Ch14

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Unformatted text preview: 0,000 $ b. Cash flows from operating activities measures all the cash inflows and cash outflows associated with a company's operating assets and liabilities. Alternatively, net income measures the inflows and outflows of operating assets and liabilities, not just the cash associated with operating assets and liabilities. Thus, cash flows from operating activities can differ from net income due to items affecting net income that do not affect cash and due to cash flows that do not affect net income. In this particular case, the difference is due to depreciation expense. Depreciation is the systematic allocation of the cost of fixed assets. Since depreciation is simply the allocation of the asset's cost, depreciation does not affect cash flows. The indirect method more clearly shows that net income is different from cash flows because this method explicitly reconciles the difference between the two. c. Disagree. Many people think that depreciation expense represents a fund established to finance future acquisitions of fixed assets. If this were true, it would follow that companies using accelerated depreciation methods would have more cash available than companies that use straight­line depreciation. However, as demonstrated in part (a), depreciation expense has absolutely no effect on the cash flows from operating activities. Both companies have the same cash flows, even though each company uses a different method to compute depreciation. One must remember that depreciation is simply the allocation of the net cost of fixed assets. Cash flows associated with fixed assets arise when fixed assets are acquired or sold, not when the cost of the fixed asset is allocated to expenses. E14–8 a. 1. 20,000 Cash (+A) Contributed 20,000 Owner contributed Capital (+SE) capital. 2. Cash (+A) 60,000 Notes Payable (+L) 60,000 Borrowed money from the bank. 3. Property, Plant, & Equipment (+A) 25,000 Cash (–A) 25,000 Purchased long­lived assets. 4. Inventory (+A) 40,000 Cash (–A) 25,000 Accounts Payable (+L) 15,000 Purchased...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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