Understanding Financial Statements Statements 11th Edition Fraser Ormiston Test Bank Solutions
Complete download Test Bank for Understanding Financial Statements 11th Edition Fraser Ormiston: https://testbankarea.com/?p=190 Complete download SOLUTIONS MANUAL for Understanding Financial Statements 11th Edition Fraser Ormiston: https://testbankarea.com/?p=189 Chapter 4 True-False
1. The analyst of financial statements should consider cash flows over a period of time, looking at patterns of performance and exploring underlying underlying causes of strength and weakness. 2. The statement of cash flows shows the changes in the balance sheet accounts between periods. 3. Cash flow from operations represents the “cash” income from the company’s company’s business operations.
4. Cash from sales of property, plant and equipment is considered an operating activity on the cash flow statement. 5. Proceeds from borrowing are a financing cash outflow. 6. Repurchase of a firm’s own shares is an investing cash outflow.
7. Cash outflows result from increases in asset accounts and decreases in liability and equity accounts. 8. Analyzing the statement of cash flows helps determine the future external financing needs of a business firm.
9. An analysis of the statement of cash flows should, at a minimum, cover the following areas: analysis of cash inflows, analysis of cash outflows, and an analysis of the structure of asset and liabilities. 10. The amounts on a cash flow statement cannot be manipulated. Fill in the Blank
1. Cash flows are segregated on a statement of cash flows by activities, activities, and activities. 2. A change in the retained earnings account is the result of the for the period and the payment of . 3. Per FASB rules, firms may use the method or the method to calculate and present cash flow from operating activities. 4. The statement.
is one way to common size the cash flow
For questions 5 through 10, insert the word “added” or “subtracted” in the blank.
5. An increase in inventory should be flow from operating activities.
to convert net income to cash
6. An increase in accounts payable should be income to cash flow from operating activities.
to convert net
7. A decrease in accrued liabilities should be income to cash flow from operating activities.
to convert net
8. A decrease in accounts receivable should be income to cash flow from operating activities.
to convert net
9. Depreciation and amortization should be cash flow from operating activities. 10. A gain on sale of asset should be flow from operating activities.
to convert net income to
to convert net income to cash
Multiple Choice
1. All of the following are reasons reasons that the statement of cash flows is useful to the analyst except: a. The statement of cash flows shows how cash is generated during an accounting period and how it has been used. b. A positive net income income figure on on the income statement is ultimately ultimately insignificant unless a company can translate its earnings into cash, and the only source in financial statements for learning about cash generation is the statement of cash flows. c. The statement of cash flows shows the adjustments made to net income in order to calculate cash flow from operations; those should be examined to determine why cash flow from operations is negative or positive. d. The statement of cash flows is the only financial statement that cannot be manipulated. 2. How is the statement of cash flows connected connected to the balance balance sheet? a. The statement of cash flows shows changes in the asset and liability accounts to explain cash from operating activities. b. The changes in all all revenue and expense accounts accounts are calculated calculated and then listed as cash inflows or outflows. c. The changes in all of the balance sheet accounts are calculated and then listed as inflows or outflows, except for cash. d. Changes in asset ass et accounts are recorded as operating activities, changes in liability accounts are recorded as financing activities and changes in equity accounts are recorded as investing activities. 3. The following item item would be classified classified as an operating activity activity on the statement statement of cash flows: a. Payments for inventory. b. Acquisitions of equipment. c. Proceeds from borrowing. d. Payments on loans. 4. The following item item would be classified classified as an investing activity activity on the statement statement of cash flows: a. Proceeds from borrowing. b. Sale of goods. goods. c. Sale of property. d. Payment to lenders.
