C213 Study Guide - Solution.docx

# 300000 3000 15000 282000 what is ravens cash flows

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300,000 – 3,000 - 15,000 = 282,000 What is Raven’s cash flows from investing activities? 1,000,000 - 250,000 = 750,000 What is Raven’s cash flow from financing activities? 200,000 + 100,000 – 50,000 – 20,000 = 230,000 Describe the differences between the direct and indirect methods of the cash flow statement. The direct and indirect method only apply to the operating section of the cash flow statement. The investing and financing are always prepared using a direct method . The operating activities section of a statement of cash flows prepared using the direct method is, in effect, a cash-basis income statement. Unlike the indirect method, the direct method does not start with net income. Instead, this method reports directly the major classes of operating cash receipts and payments of an entity during a period. The direct method is favored by many users of financial statements because it is easy to understand. The indirect method begins with net income as reported in the income statement and then details the adjustments needed to arrive at cash flow from operations. The indirect method is favored and used by most companies because it is relatively easy to construct from existing balance sheet and income statement data. In addition, the indirect method highlights the reasons for the difference between net income and cash from operations. In addition, GAAP required this reconciliation and so if a firm uses the direct method, they must present the indirect method in the footnotes anyway, thus having to do the calculations twice. Analyze a statement of cash flows to identify operating, investing, or financing activities. See prior problem. 19

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Chapter 7: Cash Budgeting Evaluate a company’s credit policy. This material is not covered in the text. Calculate cash collections from cash and credit sales based upon collection history. The following problem illustrates how to calculate future cash collections using a firm’s sales and their collection history: 20
Calculate cash payments for disbursement based upon a company’s payment policy. The following problem illustrates how to calculate a firm’s cash payments based on their payment policy and projected purchases. 21

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Chapter 8: Internal Controls Identify common financial statement errors. The text identifies three categories of sources of financial statement misstatement. Note that the term “error” is usually reserved for one of these categories. Errors - Result when unintentional mistakes are made in recording transactions, posting transactions, summarizing accounts, and so forth. Errors are not intentional and when detected are immediately corrected. Errors can result from sloppy accounting, bad assumptions, misinformation, miscalculations, and other factors. Disagreement - Result when different people arrive at different conclusions based on the same set of facts. Because accounting involves judgment and estimates, opportunities for honest disagreements in judgment abound. These disagreements often come about because of the different incentives that motivate those involved with producing the financial statements. For example, there might be differing views about
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• Spring '16
• Kenneth Cassell
• Balance Sheet, Generally Accepted Accounting Principles

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