There are two different ways of starting the cash flow statement, as IAS 7, Statement of Cash Flows permits using either the 'direct' or 'indirect' method for operating activities. The statement of cash flows documents a firm’s sources and uses of cash for a particular […] This information is summarized in the following T-account: Question: How is accumulated depreciation information used in the statement of cash flows for Home Store, Inc.? Source: Microsoft Corporation, “2004 Annual Report,” http://www.microsoft.com; Microsoft Corporation, “2005 Second Quarter Statement of Cash Flows,” http://www.microsoft.com. Cost of equity = (Dividend / Price per share) + Growth rate How much cash did Phantom Books use for financing activities during the year? Chapter Name: Statement of cash flows Section: Exercises Number of Exercises: 13 Solutions: Available for all 13 exercises We have provided the solutions of all the exercises in the statement of cash flows … The company started on 1st January 2003, When it issued 60,000 shares of $1 par value common stock for $60,000 cash… The increase of $12,000 is solely from purchasing long-term investments with cash. Prepaid expenses (current asset) decreased by $2,000. (Recall the financial accounting entry to record depreciation expense: debit depreciation expense and credit accumulated depreciation. Issuance of capital stock for cash: The end result is as though depreciation expense was never deducted as an expense. Cash totaling $82,000 was generated from the company’s operating activities during the year. Answer: The first adjustment to net income involves adding back expenses that do not affect cash (often called noncash expenses). Answer: The current liability rule is a bit different than the current asset rule as described next. Answer: The investing activities section of the statement of cash flows focuses on cash activities related to noncurrent assets. When preparing the operating activities section of the statement of cash flows, increases in current assets are deducted from net income; decreases in current assets are added to net income. Income tax payable (current liability) decreased by $9,000. Second, the sale of equipment for $5,000 is shown as an increase in cash. It is important to note that all positive amounts shown in the statement of cash flows denote an increase in cash, and all negative amounts denote a decrease in cash. Change in cash and cash equivalents during the Cash Flow Statement & AS-3 - MCQs with answers 1. 13. Note 12.21 “Review Problem 12.4” through Note 12.25 “Review Problem 12.7” will use the data presented as follows for Phantom Books. Answer: Several adjustments are necessary to convert this amount to a cash basis and to provide an amount related only to daily operating activities of the business. As you can see, all of the operating activities are clearly listed by their sources. The accounts receivable T-account shown in the following provides further clarification. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Since your question has multiple sub-parts, we will solve the first three sub-parts for you. . Answer: The final step is to show that the change in cash on the statement of cash flows agrees with the change in cash on the balance sheet. Answer: Figure 12.5 “Operating Activities Section of Statement of Cash Flows (Home Store, Inc.)” shows the completed operating activities section of the statement of cash flows for Home Store. = $5,000 - $750 Study these two rules carefully: Now let’s work through each current asset and current liability line item shown in the balance sheet (Figure 12.3 “Balance Sheet and Income Statement for Home Store, Inc.”) and use these rules to determine how each item fits into the operating activities section as an adjustment to net income. The second adjustment is adding back losses and deducting gains related to investing activities. Study Figure 12.5 “Operating Activities Section of Statement of Cash Flows (Home Store, Inc.)” carefully noting the three types of adjustments made to net income. This is because cash paid for these expenses was lower than the expenses recognized on the income statement using the accrual basis. Three general types of adjustments are necessary to convert net income to cash provided by operating activities. Answer: The financing activities section of the statement of cash flows focuses on cash activities related to noncurrent liabilities and owners’ equity (i.e., cash activities related to long-term company financing). Certificates of Achievement . The indirect cash flow method adjusts net income for the changes in balance sheet accounts to calculate the cash flow from operating activities. Home Store, Inc., made the following journal entry for this transaction: Notice the two entries to property, plant, and equipment shown previously. Accounting changes are often made and the monetary impact is reflected in the financial statements … Direct and indirect method of preparing cash flow statement is same with only one difference which is under indirect method 'Cash flow from operating activities' is … How do we convert this amount to a cash basis? Cash Flow Statement – Indirect method Financial statements consist of the Income Statement (Statement of Comprehensive Income), Balance Sheet (Statement of Financial Position), and Cash Flow Statement (Statement of Cash Flows). Cash flow statement mcqs is a set of different four option based questions. Then prepare the investing activities section of the statement of cash flows. Which of the following items would be subtracted from net income when using the indirect method of calculating cash flows … $61,250 Question: Now that you are familiar with the four key steps, let’s take a look at the statement of cash flows for Home Store, Inc. Where do we