Financial reporting financial statement analysis and valuation 8th edition test bank

Which of the following is not one of the reasons why net income differs from cash flows from operations under the indirect method of calculating cash flows?. Which of the following is a

Chapter 3—Income Flows versus Cash Flows: Understanding the Statement of Cash Flows

MULTIPLE CHOICE

1 One rationale for the statement of cash flows is to

changes in accounting principles

2 Which of the following is not one of the reasons why net income differs from cash flows from

operations under the indirect method of calculating cash flows?

3 A company in the growth phase of its product life cycle will normally have the following pattern of cash flows

flows from financing

positive cash flows from financing

flows from financing

negative cash flows from financing

Financial Reporting, Financial Statement Analysis and Valuation 8th tion Test Bank Download:

Edi-ANS: B PTS: 1

4 Which of the following is an adjustment that would need to be made to net income when calculating cash flows from operations under the indirect method?

5 If a firm is growing and expanding its accounts receivable and inventories faster than its current operating liabilities its cash flow from operation will normally be

c Maturity

10 Free cash flows to all debt and common equity shareholders represents the excess of cash flows from

11 When preparing the statement of cash flows using the indirect method, an increase in inventories would appear as

12 When preparing the statement of cash flows using the indirect method, an increase in accounts payable would appear as

13 When preparing the statement of cash flows using the indirect method, the payment of dividends would appear as

14 When preparing the statement of cash flows using the indirect method, the sale of marketable

securities would appear as

18 Which of the following is the correct formula for calculating cash collections from customers?

receivable at the end of the period

receivable at the beginning of the period

19 Outback Corp recorded sales of $1,300,000 in 2010, in addition the company’s accounts receivable balance grew from $120,000 at the beginning of 2010 to $165,000 at the end of 2010 How much cash did Outback collect from customers in 2010?

PTS: 1

21 Fizzzle Inc sold a piece of equipment during the period for $230,000 and recorded a gain of $45,000

on the sale How should this gain be treated when preparing the operating activities section of the statement of cash flows using the indirect method?

activities section

22 The expense incurred by issuing stock options should be

25 A firm’s cash flows will differ from net income each period for all of the following reasons except:

recognizes revenues

the same period in which a firm recognizes expenses

d cash inflows and outflows that pertain to investing and financing activities do not

immediately flow through the income statement

27 Under the indirect method of preparing the statement of cash flows, add backs to net income include

all of the following except:

28 All of the following are firms that may experience a long lag between the expenditures of cash and the

receipt of cash from customers, except:

29 Which of the following is an approximation of a cash-based measure of pretax operating earnings?

32 When net income is low relative to operating cash flows, we describe the firm as having recorded

33 As a complement to the balance sheet and the income statement, the statement of cash

flows is an informative statement for analysts for all the following reasons except:

Analysts increasingly recognize that cash flows do not necessarily track income flows A firm with a healthy income statement is not necessarily financially healthy, and vice versa Cash requirements to service debt, for example, may outstrip the ability of operations to generate cash

financial statement

the overall sustainability and quality of a firm’s reported earnings

interpretations that are appropriate find that the statement of cash flows reveals

information about the economic characteristics of a firm’s industry, its strategy,

and the stage in its life cycle

a. Payment of a cash dividend

b. The company purchased some of its own stock from a stockholder

c. Amortization of patent for the period

d. Sale of equipment at book value (i.e no gain or loss)

a. Sale of a patent

b. Collection of interest revenue on a long-term note receivable

c. Collection of principal of a note receivable

d. Purchase of long-term investments

a. Sale of long-term investments in common stock

b. Purchase of merchandise for resale

c. Payment of a note payable

d. Sale of a piece of land no longer used in operations

a. receipt of interest payments

b. proceeds from selling equipment

c. proceeds from issuance of bonds payable

d. proceeds from selling investments in equity securities of another company

depreciation expense of $60,000, and amortization expense on a patent of $10,000 Also, cash

of $50,000 was borrowed on a 5-year note payable Based on this data, total cash inflow from operating activities using the indirect method for 2010 was

(including $40,000 depreciation) of $720,000 The 2010 balance sheet reported the following: accounts receivable beginning balance of $50,000 and ending balance of $40,000; accounts payable beginning balance of $22,000 and ending balance of $28,000 Therefore, based only

on this information and using the indirect method, the 2010 net cash inflow from operating activities was

