Chapter 06 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 6 CASH FLOW ANALYSIS I. Questions 1. Purposes of the Statement of Cash Flows a. To predict future cash flows b. To evaluate management decisions c. To determine the ability to pay dividends to shareholders and interest and principal to creditors d. To show the relationship of net income to changes in the business’s cash. 2. Comparative balance sheets present the financial position of the enterprise at two points in time. The income statement for the period between the two balance sheets describes how the income-producing activities affected the financial position. Because cash flows from operating activities may differ substantially from net income, and because numerous other financing and investing activities have an impact on financial position, the statement of cash flows is necessary. The statement emphasizes changes in the cash balances that result from changes in assets, liabilities and equity accounts caused by operating, investing and financing activities. 3. The most important source of cash for many successful companies is from operating activities. A large positive operating cash flow is a good sign because it means funds have been internally generated with no fixed obligations or commitment to return such to anybody. 4. It is possible for cash to decrease during a year when income is high because cash may be used not only for operating activities but also for investing and financing activities. 5. Transactions involving accounts payable are not considered to be financing activities because such transactions are used to obtain goods and services rather than to obtain cash. Furthermore, purchases of goods and services relate to a company’s day-to-day operating activities. 6-1
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Chapter 6 Cash Flow Analysis 6. The loss is added back to net income to avoid double counting since the entire proceeds from the sale (net book value minus loss on sale) will appear as a cash inflow from investing activities. 7. Three categories of transactions that may result in increases in cash are a. Operating activities b. Investing activities (e.g., sale of investments or other assets). c. Financing activities (e.g., borrowing or sale of shares). These activities are sources of cash when cash is increased as a result of the particular activity. 8. Three categories of transactions that may result in decreases in cash are a. Operating activities b. Investing activities (e.g., purchase of investments or other assets). c. Financing activities (e.g., repayment of debt or retirement of shares). These activities are uses of cash when cash is decreased as a result of the particular activity. 9. Noncash transactions do not provide or consume cash even though they may result in significant changes in financial position. Examples are the issuance of share capital for plant assets and the conversion of debt or preference shares into ordinary shares. Such transactions are not presented in the body of the statement of cash flows but rather disclosed
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Chapter 06 - Answer - MANAGEMENT ACCOUNTING - Solutions...

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