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Unformatted text preview: CHAPTER 15 STATEMENT OF CASH FLOWS DISCUSSION QUESTIONS 1. Knowledge of cash flows was needed to as- sess the value of Lemmons and to ensure that Golding was not stuck with a lemon, an acquisition that would be a cash drain. 2. Operating activities are the ongoing, day-to- day, revenue-generating activities of an or- ganization. Investing activities are those that involve the sale or purchase of long-term as- sets. Financing activities are those that raise cash from long-term liabilities and equity sources. 3. The operating activity category is the most useful since it provides the cash effects of ongoing operations. 4. The all-financial-resources approach re- quires disclosure of all investing and finan- cing activities, even if they do not affect cash. 5. The separation ensures that the cash report is emphasized since the major purpose of the statement is disclosure of cash activities. 6. (1) Compute the change in cash for the peri- od; (2) Compute the cash flows from operat- ing activities; (3) Identify the cash flows from investing activities; (4) Identify the cash flows from financing activities; (5) Prepare the statement of cash flows. The first step provides the net cash inflow or outflow that must appear on the statement of cash flows. The next three steps provide the detail for explaining the change in cash flows. The fi- nal step summarizes all the detail. 7. Cash equivalents are highly liquid invest- ments that can be readily converted into cash. They are treated as cash. 8. Worksheets are an efficient, logical way of organizing the data needed to prepare a statement of cash flows. 9. Accrual accounting allows a firm to recog- nize revenues before they are collected or to pay for inputs before they are expensed. This practice creates the possibility of hav- ing a negative operating cash flow while still reporting a positive net income. 10. Accrual accounting allows a firm to collect revenues that were recognized in a prior period and to recognize expenses not yet paid for. Additionally, noncash expenses are deducted to arrive at net income. Thus, a loss may not mean negative cash flows. 11. An increase in current liabilities means that payments to creditors were less than pur- chases made during the period. A decrease in a noncash current asset means that cash is freed up by using up the noncash current asset. (For example, a decrease in receiv- ables means more cash was collected than revenues recognized.) 12. A decrease in a current liability means that cash payments to creditors were greater than the expenses recognized during the period. An increase in a noncash current as- set means that more cash was paid than the expenses recognized. (As assets expire, they become expenses.) 13. Noncash expenses are added back because they involve no cash outflow and have already been deducted in computing cash income....
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- Fall '07