5. The following item item would be classified classified as a financing activity activity on the statement statement of cash flows: a. Payments for inventory. b. Payment of dividends. dividends. c. Acquisition of land. d. Sales of goods. 6. Which item is a noncash item that would be added to net income to convert it to cash flow from operating activities? a. Accounts receivable. b. Depreciation. c. Accounts payable. d. Inventory. Use the indirect method method to answer questions questions 7-10. The following information information is available for Armstrong Company: Net income $450 Depreciation expense 80 Decrease in accts. receiv. 20 Increase in inventories 15
Increase in plant and and equip. Payment of dividends Increase in long-term debt Decrease in accounts payable
7. What is cash flow from operating activities for Armstrong Company? a. $505 b. $495 c. $335 d. $55 8. What is cash from investing activities for Armstrong Company? a. ($160) b. $160 c. $170 d. ($170) 9. What is cash from financing activities activities for Armstrong Company? Company? a. $70 b. $60 c. $90 d. ($110)
$170 10 100 30
10. What is the change in in cash for Armstrong Armstrong Company? Company? a. $315 b. $565 c. $425 d. $215 Use the indirect method method to answer questions questions 11-14. The following information is available for Felix Company: Net income Depreciation expense Gain on sale of assets Increase in inventories
$300 20 35 25
Decrease in plant and and equip. Increase in deferred tax asset Decrease in long-term debt Decrease in accounts payable
11. What is cash flow from operating activities for Felix Company? a. $240 b. $70 c. $320 d. $250 12. What is cash from investing activities for Felix Company? a. $5 b. $40 c. $75 d. $10 13. What is cash from from financing activities activities for Felix Company? Company? a. $50 b. $65 c. ($50) d. $60 14. What is the change in in cash for Felix Felix Company? Company? a. $310 b. $205 c. $330 d. $230 15. What is implied implied if the inventory account has increased? increased?
$40 5 50 15
a. Cash flow from financing activities has decreased relative to net income. b. Cash flow from from operating activities activities has increased relative relative to net income. income. c. Cash flow from operating activities has h as decreased relative to net income. d. Cash flow from financing activities has increased relative to net income. 16. Why are gains gains and losses from asset sales removed from net income when calculating the cash flows from operating activities? a. Selling assets is a noncash item. b. Gains and losses from from asset sales are a financing financing activity. activity. c. Gains and losses are not removed from net income when calculating the cash flows from operating activities d. The entire proceeds from sales of long-lived assets are included in investing activities. 17. What is the preferred preferred method method to generate cash cash in a firm? a. Operating activities. b. Investing activities. activities. c. Financing activities. d. Investing and financing activities. 18. Which item may be of concern when analyzing cash flow from financing activities? a. Increasing inventories. b. Borrowing each each year to repay debt from prior years. c. Repayment of debt. d. Payments of dividends. 19. Which of the following would increase cash from operating activities? a. Increasing accounts receivable. b. Increasing inventories. inventories. c. Decreasing accounts payable. d. Decreasing accounts receivable. 20. Which of the following items would be a way to manipulate the cash flow from operating activities amount on the statement of cash flows? a. Adding depreciation back to net income to determine cash flow from operating activities. b. Including interest expense and tax expense in the calculation calculation of cash flow from operating activities. c. Recording an item that should be recorded as an operating activity as an investing activity.
d. The cash flow statement cannot be manipulated. manipulated. Short Answer/Problem Answer/Problem
1. What can be learned from a statement of cash flows? 2. Discuss the format of a statement of cash flows prepared using the indirect method. 3. What are the three areas of a cash flow statement that an analyst should cover at a minimum? Discuss each area by explaining items an analyst should be concerned with when reviewing the cash flow statement. 4. Identify the following as operating (O), financing (F), or investing (I) activities: a. Proceeds from borrowing b. Purchases of property, plant plant and equipment c. Cash from sale of a business segment d. Interest payments to lenders e. Cash from sales of goods and services s ervices f. Payment of dividends g. Payments for purchase of inventory h. Payments for taxes i. Repurchase of a firm’s own shares j. Cash collections from from loans to others others 5. Indicate which of the following current asset and current liability accounts are operating (O), investing (I), or financing (F) accounts. a. Current portion of long-term debt b. Accounts receivable receivable c. Prepaid expenses d. Marketable securities e. Accrued expenses f. Notes payable to bank 6. Indicate whether each of the following items would result in net cash flow from operating activities being higher (H) or lower (L) than net income. a. Increase in inventory b. Increase in accounts accounts payable c. Amortization expense d. Decrease in accrued liabilities
e. Loss on sale of assets f. Decrease in accounts receivable g. Decrease in deferred tax assets h. Increase in deferred revenue i. Decrease in income taxes payable j. Decrease in prepaid prepaid expenses 7. Jesse Corporation reported reported the following following information information for the current current year: (1) Net income is $205 million. (2) Acquisitions were $32 million. (3) Customer accounts receivable increased by $12 million. (4) Dividends paid to common shareholders were $8 million. (5) Depreciation expense was $41 million. (6) Income tax payable decreased by $11 million. (7) Long-term debt increased by $28 million. (8) Accounts payable decreased by $6 million. (9) Inventories increased by $17 million. Required: Based on the above information, information, calculate the following following items: a. b. c. d.
