Jiam_Mgrl_4e_SolutionsManual_Ch13 - Chapter 13 Statement of...

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Chapter 13 Statement of Cash Flows QUESTIONS 1. The income statement is prepared using accrual accounting which reflects both cash and non-cash transactions. The statement of cash flows is prepared using the cash basis of accounting which reflects only cash transactions. 2. Investors use the statement to assess whether the company they are investing in can earn a reasonable return on their investment and possibly pay a dividend. Managers use the statement to determine whether their company can generate enough cash to pay wages, bills, and make debt payments. 3. a. Operating cash flows relate to the production and delivery of goods and services. That is, they are related to the day-to-day profit-oriented activities of a business. An example of an operating cash inflow would be cash receipts from customers. An example of an operating cash outflow would be a cash payment to a supplier. b. Investing cash flows are related to the buying and selling of long-term assets. An example of a related cash inflow would be the cash inflow related to the sale of a company building. An example of a related cash outflow would be a cash payment related to the purchase of a patent. c. Financing cash flows generally involve cash flows related to long-term debt and equity. An example of a financing cash inflow would be a cash receipt from issuing a bond. An example of a financing cash outflow would be a cash payment related to a stock buy-back. 4. Cash received from interest and dividends are shown in the section for operating cash flows. This is consistent with FASB requirements but is somewhat confusing since it might seem more appropriate to classify these cash inflows under investing activities. 5. The investing and financing sections are identical whether one uses the direct or the indirect method. 6. The indirect method is used much more frequently compared to the direct method. If the direct method is used, the FASB requires a separate schedule reconciling cash flows from operating activities and net income. However, if the indirect method is used, this reconciliation is performed right in the statement. 7. Under the indirect method, the starting point for determining operating cash flows is
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13-2 Jiambalvo Managerial Accounting net income. This allows the reader to correlate the statement of cash flows to the income statement as a basis for converting accrual net income to cash flows provided by operations. 8. Depreciation expense is deducted in arriving at net income. However, it does not involve a cash outflow and, thus, must be added back to net income to calculate cash flows from operating activities. 9. Comparing relationships from year to year allows users to identify trends. For example, a startup company would normally be expected to have negative operating cash flows, net cash outflows from investing activities and, most likely, net cash inflows from financing activities. As time passes, however, operating cash flows should become positive and a much larger percent of total cash flows. Otherwise,
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This note was uploaded on 04/06/2012 for the course BUS 5601 taught by Professor Muth during the Spring '09 term at FIT.

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Jiam_Mgrl_4e_SolutionsManual_Ch13 - Chapter 13 Statement of...

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