(including depreciation) for the year ended December 31, 2010 During 2010, accounts

receivable decreased by $5,000, merchandise inventory increased by $4,000, accounts payable increased by $6,000, and depreciation expense of $10,000 was recorded Assuming no other data is needed and using the indirect method, the net cash inflow from operating activities for

a. A purchase of equipment is classified as a cash inflow from investing activities

b. Cash dividends paid are classified as cash flows from operating activities

c. Cash dividends received on stock investments are classified as cash flows from

operating activities

d. A company with a net loss on the income statement will always have a net cash

outflow from operating activities

42 Norton Company reported total sales revenue of $55,000, total expenses of $45,000, and net income of $10,000 on its income statement for the year ended December 31, 2010 During

2010, accounts receivable increased by $4,000, merchandise inventory increased by $6,000, accounts payable decreased by $2,000, and depreciation of $18,000 was recorded Therefore, based only on this information, the net cash flow from operating activities using the indirect method for 2010 was:

net income of $8,000 for the year ended December 31, 2009 During 2009, accounts

receivable increased by $3,000, merchandise inventory decreased by $2,000, accounts payable increased by $1,000, and $5,000 in depreciation expense was recorded Assuming no other adjustments to net income are needed, the net cash inflow from operating activities using the indirect method was

a. An increase in merchandise inventory is subtracted from net income

b. Depreciation expense is added to net income

c. An increase in accounts receivable is added to net income

d. An increase in accounts payable is added to net income

2009-2010 comparative balance sheets showed that accounts receivable increased by $20,000 The

2010 "cash receipts from customers" would be

Cost of goods sold $725,000

Beginning Balance Ending Balance

47 Which of the following statements is true?

a. A cash dividend is an operating cash outflow

b. Cash paid to repurchase treasury stock is an investing cash outflow

c. Cash paid to acquire stock in another company is a financing outflow

d. Purchase of a patent is an investing cash outflow

48 Which of the following statements is false?

a. Purchase of equipment is an investing cash outflow

b. Sale of equipment creates investing cash outflow equal to its selling price

c. Purchase of short-term investments is an investing cash outflow

d. Purchase of a patent is an investing cash outflow

A decrease in accounts receivable during a period indicates that a firm collected more

as the amount of revenues included in net income

4 The length of the operating cycle is another factor that may cause cash flow from operations to differ from .

ANS: working capital from operations

ANS: direct method

19 Cash flow from operations should include none of the cash flows associated with marketable securities

if such transactions are viewed as _

ANS: investing activities

PTS: 1

20 The issuance of debt would be classified as a (an) activity in the statement of cash flows.

1 The calculation of cash flow from operations under the indirect method involves two types of

adjustments Discuss each type of adjustment and provide an example of each type of adjustment.ANS:

depreciation, amortization and deferred income tax

example accounts receivable and accounts payable, inventories

PTS: 1

2 Discuss operating, investing, and financing cash flows in relation to the various stages of the product life cycle

ANS:

1 Operating cash flows begin negative in the introduction phase and start becoming positive

in the growth phase Operating cash flows reach their peak in the maturity phase and start to decrease at the end of the maturity phase and into the decline phase

2 Investing cash flows begin negative in the introduction phase and stays negative in the

growth phase Investing cash flows become positive in the maturity phase and start to

decrease at the end of the maturity phase and into the decline phase

3 Financing cash flows are positive in the introduction and growth phase Financing cash

flows start to decrease at the end of the maturity phase and continue to decrease in the

decline phase

PTS: 1

3 What is working capital from operations? Discuss what types of firms will have similar net income and working capital from operations? For which types of firms will net income and working capital from operations be significantly different?

ANS:

Working capital from operations is defined as net income adjusted for changes in non-working capital accounts These changes include depreciation, amortization, the equity method, deferred tax amounts, the minority interest in the earnings of consolidated subsidiaries and some restructuring charges Companies that have mostly current operating assets, such as retailers who rent their space, will likely have similar net income and working capital from operations Capital-intensive firms are more likely

to have significantly different net incomes and working capital from operations

PTS: 1

4 For the following types of companies, discuss whether you think their cash flows from operations, investing, and financing will be positive (the activity provides cash) or negative (the activity uses cash) Provide support for your answer

company recently launched its first software title The company is expanding its operations

by hiring additional developers and administrative staff The company is not yet profitable, but expects to break even within two years Investors view it as having a first mover

advantage and have been happy to invest in the company

its 25th year of profitability, but is concerned that sales have contracted for the fifth year in

a row Midwest prides itself in paying dividends and having no debt on its balance sheet

product and is the leader in market share for the industry The company continues to invest

in research and development and expand by purchasing competitors The company has yet

to pay dividends, but is considering it in the future The company’s largest current asset is cash, due to its high profit margin

