Teamwork in Action — BTN 12-6
Part 1
a. The reporting objective of the statement of cash flows is to provide
information about important cash inflows and outflows for business
decision makers. It answers specific questions such as:
How does a company obtain its cash?
Where does a company spend its cash?
What is the change in the cash balance?
b. The statement can be prepared using the direct method or the indirect
method for reporting cash flows from operating activities.
Similarities
Both methods report the same net cash flow from operating activities.
Both methods classify cash flows into operating, financing, and
investing categories.
Differences
Cash flow from operating activities is determined differently. The direct
method determines all operating cash inflows and outflows, and then
subtracts total operating outflows from inflows. The indirect method
forwarded, distributed, or posted on a website, in whole or part.
Teamwork in Action (Continued)
c. Steps to prepare the statement of cash flows:
(i) Compute the net increase or decrease in cash using comparative
balance sheet data. This is the target number or the number the
statement will explain and prove.
Also, identify and list noncash financing and investing activities in a
separate schedule or note.
d. Common analyses made from information in the statement of cash flows
include assessing a company’s:
Ability to generate future cash flows.
Ability to pay dividends.
Part 2
Adjusting Net Income to Cash Flow from Operating Activities
Items to Add Items to Subtract
a. Noncash expenses Noncash revenues
Financial and Managerial Accounting, 6th Edition
Teamwork in Action (Concluded)
Part 3
a. Cash receipts from customers = Sales – Increase in Accounts Receivable,
or, + Decrease in Accounts Receivable.
b. Cash paid for inventory requires a two-step computation.
(1) Purchases = Cost of goods sold + Increase in inventory, or, – Decrease
in inventory.
Explanation for (1): If inventory increases, the entity bought more than was
Explanation for (2): If Accounts Payable decreases, the entity paid for more
c. Cash paid for wages and operating expenses = Wages and other operating
liabilities].
Explanation: If prepaid expenses increase, the entity paid for more than
was incurred, so we add it. If prepaid expenses decrease, the entity paid
period’s expenses, so we add it.
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, – Increase in related payable.
forwarded, distributed, or posted on a website, in whole or part.
Entrepreneurial Decision — BTN 12-7
1. It is common that small businesses must pay cash in advance for items such
as rent, advertising, supplies, and facilities expansion. Consequently, those
2. As a privately owned company, it can potentially raise cash financing for
expansion by selling shares in the company or by borrowing money. The
Entrepreneurial Decision — BTN 12-8
Memorandum
To: Jenna and Matt Wilder
From: Your name
Subject: Performance evaluation of Mountain High
Date: Current Date
I have completed my evaluation of your company, Mountain High. My conclusion
is that Mountain High is performing well. This is in spite of its reported net loss
and its negative net cash flow, which I explain in this memorandum.
First, with respect to the net loss, please note that it includes an $85,000
Second, with respect to its net cash outflow of $(5,000), please note that this is
mainly due to Mountain High’s renovation and expansion activities. This is
Consequently, my evaluation is positive. Operating cash flows are very good and
attention should be directed at maintaining or increasing these amounts. Also,
Financial and Managerial Accounting, 6th Edition
Hitting the Road — BTN 12-9
1. The Motley Fool’s Website defines cash flow as earnings before interest,
taxes, depreciation, and amortization (EBITDA). The school’s justification
for this definition includes: “Interest income and expense, as well as taxes, are
all tossed aside because cash flow is designed to focus on the operating business
2. Some analysts tend to focus on this particular earnings definition
(earnings before interest and taxes or EBIT) as it purportedly allows a
3. Answer depends on the links visited and chosen for the report.
Global Decision — BTN 12-10
1. Samsung’s cash flow on total assets ratio follows (in KRW millions):
Current Year = Operating cash flows / Average total assets
= 46,707,440 / [( 214,075,018 + 181,071,570)/2]₩ ₩ ₩
= 46,707,440 / 197,573,294₩ ₩ = 23.6 %
2. For the current and prior years, Samsung’s ratios (23.6% and 22.5%,
respectively) are lower than Apple’s ratios (28.0% and 34.8%, respectively).
forwarded, distributed, or posted on a website, in whole or part.