Cash flow from operating activities. Cash flow from investing activities. Cash flow from financing activities. The increase or decrease in the cash balance.
8. N&M Corporation reported reported the following information information for the current year: year: (1) Net income is $560 million. (2) Sales of assets $26 million. (3) Customer accounts receivable decreased by $14 million. (4) Repurchases of common stock were $20 million. (5) Depreciation expense was $38 million. (6) Income tax payable increased by $4 million. (7) Long-term debt decreased by $13 million. (8) Accounts payable increased by $9 million. (9) Inventories increased by $24 million. Required: Based on the above information, information, calculate the following following items: a. b.
Cash flow from operating activities. Cash flow from investing activities.
c. d.
Cash flow from financing activities. The increase or decrease in the cash balance.
9. Prepare the statement of cash flows for Franklin Company using the indirect method. Franklin Company Income Statement For the Year Ended December 31, 2015 Revenues Depreciation expense Other operating expenses Income before income taxes Interest expense Income tax expense Net income
$9,000 $ 650 7,100
7,750 $1,250 440 270 $ 540
Franklin Company Balance Sheet December 31, 2015 and 2014 2015
Assets: Cash A/R Inventories Plant & Equip. Less: Acc. Depr. Total Assets
$ 230 510 980 3,140 (1,520) $3,340
2014
$ 480 590 960 2,150 (870) $3,310
2015
Liab. & SE: A/P $ 370 Inc.Taxes/Pay. 120 LT debt 910 Common Stock 1,100 Retained Earnings 840 Total Liab. & SE $3,340
2014
$ 550 280 830 1,350 300 $3,310
10. Prepare the statement of cash flows for Benji Company using the indirect method. Benji Company Income Statement For the Year Ended December 31, 2015 Revenues Depreciation expense Other operating expenses Income before income taxes Income tax expense Net income
$8,200 $ 400 6,800
7,200 $1,000 340 $ 660
Benji Company Balance Sheet December 31, 2015 and 2014 2015
Assets: Cash A/R Inventories Plant & Equip. Less: Acc. Depr. Total Assets
$ 380 640 950 2,870 (1,120) $3,720
2014
$ 120 580 840 2,990 (720) $3,810
2015
Liab. & SE: A/P $ 770 Inc.Taxes/Pay. 90 LT debt 1,080 Common Stock 1,000 Retained Earnings 780 Total Liab. & SE $3,720
2014
$ 600 160 1,630 1,000 420 $3,810
11. Using the excerpt excerpt from the Ralston Company Company statement of cash flows analyze analyze thoroughly the cash flow from operating activities. Be sure to offer possible reasons for the changes identified. Operating Activities 2015 2014 Net income $175,000 $137,000 Depreciation and amortization 28,500 23,200 Deferred income taxes 7,600 4,100 Equity in gains of investees 3,300 1,100 Increase (decrease) in cash resulting from changes in: Accounts receivable (6,500) (66,700) Inventories 35,600 (53,900) Accounts payable and accrued expenses 43,400 (5,000) Net cash provided (used) (used) by operating activities activities $286,900 $(39,800)
12. Using the excerpt excerpt from the Animal Animal World Company statement of cash flows flows analyze thoroughly the cash flow from operating activities. Be sure to offer possible reasons for the changes identified. identified. Operating Activities Net income Depreciation and amortization Loss on disposal of property and equipment Increase (decrease) in cash resulting from changes in: Accounts receivable Inventories Accounts payable and accrued expenses Net cash provided (used) (used) by operating activities activities
2015 $(2,800) 21,800 11,000
2014 $(9,800) 21,700 3,100
(10,100) (35,500) 54,700 $39,100
