The Statement of Cash Flows Review Questions

Review Questions  The statement of cash flows provides summary information about cash inflows and cash outflows during the year  The three classifications on the statement of cash flows are cash flows from the financing activities, investing activities, and operating activities  Cash receipts and cash payments for transactions relating to revenue and expense activities are classified on the statement of cash flows as operating activities  Cash transactions involving the purchase and sale of long-term assets and current investments are classified on the statement of cash flows as investing activities  Cash inflows and outflows involving stockholders and creditors are classified on the statement of cash flows as financing activities  The financial statement that provides information about cash receipts and cash disbursements for the period is the statement of cash flows  The statement of cash flows classifies items as operating, investing, and financing  Examples of cash out flows from operating activities on the statement of cash flows are payment of salaries, payment on account, Interest paid on bonds, payment on account payable, and purchase of supplies  The four steps in preparing a statement of cash flows in order is o calculate the net cash flows from operating activities o determine the net cash flows from investing activities o determine the net cash flows from financing activities o combine operating, investing, and financing activities  In a statement of cash flows, the sum of cash inflows and outflows is equal to the change in the cash balance  Cash flows from financing activities include both inflows and outflows of cash from the external funding of a business  When using the indirect method to prepare the operating activities section of the statement of cashflows, the first amount listed is net income  Adjustments to net income and calculating operating cashflows include non-operating items, changes in current assets and current liabilities, and noncash items  Examples of common noncash items requiring adjustment to net income under the indirect method are depreciation expense and amortization expense  Gains and losses on the sale of long-term assets represent common nonoperating items needing adjustment under the indirect method  The accounts that result in adjustments to net income under the indirect method of preparing the statement of cash flows if their balance is changed during the year our accounts receivable, inventory, and accounts payable  Noncash items, nonoperating items, and changes in current assets and liabilities are necessary adjustments to net income to prepare the operating section for the indirect format of the statement of cash flows  Depreciation expense and amortization expense represent noncash items requiring adjustments to net income under the indirect method  Issuing stock to owners is classified as a financing activity               Losses on the sale of long term assets and gains on the sale of long term assets are non operating items that require adjustments under the indirect method The return on assets is calculated by dividing net income by average total assets Changes to current assets and current liabilities require adjustment of net income under the indirect method because related cash may be higher or lower than accrued amount included in net income The direct method prepares the operating activity section of the statement of cash flows by restating each revenue an expense from the accrual basis to the cash basis. It shows the cash collected from customers and the cash paid for operating expenses. Cash flows from investing activities are both outflows and inflows of casually to the acquisition and disposal of long term assets When accounts receivable decrease net sales are less than cash receipts from customers Repayments of formal long term debt contracts are classified as financing activities A decrease in accounts receivable will result in an inflow in cash from sales revenue when using the direct method to determine cash flows from operations The direct method prevents a summary of all operating transactions that result in either a debit or credit to the cash account When using the direct method to prepare the statement of cash flows, depreciation expense is not reported on the statement of cash flows Cash from operating activities differs between the direct and indirect method with respect to the detail and presentation only The direct method reports a total cash inflow are cash outflow from each main type of transaction. The indirect method starts with net income adjusted by eliminating the effects of transactions that do not involve cash. The amount of net cash flows from operating activities calculated using the direct method is the same as under the indirect method Cash flows from financing activities and cash flows from investing activities will be identical in every detail under the direct and indirect methods