Problem #2 (11 points) Specify on which of the four major financial statements y

Question

Problem #2 (11 points) Specify on which of the four major financial statements you would find the following: Balance Sheet Income Statement Statement of Retained Eamings Statement of Cash Flows A. Accounts Receivable Increase in Accounts Receivable C. Net Cash Flow from Financing D Rent expense E Notes ant Icome StomaNs Payable F.Decrease in Accounts Payable alanie She G. Accumulated Depreciation Speeify on which two of the four majgr financial statements you would find the following: ance sheet /, and SCK H. Depreciation Expense I. Total Cash Dividends Paid and

Explanation / Answer

A) Accounts receivable is the component of current assets which is shown in Balance sheet.

B) Increase in accounts receivable is change in working capital. So it is used in calculating cash flow from operating activities. So, Increase in accounts receivable is found in Cash flow statement.

C) Net cash flow from financing is found in cash flow from financing activities. So, this is found in cash flow statement.

D) Rent expense is expenditure so it is found in Income statement as all operating expenses are subtracted from gross income to calculate EBIT.

E) Notes payable is current liability, so it is found in balance sheet.

F) Decrease in accounts payable is change in working capital. So it is used in calculating cash flow from operating activities. So, Decrease in accounts payable is found in Cash flow statement.

G) Accumulated depreciation reduces the value of fixed assets and it is shown in Balance sheet.

H) Depreciation expense is found in income statement as it is expense. However, it is shown in cash flow from operating activities to add it back in net income as it is a non-cash item. So, depreciation is found in income statement and cash flow statement.

I) Total cash dividends paid reduces retained earnings. So, it is found in statement of retained earnings. Also, dividend paid is shown in cash flow from financing activities.

Q2

A)

Cash flow from operating activities

Amount $M

EBIT

500

Tax

-150

Net income

350

Add non-cash item - depreciation

200

Less increase in current assets

-10

Add increase in current liability

5

Net cash inflow from operating activities

545

B)

Cash flow from investing activities

Amount $M

Purchase of fixed assets

-90

Net cash outflow from investing activities

-90

C) Company’s free cash –   545-90 = 455

Cash flow from operating activities

Amount $M

EBIT

500

Tax

-150

Net income

350

Add non-cash item - depreciation

200

Less increase in current assets

-10

Add increase in current liability

5

Net cash inflow from operating activities

545

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