start in preparing Home Store, Inc.’s statement of cash flows? A cash dividend of $43,900 was declared and paid during the year. (All India 2014 (C), 2009) Every asset can be converted to cash at some price. For example, Home Store, Inc., realized a $6,000 loss on the sale of equipment. What information is used for this section, and how is it prepared? Thus to convert net income to a cash basis, depreciation expense is added back to net income. Two items caused this increase: (1) net income of $124,000 increased retained earnings, and (2) cash dividends paid totaling $32,000 decreased retained earnings. That is, Home Store, Inc., is not in the business of buying and selling equipment daily. Examine this figure carefully. Cash Flow Statement (Page 1) [If you need more questions and answers E-books on subjects like bookkeeping, financial accounting, costing/managerial accounting and financial Allowance for doubtful acc... A: Current assets are those assets which are expected to be sold or utilized by the firm. Thus the $6,000 loss shown as a deduction on the income statement is added back to net income, and it will be included later in the investing activities section as part of the proceeds from the sale of equipment. There are two different ways of starting the cash flow statement, as IAS 7, Statement of Cash Flows permits using either the 'direct' or 'indirect' method for operating activities. If the merchandise inventory account increases over time, more goods are purchased than are sold. Prepare A Statement Of Cash Flows Using The Indirect Method. Code Cash Flows From Operating Activities Add to Net Income A Deduct from Net Income D Cash Flows From Investing Activities IA Cash Flows From Financing Activities FA Category 1. Cash Flow Statement Format (Direct Method) Okay, so before anything else, here's the format of the cash flow statement itself (see further below for explanations): adjusts net income for the changes in balance sheet accounts to calculate the cash from operating activities the "ABC" Company is Phantom’s most recent balance sheet, income statement, and other important information for 2012 are presented in the following. To illustrate indirect method of statement cash flows, we will use the first year of operation for Tax Consultants Inc. We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping. Other pertinent data for 2012 are as follows: With these data and the information provided in Figure 12.3 “Balance Sheet and Income Statement for Home Store, Inc.”, we can start preparing the statement of cash flows. The Cash Flow Statement documents an entity’s movement in cash … Describe “Direct” and “Indirect” method of ascertaining cash flow … Computation of rest of the two activities will remain same. Figure 12.9 Cash Flows at Home Store, Inc. The group reconvened the following week. Modified UCA Format Cash Flow Statement Primarily a direct method cash flow statement • Also contains elements of the indirect method format • Designed for a credit officer’s use • Key subtotals are added to facilitate analysis Indirect and direct method cash flow statements … Cash Flow Statement 6 250 Accountancy : Company Accounts and Analysis of Financial Statements equivalents of an enterprise by classifying cash flows into operating, investing and financing activities. The additional information provided for 2012 indicates there were no sales of long-term investments during the year. )The starting point using the indirect method … Question: What is the second type of adjustment necessary to convert net income to a cash basis? Solution. The impact these items have on cash is reflected in the investing activities section of the statement of cash flows by showing a $25,000 cash outflow for the purchase of investments, and a $3,000 cash inflow from the sale of investments. Prepare a Sold equipment with a book value of $11,000 (= $21,000 cost − $10,000 accumulated depreciation) for $5,000 cash, Long-term investments were purchased for $12,000 cash. Here’s how the accounts receivable adjustment to net income appears in the operating activities section of the statement of cash flows for Home Store, Inc.: We will continue analyzing each current asset and current liability item in the balance sheet shown in Figure 12.3 “Balance Sheet and Income Statement for Home Store, Inc.” and present the resulting adjustments and completed operating activities section at the end of our analysis in Figure 12.5 “Operating Activities Section of Statement of Cash Flows (Home Store, Inc.)”. This contra asset account is not typical of the other asset accounts shown on Home Store, Inc.’s balance sheet since contra asset accounts have the effect of reducing assets. Figure 12.4 Operating Activities Format and Adjustments. Income tax payable Notice this amount is significantly lower than the net income amount of $124,000 reported on the income statement. Thus the purchase of long-term investments for $12,000 is shown as a decrease in cash in the investing activities section. Problem 1: From the following summary of Cash Account of X Ltd., prepare Cash Flow Statement for the year ended 31st March 2007 in accordance with AS-3 using the direct method. Figure 12.5 Operating Activities Section of Statement of Cash Flows (Home Store, Inc.). Source: Photo courtesy of Rob Enslin, http://www.flickr.com/photos/doos/6086236471/. ... You must ask this sort of question … 9. To compute net cash flow from operating activities, non-cash charges in the income statement are added back to net income, and non-cash credits are deducted from net income. An increase in accounts payable signifies that Home Store, Inc., recorded more as an expense on the income statement (accrual basis) than the company paid in cash (cash basis). The financial accounting and reporting (FAR) section