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Chapter 11: Q4DQ (page 515)

Describe the direct method of reporting cash flows from operating activities.

Short Answer

Expert verified

The direct method is one of the methods of computing cash flows from operating activities in which cash receipts and payments are separately listed.

Step by step solution

01

Step 1Definition of Operating activities

The amount of money a business earns from ongoing, routine business operations, such as producing and selling products or offering clients a service, is known as cash flow from operating activities.

02

Explanation ondirect method

The direct method lists each main item of operating cash payments (such as amount spent for inventory) and receipts (such as amount received from clients) separately. To calculate the net cash provided (used) by operating operations, the cash payments are subtracted from the cash received.

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Most popular questions from this chapter

The following information is available for Amos Company for the year ended December 31, 2017.

a. Balance of retained earnings, December 31, 2016, prior to discovery of error, \(1,375,000.

b. Cash dividends declared and paid during 2017, \)43,000.

c. It forgot to record 2015 depreciation expense of \(55,500, which is net of \)4,500 in tax benefits.

d. The company earned $126,000 in 2017 net income.

Prepare a 2017 statement of retained earnings for Amos Company

Prepare journal entries to record each of the following four separate issuances of stock.

  1. A corporation issued 4,000 shares of \(5 par value common stock for \)35,000 cash.
  2. A corporation issued 2,000 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth \(40,000. The stock has a \)1 per share stated value.
  3. A corporation issued 2,000 shares of no-par common stock to its promoters in exchange for their efforts, estimated to be worth \(40,000. The stock has no stated value.
  4. A corporation issued 1,000 shares of \)50 par value preferred stock for $60,000 cash.

In the blank next to each corporate characteristic 1 through 8, enter the letter of the description that best relates to it.

1. Owner authority and control

a. Requires government approval

2. Ease of formation

b. Corporate income is taxed

3. Transferability of ownership

c. Separate legal entity

4. Ability to raise large capital amounts

d. Readily transferred

5. Duration of life

e. One vote per share

6. Owner liability

f. High ability

7. Legal status

g. Unlimited

8. Tax status of income

h. Limited

Compute the price-earnings ratio for each of these four separate companies. Which stock might an analyst likely investigate as being potentially undervalued by the market? Explain.

Company

Earningsper Share

Market Value Per Share

1

\( 12.00

\) 176.40

2

10.00

96.00

3

7.5

93.75

4

50

250.00

What is the difference between authorized shares and outstanding shares?
See all solutions

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