)

340,000

Inventory (Lower of average cost or market)

401,000

Equity investment (Trading)

140,000

Property, Plant and Equipment

Building (net)

570,000

Equipment (net)

160,000

Land held for future use

175,000

Intangible assets

Goodwill

80,000

Cash surrender value of life insurance

90,000

Prepaid expenses

12,000

Current liabilities

Account payable

135,000

Note payable

125,000

Pension obligation

82,000

Rent payable

49,000

Premium on bond payable

53,000

Long-term Liabilities

Bond payable

500,000

Stockholders equity

Common stock \)1 par, authorized 400,000 shares, issued 290,000

290,000

Additional paid in capital

160,000

Retained earnings

Instructions

Prepare a revised balance sheet given the available information. Assume that the accumulated depreciation balance for the buildings is \(160,000 and for the equipment, \)105,000. The allowance for doubtful accounts has a balance of $17,000. The pension obligation is considered a long-term liability.

The bookkeeper for Geronimo Company has prepared the following balance sheet as of July 31, 2017.

GERONIMO COMPANY

Balance Sheet

As of July 31, 2017

Cash

\(69,000

Notes and accounts payable

\)44,000

Account receivable (net)

40,500

Long-term liabilities

75,000

Inventory

60,000

Stockholder鈥檚 equity

155,500

Equipment (net)

84,000

Patents

21,000

\(274,500

\)274,500

The following additional information is provided.

1. Cash includes \(1,200 in a petty cash fund and \)15,000 in a bond sinking fund.

2. The net accounts receivable balance is comprised of the following two items: (a) accounts receivable \(44,000 and (b) allowance for doubtful accounts \)3,500.

3. Inventory costing \(5,300 was shipped out on consignment on July 31, 2017. The ending inventory balance does not include the consigned goods. Receivables in the amount of \)5,300 were recognized on these consigned goods.

4. Equipment had a cost of \(112,000 and an accumulated depreciation balance of \)28,000.

5. Income taxes payable of $6,000 were accrued on July 31. Geronimo Company, however, had set up a cash fund to meet this obligation. This cash fund was not included in the cash balance but was offset against the income taxes payable amount.

Instructions

Prepare a corrected classified balance sheet as of July 31, 2017, from the available information, adjusting the account balances using the additional information.

Use the information presented in BE5-14 for Martinez Corporation to compute the net cash used (provided) by financing activities.

BE5-14 (L05) Martinez Corporation engaged in the following cash transactions during 2017.

Sale of land and building $191,000

Purchase of treasury stock 40,000

Purchase of land 37,000

Payment of cash dividend 95,000

Purchase of equipment 53,000

Issuance of common stock 147,000

Retirement of bonds 100,000

Compute the net cash provided (used) by investing activities.

Net income for the year for Carrie, Inc. was \(750,000, but the statement of cash flows reports that net cash provided by operating activities was \)860,000. What might account for the difference?

E5-8 (L02) (Current vs. Long-term Liabilities) Frederic Chopin Corporation is preparing its December 31, 2017, balance sheet. The following items may be reported as either a current or long-term liability.

1. On December 15, 2017, Chopin declared a cash dividend of \(2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2018. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury.

2. At December 31, bonds payable of \)100,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of \(25,000,000 every September 30, beginning September 30, 2018.

3. At December 31, 2016, customer advances were \)12,000,000. During 2017, Chopin collected \(30,000,000 of customer advances; advances of \)25,000,000 should be recognized in income.

Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability if any.
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