of the CPA exam covers basic financial statements including the statement of cash flows. These solutions for Cash Flow Statement are extremely popular among Class 12 Commerce students for Accountancy Cash Flow Statement … This amount will appear in step 4 when we reconcile the beginning cash balance to the ending cash balance. Access the answers to hundreds of Cash flow questions that are explained in a way that's easy for you to understand. Common stock is issued for cash at an amount above par value ______ 2. Land is sold for cash at an amount equal to book value ______, 10. The first adjustment is adding back expenses that do not affect cash, such as depreciation. Figure 12.6 “Investing Activities Section of Statement of Cash Flows (Home Store, Inc.)” shows the three investing activities described previously: (1) a $67,000 decrease in cash from the purchase of equipment, (2) a $5,000 increase in cash from the sale of equipment, and (3) a $12,000 decrease in cash from the purchase of long-term investments. When comparing the two cash flow statements, the financial statement of cash flows is a more appropriate measure of the company’s performance … Figure 12.8 Statement of Cash Flows (Home Store, Inc.). As shown previously, this amount is added back to the net income of $124,000. (15,000).) How much cash did Phantom Books use for investing activities during the year? Additional data for 2012 include the following: Before moving on to step 2, note that investing and financing activities sections always use the same format whether the operating activities section is presented using the direct method or indirect method. However, $29,000 in depreciation expense is a noncash expense and is added back to net income in the operating activities section (see solution to Note 12.21 “Review Problem 12.4”). The income statement. Two items caused the change in the accumulated depreciation account. Question 2. The direct method is intuitive as it means the statement of cash flow starts with the source of operating cash flows. This is why the change column shows this account as decreasing assets. In effect, we are reversing the $6,000 loss because it is not an operating expense. Accounts payable decreased during the period ______ 7. As you read the dialogue that follows, refer to Figure 12.8 “Statement of Cash Flows (Home Store, Inc.)”; it is the statement of cash flows that Linda prepared for the meeting. Instead, Home Store, Inc., must show the components of this cash outflow as separate line items in the statement of cash flows as required by U.S. GAAP. indirect method. Question: Your Answer Is Correct. . Use the, following code letters to indicate the appropriate category under which the item would appear on the, 1. A one-time increase in cash dividends resulted in $33,500,000,000 paid to the owners of the company during the second quarter of fiscal year 2005 (three months ended December 31, 2004). Question: Some organizations have noncash activities involving the exchange of one noncurrent or owners’ equity balance sheet item for another (e.g., the issuance of common stock for a building; or the issuance of common stock in exchange for bonds held by creditors). Important Questions for CBSE Class 12 Accountancy Cash Flow Statement. Second, $10,000 of accumulated depreciation related to disposals is included as part of the $5,000 proceeds from the sale of equipment in the investing activities section of the statement of cash flows (see Figure 12.6 “Investing Activities Section of Statement of Cash Flows (Home Store, Inc.)”). Answer: The third type of adjustment to net income involves analyzing the changes in all current assets (except cash) and current liabilities from the beginning of the period to the end of the period. Depreciation expense recorded for the period ______, 4. Start studying Chapter 14 The Statement of Cash Flows. Important: Cash flow statements can be presented using either of two methods: the direct or indirect method.The direct method is used more outside the US, while the indirect method is the preferred method within the US. Cash collections from customers during the period b. It is not enough to simply show a cash outflow of $62,000 in the investing activities section of the statement of cash flows (= $67,000 − $5,000). Start with net income from the income statement; make the appropriate adjustments for (1) noncash expenses, such as depreciation and amortization; (2) gains and losses related to investing activities; and (3) changes in current assets other than cash and current liabilities. Question: Now that we know how to handle the change in current assets when preparing the operating activities section of the statement of cash flows, what do we do with current liabilities? First, the sale of equipment during the year caused the company to take $10,000 in accumulated depreciation off the books. Building was purchased for cash ______ 5. The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more Common stock increased by $4,000. Step 1: Prepare the Operating Activities Section. Assuming a statement of cash flows is prepared using the indirect method, indicate the, reporting of the transactions and events listed below by major categories on the statement. Huh? This statement helps in analysing and understanding the liquidity and solvency of a company , thereby, depicting the true liquidity position to … Retained earnings increased by $92,000. What is the purpose of the cash flow statement? CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. The formal presentation of this information in the financing activities section is shown later in Figure 12.7 “Financing Activities Section of Statement of Cash Flows (Home Store, Inc.)”