(9,200) (56,500) 24,200 $(26,500)
13. Using the summary analysis for eApparel, Inc. analyze the cash inflows and cash outflows for 2015 and 2014. Inflows (in percent of total) Sales and maturities of marketable securities Proceeds from issuance of common stock Proceeds from long-term debt Total Inflows Outflows (in percent of total) Operations Purchases of marketable securities Purchases of fixed assets Repayment of long-term debt Total Outflows
2015 20.1 54.5 25.4 100.0
2014 22.9 23.5 53.6 100.0
18.4 19.8 26.5 35.3 100.0
22.4 21.7 23.1 32.8 100.0
14. Use the following statement of cash flows for Star Pharmaceuticals to: a. prepare a summary analysis of the statement of cash flows, b. analyze cash flow from operating operating activities, and c. analyze the cash inflows and cash outflows. Star Pharmaceuticals Pharmaceuticals Statement of Cash Flows For the Years Ended December 31, 2015 and 2014
(in millions) 2015 2014 Cash flows from operating activities (CFO): Net income $5,800 $3,300 Adjustments to reconcile net income to CFO: Depreciation and amortization 550 360 Deferred income taxes 10 (580) Stock-based compensation 590 170 (Increase) decrease in operating assets and liabilities: Accounts receivable (490) (380) Inventories (6,900) (1,960) Other current assets 410 (480) Accounts payable 700 690 Income taxes payable 250 140 Accrued liabilities 170 (290) Net CFO 1,090 970 Cash flows from investing activities: Purchases of property and equipment (740) (750) Acquisitions 0 (350) Net cash used by investing activities (740) (1,100) Cash flows from financing activities: Proceeds from common stock sales 2,000 580 Repayment of short-term line of credit 0 (140) Repayment of long-term debt (70) (70) Net cash provided by financing activities activities 1,930 370 Net increase in cash 2,280 240 Beginning cash balance 980 740 Ending cash balance $3,260 $980
15. Using the statements of cash flows for JAJ Enterprises: a. prepare a summary analysis of the statement of cash flows, b. analyze cash flow from operating operating activities, and c. analyze the cash inflows and cash outflows. JAJ Enterprises Statement of Cash Flows For the Years Ended December 31, 2015 and 2014
(in thousands) 2015 2014 Cash flows from operating activities (CFO): Net income $8,100 $6,800 Adjustments to reconcile net income to CFO: Depreciation and amortization 3,100 1,600 Deferred income taxes 900 700 Other non-cash items (600) (700) (Increase) decrease in operating assets and liabilities: Accounts receivable (7,800) (2,300) Inventories (2,100) 1,700 Other current assets (900) 2,000 Accounts payable (1,300) 4,100 Income taxes payable 400 (800) Accrued liabilities 1,700 700 Net CFO 1,500 13,800 Cash flows from investing activities: Purchases of property and equipment (800) (1,200) Net cash used by investing activities (800) (1,200) Cash flows from financing activities: Proceeds from common stock sales 4,700 4,600 Proceeds (repayments) of short-term debt 100 (1,100) Repayment of long-term debt (200) (3,300) Net cash provided by financing activities activities 4,600 200 Net increase in cash 5,300 12,800 Beginning cash balance 30,600 17,800 Ending cash balance $35,900 $30,600
Solutions - Chapter 4 True-False
1. 2. 3. 4. 5.
T T T F F
6. F 7. T 8. T 9. F 10. F
Fill in the Blank
1. operating, investing, financing 2. net income, dividends 3. direct, indirect 4. summary analysis 5. subtracted 6. added 7. subtracted 8. added 9. added 10. subtracted Multiple Choice
1. 2. 3. 4. 5.
d c a c b
6. 7. 8. 9. 10.
b a d c c
11. 12. 13. 14. 15.
a b c d c
16. 17. 18. 19. 20.
