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Unformatted text preview: CHAPTER 13 DISCUSSION QUESTIONS 1. The main purpose of a statement of cash flows is to provide information about the cash receipts and cash payments of an en- tity during a period of time. The statement of cash flows also explains the changes in the balance sheet accounts and the cash ef- fects of the accrual-basis amounts reported in the income statement. In addition to oper- ating activities, it also provides information about an entity’s investing and financing activities. This information should assist in- vestors and creditors in assessing an en- tity’s ability to generate positive future cash flows. 2. Cash equivalents are short-term, highly li- quid investments that can be converted eas- ily and quickly to cash. Examples include U.S. Treasury bills, money market funds, and commercial paper. Cash equivalents are to be included as cash (i.e., added to cash) on a statement of cash flows. 3. Cash flows from operating activities include those items that enter into the determination of net income. Examples are cash receipts from the sale of goods or services and from interest, and cash payments for inventory, wages, taxes, interest, etc. Cash flows from investing activities result from transactions and events involving the purchase or sale of securities (other than trading securities), property, plant, and equipment, and other assets not generally held for resale, and the making and collect- ing of loans. Examples include the proceeds from the sale of equipment, the purchase of a building, the sale of a business segment, the collection of the principal amount on a loan to another entity, and the purchase of another entity’s equity securities (not held as trading securities). Cash flows from financing activities result from transactions and events whereby resources are obtained from or paid to own- ers (equity financing) and creditors (debt fin- ancing). Examples include cash received from the sale (issuance) of stock, cash received from a bank loan or by issuing bonds, dividend payments to stockholders, or cash used to repurchase an entity’s own stock (treasury stock). 4. Significant noncash investing and financing transactions are to be reported separately in a schedule below the statement of cash flows or in the notes to the financial state- ments. Because they do not involve cash, they should not be reported in the body of the statement itself. 5. The process of converting from accrual rev- enues to cash receipts involves adjusting the beginning and ending receivable bal- ances. We use Sales Revenue and Accounts Receivable to illustrate the pro- cess. Sales revenue............................... $100,000 + Beginning accounts receivable... 50,000 – Ending accounts receivable........ (40,000 ) = Cash received from customers. . $110,000 Alternatively, the decrease in the accounts receivable balance could be added to sales revenue to derive the $110,000 cash received from customers....
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This note was uploaded on 02/02/2010 for the course FNEC 140 taught by Professor Clark during the Spring '08 term at Vanderbilt.
- Spring '08