A statement of cash flows complements an accrual-based income statement by expla

Question

A statement of cash flows complements an accrual-based income statement by explaining the changes in cash during the period. Recall that revenues and expenses are reported on the - Select your answer -balance sheetincome statementretained earnings statementstatement of cash flowsCorrect 1 of Item 1 on an accrual basis. Consequently, some of the cash for the revenue earned may not have been - Select your answer -collected paidCorrect 2 of Item 1 as of the statement date. In other cases, cash may have been received before revenue is earned. Conversely, some of the cash for the expenses reported may not have been - Select your answer -collected paidCorrect 3 of Item 1 as of the statement date. And in still other cases, cash may have been paid before expense is incurred. This void caused by accrual accounting is filled by the statement of cash flows which explains the sources from which a company has acquired cash (inflows) and how the company has used its cash (outflows). A statement of cash flows helps the reader of the financial statements:

assess a company’s ability to produce future cash flows

judge a company’s ability to meet obligations and pay dividends

estimate the company’s need for external financing

Cash inflows and outflows come from three categories: operating activities, financing activities and investing activities.

Determine whether the activities described in the following table are operating, investing, or financing activities:

In addition to recognizing what type of activity transactions are describing, it is important to recognize whether a transaction is an increase in cash or a decrease in cash. Determine whether the activity described results in an increase in cash or a decrease in cash.

There are two methods for reporting operating activities on the Statement of Cash Flows, the direct method and the indirect method. Examples of the two methods are shown. Selected information from Rowe Publishing Company's Income Statement and Balance Sheets are provided as support to the following Statements of Cash Flows.

Selected information from Rowe Publishing Company's Income Statement

Selected information from Rowe Publishing Company's Balance Sheets

Direct method:

Indirect method:

Notice that the only difference between the two methods is in the - Select your answer -operatinginvestingfinancingCorrect 1 of Item 2 activities section. The direct method adjusts each item on the income statement from the accrual basis to the cash basis and the indirect method starts with net income and adjusts for non-cash items such as depreciation expense and for increases and decreases in the balances in current assets.

The balance sheets for Byron Manufacturing at December 31, 2013 and 2014 are shown:

Additional Information needed to prepare the Statement of Cash Flows using the indirect method:

Net income was $2,520

Byron paid $25,580 in cash dividends

Byron issued $49,830 in bonds payable for cash

Byron retired $93,830 in bonds payable with cash

No property, plant and equipment assets were sold or disposed of during the period

Prepare the Statement of Cash Flows using the indirect method.

The major causes of differences between Byron Manufacturing’s net income and net cash from operating activities are the non cash - Select your answer -depreciation expenseincrease in accounts payable proceeds from issuance of bonds payabledecrease in income taxes payableCorrect 15 of Item 3, the - Select your answer -depreciation expenseincrease in accounts payable proceeds from issuance of bonds payabledecrease in income taxes payableCorrect 16 of Item 3 (showing that the company paid less than what was expensed on the income statement), and the - Select your answer -depreciation expenseincrease in accounts payable proceeds from issuance of bonds payabledecrease in income taxes payableCorrect 17 of Item 3 (showing the company paid more for taxes than it expensed in the year.)

Company purchased a factory for cash - Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 4 of Item 1 Payment to supplier for purchase of inventory - Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 5 of Item 1 Company issued long-term bonds - Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 6 of Item 1 Company paid cash dividends - Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 7 of Item 1 Collection on customer's account - Select your answer -Operating ActivitiesInvesting ActivitiesFinancing ActivitiesCorrect 8 of Item 1

Explanation / Answer

Answer:

Company purchased a factory for cash Investing activities Payment to supplier for purchase of inventory Operating Activities Company issued long-term bonds Financing activities Company paid cash dividends Financing activities Collection on customer's account Operating Activities

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