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    ACC 102 Chapter 16 Review Questions

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    Kaitlyn Maki
    This document provides an overview of key concepts related to preparing a statement of cash flows using the indirect method. It defines what a statement of cash flows reports, the three categories of cash flow activities, and the five steps to prepare it using the indirect method. Key points include starting with net income and adjusting for non-cash expenses like depreciation, as well as changes in current assets and liabilities to determine cash provided by operating activities.

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    ACC 102 Chapter 16 Review Questions

    Uploaded by

    Kaitlyn Maki
    89 views3 pages
    This document provides an overview of key concepts related to preparing a statement of cash flows using the indirect method. It defines what a statement of cash flows reports, the three categories of cash flow activities, and the five steps to prepare it using the indirect method. Key points include starting with net income and adjusting for non-cash expenses like depreciation, as well as changes in current assets and liabilities to determine cash provided by operating activities.

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    This document provides an overview of key concepts related to preparing a statement of cash flows using the indirect method. It defines what a statement of cash flows reports, the three categories of cash flow activities, and the five steps to prepare it using the indirect method. Key points include starting with net income and adjusting for non-cash expenses like depreciation, as well as changes in current assets and liabilities to determine cash provided by operating activities.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    89 views3 pages

    ACC 102 Chapter 16 Review Questions

    Uploaded by

    Kaitlyn Maki
    This document provides an overview of key concepts related to preparing a statement of cash flows using the indirect method. It defines what a statement of cash flows reports, the three categories of cash flow activities, and the five steps to prepare it using the indirect method. Key points include starting with net income and adjusting for non-cash expenses like depreciation, as well as changes in current assets and liabilities to determine cash provided by operating activities.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Maki 1

    Kaitlyn Maki

    Professor Gina Heaney

    Accounting 102

    July 19, 2020

    Chapter 16: Statement of Cash Flows

    Answer "Review Questions" 1-13, 15A on pages 869-870.

    1. A cash flow statement reports on a business’s cash receipts and cash payments for a

    specific period.

    2. The statement of cash flows helps users of financial statements to predict future cash

    flows, evaluate management, and predict ability to pay debts and dividends.

    3. The three basic types of cash flow activities are operating activities, investing activities,

    and financing activities. Operating activities create revenue or expense in the entity’s

    business. Investing activities increase or decrease long-term assets. Financing activities

    increase or decrease long-term liabilities and equity.

    4. Investing and financing transactions that do not involve cash are called non-cash

    investing and financing activities. Examples of these non-cash investing and financing

    activities include issuing stock in exchange for plant assets, retirement of debt by issuing

    stock, or purchasing plant assets with long-term notes payable.

    5. The two formats for reporting operating activities on the statement of cash flows are the

    indirect and direct methods. The indirect method starts with net income and adjusts it to

    net cash provided by operating activities. The direct method restates the income

    statement in terms of cash. It shows all the cash receipts and cash payments from

    operating activities.
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    6. The five steps used to prepare the statement of cash flows by the indirect method:

    a. STEP 1: Complete the cash flows from operating activities section using net

    income and adjusting for increases or decreases in current assets (other than cash)

    and current liabilities. Also, adjust for gains or losses on long-term assets and

    non-cash expenses such as depreciation expense.

    b. STEP 2: Complete the cash flows from investing activities section by reviewing

    the long-term assets section of the balance sheet.

    c. STEP 3: Complete the cash flows from financing activities section by reviewing

    the long-term liabilities and equity sections of the balance sheet.

    d. STEP 4: Compute the net increase or decrease in cash during the year. The

    change in cash is the key reconciling figure for the statement of cash flows and

    must match the change in cash reported on the comparative balance sheet.

    e. STEP 5: Prepare a separate schedule reporting any non-cash investing and

    financing activities.

    7. Depreciation expense, depletion expense, and amortization expense all impact the income

    statement decreasing net income. These expenses do not affect cash. The cash outflow

    related to these expenses occur when the asset is purchased. Therefore, to go from net

    income to cash flows, depreciation must be removed by adding it back to net income.

    8. A loss on disposal of long-term assets would be removed from net income on the

    statement of cash flows so the total cash receipts from the sale of the asset can be shown

    in the investing activities section.

    9. An increase in a current asset other than cash causes a decrease adjustment to net income.

    10. An increase in current liabilities causes an increase adjustment to net income.


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    11. Long-term asset accounts must be evaluated when completing the investing activities

    section of the statement of cash flows.

    12. Long-term liability accounts and equity accounts must be evaluated when completing the

    financing activities section of the statement of cash flows.

    13. The net change in cash section of the statement of cash flows should always reconcile

    with the statement of cash flows.

    15A. In the indirect method, we start with accrual basis net income and then adjunct it to cash

    basis through a series of adjusting items. When using the direct method, we take each line

    item of the income statement and convert it from accrual to cash basis.

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