d a b d c
Short Answer/Problem Answer/Problem
1. The statement of cash flows shows how cash has been generated during a year or a quarter, and how it has been used. The statement of cash flows is an important analytical tool for creditors, investors, and other users of financial statement data that helps determine the following about a business firm: • Its ability to generate cash flows in the future for cash • Its capacity to meet obligations for future external external financing financing needs • Its future
investing activities activities • Its success in productively managing investing implementing financing and investing investing strategies • Its effectiveness in implementing 2. Regardless of format used the statement of cash flows shows changes over time rather than the absolute dollar amount of the accounts at a point in time. Because a balance sheet balances, the changes in all of the balance sheet accounts balance, and the changes that reflect cash inflows less the changes that result from cash outflows will equal the changes in the cash account. The statement of cash flows is prepared in exactly that way: by calculating the changes in all of the balance sheet accounts, including cash; then listing the changes in all of the accounts except cash as inflows or outflows; and categorizing the flows by operating, financing, or investing activities. The inflows less the outflows balance to and explain the change in cash. FASB allows firms to calculate cash from operating activities using either the direct or the indirect format. The indirect method starts with net income and adjusts for deferrals; accruals; noncash items, such as depreciation and amortization; and nonoperating nonoperating items, such as gains and losses on asset sales. The net income number is converted from an accrual-based amount to a cash-basis cash-basis amount called called cash from operating activities. activities. 3. An analysis of the statement of cash flows should, at a minimum, cover the analysis of cash flow from operating activities, analysis of cash inflows and analysis of cash outflows. When analyzing the cash flow from operating activities, the analyst should be concerned with the success or failure of the firm in generating cash from operations, the underlying causes of the the positive or negative operating cash flow, the magnitude of positive or negative operating cash flow and the fluctuations in cash flow flow from operations over over time. Analyzing cash inflows is important to determine determine if the firm is generating cash ca sh from operations, the preferred preferred method, or if the the firm must rely on external sources. Using external sources to generate the majority of cash year after year should be investigated further. When analyzing the cash outflows, the analyst should consider the necessity of the outflow and how the outflow was financed. 4. a. F b. I c. I d. O e. O
f. F g. O h. O i. F j. I
5. a. F b. O c. O
d. I e. O f. F
6. a. L b. H c. H d. L e. H
f. H g. H h. H i. L j. H
7. a. Net income Increased A/R Depreciation Decreased tax payable Decreased A/P Increased inventories
$205 million (12) 41 (11) (6) (17) $200 million
b. Acquisitions
($32) million
c. Dividends paid Increase of long-term debt
($8) million 28 $20 million
d. $200 + (32) + 20 = $188 million 8. a. Net income Decreased A/R Depreciation Increased tax payable Increased A/P Increased inventories
b. Sales of assets c. Repurchases of common stock Decrease of long-term debt
$560 million 14 38 4 9 (24) $601 million $26 million ($20) million ($13) ($33) million
d. $601 + 26 - 33 = $594 million
9. Franklin Company Statement of Cash Flows For the Year Ended December 31, 2015 Net income Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation Changes in assets and liabilities: Accounts receivable Inventory Accounts payable Income taxes payable Net cash provided by operating activities activities Cash flows from investing activities: Capital expenditures Net cash used by investing activities Cash flows from financing activities: Proceeds from long-term debt Repurchase of common stock Net cash used by financing financing activities Net increase (decrease) (decrease) in cash Cash at beginning of period Cash at end of period
$540
650 80 (20) (180) (160) $910 (990) ($990) 80 (250) ($170) ($250) 480 $230
10. Benji Company Statement of Cash Flows For the Year Ended December 31, 2015 Net income Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation Changes in assets and liabilities: Accounts receivable Inventory Accounts payable Income taxes payable Net cash provided by operating activities activities Cash flows from investing activities: Sales of plant and equipment Net cash provided by investing activities activities Cash flows from financing activities: Repayment of long-term debt Dividends paid Net cash used by financing financing activities Net increase (decrease) (decrease) in cash Cash at beginning of period Cash at end of period
$660
400 (60) (110) 170 (70) $990 120 $120 (550) (300) ($850) $260 120 $380
11. Ralston Company generated negative cash flows from operations (CFO) despite a positive net income in 2014. In 2015 the firm was able to increase its net income from 2014 and cash from operations increased to a positive amount greater than net income for the year. Accounts receivable increased both years but especially in 2014, causing CFO to be lower. Inventories increased significantly in 2014, but declined in 2015. Accounts payable and accrued expenses were paid down in 2014, but increased significantly in 2015 which contributed to the larger CFO. The large increases in accounts receivable and inventory in 2014 combined with increased net income, a smaller s maller increase in accounts receivable and a large decrease in inventories suggest the firm may be expanding.
Related keywords link click to visit: understanding financial statements 11th edition answer key understanding financial statements 11th test bank understanding financial statements 11th edition pdf understanding financial statements 11th edition solutions understanding financial statements 10th edition pdf understanding financial statements 11th edition ebook understanding financial statements 11th edition solution manual understanding financial statements fraser pdf understanding financial statements 10th edition answer key
