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Chapter 14: Q-14-2RQ (page 768)

Question: How does the statement of cash flows help users of financial statements?

Short Answer

Expert verified

Answer

The statement of cash flows helps users in various ways such as comparison with other firms in operating efficiency, liquidity, and solvency, reconciliation of cash balance, etc

Step by step solution

01

Users of statement of cash flow

  1. Owners of the company
  2. Potential lenders
  3. Accounting personnel
  4. Employees
  5. Investors
02

How the statement of cash flows help users of financial statements

  1. Owners of the company: Owners use statements of cash flow to check the operating efficiencyand compare it with other firms.
  2. Potential lenders: Potential lenders can analyze the liquidity and solvency of the company with the help of a statement of cash flow.
  3. Accounting personnel: A statement of cash flows can be used to reconcile the cash balance in the balance sheet.
  4. Employees: Employees use statements of cash flows to check their upcoming possible bonuses and increments.
  5. Investors: The financing and investing activities in the cash flow statement helps investors to assess the decision-making power of the company.

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Most popular questions from this chapter

Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

  1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?
  2. Under what condition would the reclassification of the receivables be ethical? Unethical?

Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

Computing cash flow items—direct method Consider the following facts:

  1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000.
  2. Cost of goods sold is \)77,000.
  3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000.
  4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively.

Requirements

  1. Compute cash collections from customers.
  2. Compute cash payments for merchandise inventory

Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

  1. Collections from customers are \(13,000 more than sales.
  2. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
  3. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
  4. Payments to employees are \)3,000 more than salaries expense.
  5. Cash payment for the acquisition of plant assets is \(102,000.
  6. Cash receipts from sale of land total \)29,000.
  7. Cash receipts from issuance of common stock total \(38,000.
  8. Payment of long-term notes payable is \)10,000.
  9. Payment of dividends is \(9,000.
  10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.
    Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method.
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