honeycfa

Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash flows. Operating information as of the end of the most recent month appears below:

• Cash from sale of truck of $7,000.
• Cash salaries paid of $17,000.
• Cash from customers of $45,000.
• Depreciation expense of $5,500.
• Interest on bank line of credit of $1,000.
• Cash paid to suppliers of $22,000.
• Other cash expenses, including rent, of $6,300.
• No taxes due.

Using this information, what is the cash flow from operations for the month?

A) $11,200.

B) -$1,300.

C) -$300.

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The format of the question information suggests the use of the direct cash flow method. In this method, depreciation is not a component of cash flow from operations. Cash flow from operations = (all numbers in thousands of dollars) 45 – 17 – 22 – 6.3 – 1.0 = -1.3, or -$1,300.

honeycfa

An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise	$5,000
Cash received from customers	14,000
Cash paid for purchase of equipment	22,000
Dividends paid	2,000
Cash received from issuance of preferred stock	10,000
Interest received on short-term investments	1,000
Wages paid	4,000
Repayment of loan to the bank	5,000
Cash from sale of land	12,000

Under U.S. GAAP, Xavier’s reported cash flow from operations will be:

A) -$5,000.

B) $6,000.

C) $5,000.

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Cash flow relating to operating activities includes cash paid to suppliers, cash received from customers, interest received, and wages paid. –5,000 + 14,000 + 1,000 + –4,000 = 6,000.

honeycfa

An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise	$5,000
Cash received from customers	14,000
Cash paid for purchase of equipment	22,000
Dividends paid	2,000
Cash received from issuance of preferred stock	10,000
Interest received on short-term investments	1,000
Wages paid	4,000
Repayment of loan to the bank	5,000
Cash from sale of land	12,000

Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be:

CFF

CFI

A) $3,000 -$10,000

B) $10,000 $12,000

C) $3,000 $12,000

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Cash flow relating to financing activities includes dividends paid, cash received from preferred stock, and repayment of loan. -2,000 + 10,000 + -5,000 = 3,000.

Cash flow relating to investing activities includes cash paid for equipment and cash from sale of land. -22,000 + 12,000 = -10,000.

honeycfa

In preparing its cash flow statement for the year ended December 31, 2004, Giant Corporation collected the following data:

Gain on sale of equipment	$6,000
Proceeds from sale of equipment	10,000
Purchase of Zip Co. bonds for	180,000 (maturity value $200,000)
Amortization of bond discount	2,000
Dividends paid	(75,000)
Proceeds from sale of Treasury stock	38,000

In its December 31, 2004, statement of cash flows, what amounts should Giant report as net cash used in investing activities and net cash used in financing activities?

Investing Activities

Financing Activities

A) $170,000 $37,000

B) $170,000 -$38,000

C) $178,000 -$37,000

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Investing Activities:
$10,000 – $180,000 = -$170,000 cash flow from investing or $170,000 used

Financing Activities:
$38,000 ? $75,000 = -$37,000 cash flow from financing or $37,000 used

Note that the question asked for net cash used therefore this is a positive cash outflow.

honeycfa

Which of the following items is least appropriately described as a liability arising from an operating activity for a non-financial company?

A) Cash advances from customers.

B) Trade payables.

C) The current portion of long-term debt.

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The current portion of long-term debt arises from a financing activity. The other items listed arise from operating activities.

honeycfa

Which of the following choices most accurately illustrates an operating liability and which most accurately illustrates a financing liability?

Operating liabilities

Financing liabilities

A) Short-term note payable Current portion of long-term debt

B) Customer advances Accrued liabilities

C) Accounts payable Current portion of long-term debt

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Operating liabilities result from the operations of the firm and consist of operating and trade liabilities such as accounts payable, customer advances, and accrued liabilities. Financing liabilities are a result of prior financing inflows. Financing liabilities (current) include short-term notes payable and the current maturities of long-term debt.

honeycfa

When a U.S. company pays dividends to its stockholders, which type of cash flow does this represent?

A) Operating.

B) Financing.

C) Investing.

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Dividends paid to stockholders are considered cash outlays from financing according to U.S. GAAP.

honeycfa

If Jackson Ski Company issues common stock, and uses the proceeds to purchase fixed assets such as equipment:

A) cash flow from financing would increase and cash flow from investing would decrease.

B) both cash flow from operations and cash flow from financing would increase.

C) cash flow from financing would decrease and cash flow from investing would increase.

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Cash flow from financing increases when stock is issued, while cash flow from investing decreases when spending for purchases of fixed assets.

honeycfa

Which of the following items would least likely be included in cash flow from financing?

A) Dividends paid to shareholders.

B) Gain on sale of stock of a subsidiary.

C) Purchase of treasury stock.

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Gains or losses will be found in cash flow from investments.

honeycfa

Which of the following is NOT a category on the statement of cash flows? Cash flow from:

A) financing.

B) operations.

C) sales.

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There are only three types of cash flows: financing, investing, and operating.