ANS:

CFI positive and declining, CFF negative due to dividends

starting to turn negative

PTS: 1

5 Cilca Corporation is a supplier to the pulp and paper industry Selected financial information about Cilca is listed below:

Sales for the period were $450,000

Use the above information to calculate Cilca’s:

ANS:

Sales for the period 450,000

= $690,000

+Received $440,000 of cash that was borrowed from a bank to purchase real estate+Issued shares of common stock for $200,000

- Paid dividends of $480,000

- Paid $360,000 on a bank loan

= $200,000 cash used by financing activitiesPTS: 1

6 Luke Corporation is a manufacturer of home furnishings Selected financial information about Luke is listed below:

Purchased equipment for $210,000 in cash

Repurchased outstanding common shares using $100,000 in cash

Use the above information to calculate Luke’s:

ANS:

-Purchased investments for $285,000

- Purchased land for $100,000

- Purchased equipment for $210,000 cash

= ($595,000) cash used by investing activities

+Received $850,000 from bank borrowing+Issued shares of preferred stock for $500,000

- Paid dividends of $55,000

- Paid $100,000 to repurchase outstanding common stock

= $1,1950,000 cash provided by financing activities

ANS:

The study by Robert M Bowen, David Burgstahler, and Lane A Daley, “Evidence on the

Relationships Between Earnings and Various Measures of Cash Flow,” Accounting Review (October,

1986) revealed (1) a high correlation between net income and net income plus or minus Type 1 adjustments, and (2) a low correlation between net income and cash flow from operations, and (3) a low correlation between cash flow from operations and net income plus or minus Type 1 adjustments over time

PTS: 1

8 Selected financial statement information for Filmco appears below:

Cash collected from customers: $ 900,000+85,000-45,000=$940,000

Cash spent on inventory: $730,000 + $90,000 - $210,000=$610,000

PTS: 1

PROBLEM

1 J Jill is a women’s clothing retailer The company started as a mail order company and has expanded into mall department stores The company now receives approximately half of its revenues from mail order and half from retail outlets Over the time period 2010 to 2012, sales increased approximately 25%

Discuss the relationship between net income, working capital from operations, and cash flow from operations, and between cash flows from operating, investing, and financing activities over the three-year period

CASH FLOW STATEMENT (in thousands)

Cash from operations 12/25/2012 12/27/2011 12/28/2010

Net income 8,706 7,025 18,434

Depreciation & amortization 18,663 16,131 12,672

Net increase (decrease) in assets & liab 6,696 26,659 10,623

Net cash provided by (used in) operations 35,461 50,739 45,725

Cash from investments

(Increase) decrease in property & plant -28,784 -34,265 -34,734

Other cash inflow (outflow) -35,434 -1,143 -2,454

Net cash provided by (used in) investing -64,218 -35,408 -37,188

Cash from financing

Issuances (purchases) of equity shares 3,142 870 7,800

Increase (decrease) in borrowings -1,706 -1,648 -1,755

Net cash provided by (used in) financing 1,436 -778 6,045

Net change cash & cash equivalents -27,321 14,553 14,582

Cash and cash equivalents at start of year 59,287 44,734 30,152

Cash and cash equivalents at year end 31,966 59,287 44,734

ANS:

Some points that may be addressed:

construct the interiors of the company’s retail space From J Jill’s annual report

management estimates that the company spends approximately $1 million dollars decorating each store to its uniform design These cash flows can be observed by recognizing the cash used by property and equipment investing activities section of the cash flow statement We can also observe increasing depreciation charges, which is consistent with larger amounts of property and equipment

company has adequate controls over its working capital

operating activities section of the cash flow statement) This is attributable to expansion into retail space as rental commitments and other store opening costs are accrued for

debt

PTS: 1

2 Olive Corporation manufactures food processing equipment Use Olive Corporation’s two most recent balance sheets and most recent income statement to prepare a statement of cash flows for 2010 The company paid dividends of $6,250 during 2010