Chapter 14 - Solution Manual

Chapter 14 - Solution Manual - Chapter 14 Statement of Cash...

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Chapter 14 Statement of Cash Flows Chapter 14 Statement of Cash Flows Solutions to Questions 14-1 The statement of cash flows highlights the major activities that impact cash  flows and hence affect the overall cash balance. 14-2 Cash equivalents are short-term, highly liquid investments such as Treasury bills, commercial  paper, and money market funds. They are included with cash because investments of this type are made  solely for the purpose of generating a return on temporarily idle funds and they can be easily converted to  cash. 14-3 (1) Operating activities: Include cash inflows and outflows related to revenue and expense  transactions that affect net income. (2) Investing activities: Include cash inflows and outflows related to acquiring or disposing of  noncurrent assets. (3) Financing activities: Include cash inflows and outflows related to borrowing from and repaying  principal to creditors and completing transactions with the company’s owners. 14-4 The company’s specific circumstances should be considered when interpreting the statement of  cash flows. The relationships among numbers should also be considered rather than evaluating each  number in isolation. 14-5 Since the entire proceeds from a sale of an asset (including any gain) appear as a cash inflow  from investing activities, the gain must be deducted from net income to avoid double counting. 14-6 Transactions involving accounts payable are not considered to be financing activities because  such transactions relate to a company’s day-to-day operating activities rather than to its financing  activities. 14-7 The repayment of $300,000 and the borrowing of $500,000 must both be shown “gross” on the  statement of cash flows. That is, the company would show $500,000 of cash provided by financing  activities and then show $300,000 of cash used by financing activities. 14-8 The direct method reconstructs the income statement on a cash basis by restating revenues and  expenses in terms of cash inflows and outflows. The indirect method starts with net income and adjusts it  to a cash basis to determine the net cash provided by operating activities. 14-9 Depreciation is not a cash inflow, even though it is added to net income on the statement of cash  flows. Adding depreciation to net income to compute the amount of net cash provided by operating  activities creates the  illusion  that depreciation is a cash inflow. It isn’t.
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Chapter 14 - Solution Manual - Chapter 14 Statement of Cash...

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