. The net effect of these 2 items is an increase of $38,000 (= $51,000 net income − $13,000 cash dividends). What information is used for this section, and how is it prepared? Two items caused this change: (1) the sale of equipment caused the company to take $22,000 in accumulated depreciation off the books—this was the accumulated depreciation on the books for the equipment sold, and (2) $29,000 in depreciation expense was recorded during the year, with a corresponding entry to accumulated depreciation. c From Figure 12.7 “Financing Activities Section of Statement of Cash Flows (Home Store, Inc.)”. You're confusing me. Each review problem corresponds to the four steps required to prepare a statement of cash flows. The gain (computed as proceeds minus the book value) appeared on the income statement and increased the company's net income. Cash dividends are included in the financing activities section as a $13,000 cash outflow. This amount comes from the income statement, which was prepared using the accrual basis of accounting. Because the current asset rule states that decreases in current assets are added to net income, $2,000 is added to net income in the operating activities section of the statement of cash flows. Follow the format presented in Figure 12.8 “Statement of Cash Flows (Home Store, Inc.)”. The cash flows related to each noncurrent asset account are underlined as follows. Problem 1: The bank balance of a business firm has increased during the last … d From Figure 12.3 “Balance Sheet and Income Statement for Home Store, Inc.”. Question: We will be using the indirect method to prepare the operating activities section. Bonds payable decreased by $18,000. ACCA F3 Statement of Cash Flows Example 2, The direct method, Free ACCA Paper F3 lecture. Cash totaling $24,000 was used for financing activities during the year. Property, plant, and equipment increased by $46,000. Question: How is this information used in the statement of cash flows? Year-ended March No new common stock was issued, Declared and paid $13,000 in cash dividends. Treasury stock was acquired for cash ______ 9. Instructions: Prepare a statement of cash flow using the indirect method. This is the basic structure of the cash flow statement: These changes are already shown in the far right column of the balance sheet portion of Figure 12.3 “Balance Sheet and Income Statement for Home Store, Inc.”. John was concerned about the company’s drop in cash from $130,000 at the beginning of the year to $32,000 at the end of the year. This information is presented in Figure 12.3 “Balance Sheet and Income Statement for Home Store, Inc.”. http://www.flickr.com/photos/doos/6086236471/, http://2012books.lardbucket.org/books/accounting-for-managers/, CC BY-NC-SA: Attribution-NonCommercial-ShareAlike. It invol... Q: The data related to JK company is given below: The starting point using the indirect method is net income. ADVERTISEMENTS: Here is a compilation of top nine problems on cash flow statements along with its relevant solutions. This is summarized in the following T-account: Question: How is this property, plant, and equipment information used in the investing activities section of the statement of cash flows for Home Store, Inc.? Since expenses are higher using the cash basis, net income must be decreased by $9,000. By fiscal year ended June 30, 2004, Microsoft was sitting on more than $60,000,000,000 in cash and short-term investments. In step 1, the indirect method starts with net income in the operating activities section and makes three types of adjustments to convert net income to a cash basis. Figure 12.3 Balance Sheet and Income Statement for Home Store, Inc. Here’s an example of a cash flow statement prepared using the direct method. uni... A: The payment made by an individual product to cover the fixed cost of a business and once it gets con... A: a)Computation of monthly level payment: Since expenses are $2,000 lower using the cash basis, net income must be increased by $2,000. Here’s why. easy to read because it lists all of the major operating cash receipts and payments during the period by source Thus net income must be reduced by $60,000 (= $900,000 revenue using accrual basis − $840,000 revenue using cash basis). These three types of adjustments are shown in Figure 12.4 “Operating Activities Format and Adjustments”, which also displays the format used for the operating activities section of the statement of cash flows. What is Indirect Cash Flow? Using the information presented in Note 12.21 “Review Problem 12.4” and the solutions to Note 12.21 “Review Problem 12.4”, Note 12.22 “Review Problem 12.5”, and Note 12.24 “Review Problem 12.6”, prepare a complete statement of cash flows for Phantom Books. This information is found in the financing activities section of Microsoft’s statement of cash flows. The additional information provided for 2012 indicates the company issued common stock for $4,000 cash. How do we do that, given Thus $60,000 is deducted from net income in the operating activities section of the statement of cash flows. The financing activities section of the statement of cash flows for Phantom Books is shown as follows: Question: We’re almost done with Home Store, Inc.’s statement of cash flows. When preparing the operating activities section of the statement of cash flows, increases in current liabilities are added to net income; decreases in current liabilities are deducted from net income. Next, we will discuss how to use cash flow information to assess performance and help in planning for the future. Dividend Payments at Microsoft Corporation. Here is a compilation of top three accounting problems on cash flow statement with its relevant solutions. Answer: These exchanges do not involve cash and thus do not appear directly on the statement of cash flows. 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