Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 14: Q14-1SE (page 769)

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal.

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions:

a. Predict future cash flows.

b. Evaluate management decisions.

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

Short Answer

Expert verified

Answer

The statement of cash flows reports cash inflow and cash outflow from the business during a specified period.

Step by step solution

01

How investors and creditors can predict future cash flows

With the help of statement of cash flows, free cash flowcan be easily calculated that can help investors and creditors to predict future cash flows.

02

How investors and creditors can evaluate management decisions

Mainly the investing and financing decisions are taken by the management of the company so, if the cash flow of investing and financing activity is positive it means management take decisions wisely.

03

How investors and creditors can predict the ability to make debt payments to lenders and pay dividends to stockholders.

The consistency in making debt payment and dividends to stockholdersby the company help investors and creditors to predict the ability to make debt payments to lenders and pay dividends to stockholders.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Question: 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.

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the following:


20182017
Current

Assets:
Cash\( 87,700
\) 23,500
Accounts Receivable15,30022,000
Merchandise Inventory
62,600
60,400
Current

Liabilities:
Accounts Payable
28,100
26,100
Accrued Liabilities
10,600
11,300

Jackson’s transactions during 2018 included the following:

Payment of cash dividends \( 16,200

Depreciation expense \) 16,700

Purchase of equipment with cash 54,700

Purchase of building with cash 98,000

Issuance of long-term notes payable to borrow cash 48,000

Net income 57,600

Issuance of common stock for cash 105,000

Requirements

  1. Prepare the statement of cash flows of Jackson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
  2. Evaluate Jackson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
  3. If Jackson plans similar activity for 2019, what is its expected free cash flow?

Preparing the statement of cash flows—indirect method

Accountants for Morganson, Inc. have assembled the following data for the year ended December 31, 2018:

2018 2017 Current Assets: Cash \( 99,400 \) 25,000 Accounts Receivable 64,100 69,700 Merchandise Inventory 83,000 75,000 Current Liabilities: Accounts Payable 57,600 55,200 Income Tax Payable 14,800 16,800

Transaction Data for 2018:

Issuance of common stock for cash \( 38,000

Payment of notes payable \) 46,100

Depreciation expense 24,000

Payment of cash dividends 50,000

Purchase of equipment with cash 74,000

Issuance of notes payable to borrow cash 62,000

Acquisition of land by issuing long-term notes payable 119,000

Gain on sale of building 4,500 Book value of building sold 54,000

Net income 68,500

Prepare Morganton'sstatement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities.

Question: Big Island, Inc. began 2018 with cash of \(40,000. During the year, Big Island earned revenue of \)200,000 and collected \(120,000 from customers. Expenses for the year totaled \)160,000, of which Big Island paid \(65,000 in cash to suppliers and \)80,000 in cash to employees. The company received \(2,000 cash for interest revenue and paid \)10,000 for income taxes. Big Island also paid \(35,000 to purchase equipment and a cash dividend of \)15,000 to its stockholders during 2018. Prepare the company’s operating activities section of the statement of cash flows for the year ended December 31, 2018. Use the direct method.
See all solutions

Recommended explanations on Business Studies Textbooks

Strategic Analysis

Read Explanation

Managerial Economics

Read Explanation

Organizational Behavior

Read Explanation

Human Resources

Read Explanation

Intermediate Accounting

Read Explanation

Influences On Business

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free