Title: Taking It to the Net 1
QA_Ori: Mendocino Brewing Company uses the indirect method to construct
the consolidated statement of cash flows.
Title: Taking It to the Net 2
QA_Ori: The largest reconciling item is for depreciation and amortization
totaling $1,488,000.
Title: Taking It to the Net 3
QA_Ori:
The following table shows the net income (or net loss) and the cash flows
from operations for Mendocino Brewing for 2010 and 2011. Over this
2010 2011
Title: Taking It to the Net 4
QA_Ori:
Title: Taking It to the Net 5
QA_Ori: In the recent period, for supplementary cash flow information, the
company reports cash flows related to: Interest paid, and Income taxes paid.
Title: Taking It to the Net 6
QA_Ori: Yes, the company reports non-cash financing information related to
“Common stock issued to satisfy liabilities.”
Title: Teamwork in Action 1
QA_Ori:
a. The reporting objective of the statement of cash flows is to provide information
How does a company obtain its cash?
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
c. Steps to prepare the statement of cash flows:
(i) Compute the net increase or decrease in cash using comparative
(ii) Compute net cash flow in operating activities using the direct or indirect
method.
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.
1* Ability to pay dividends.
Title: Teamwork in Action 2
QA_Ori:
Adjusting Net Income to Cash Flow from Operating Activities
Items to Add Items to Subtract
a. Noncash expenses Noncash revenues
Title: Teamwork in Action 3
QA_Ori:
a. Cash receipts from customers = Sales – Increase in Accounts Receivable, or,
+ Decrease in Accounts Receivable
Explanation: Sales reflects what is earned during the period. If Accounts
b. Cash paid for merchandise requires a two-step computation.
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
Explanation: If prepaid expenses increase, the entity paid for more than was
incurred, so we add it. If prepaid expenses decrease, the entity paid for less
d. Cash paid for interest and taxes = Interest and tax expense + Decrease in
related payable, or, – Increase in related payable.
Explanation: If the related payable decreases, the entity paid for more than
Title: Entrepreneurial Decision 1
QA_Ori: It is common that small businesses must pay cash in advance for items
such as rent, advertising, supplies, and facilities expansion. Consequently, those
Title: Entrepreneurial Decision 2
QA_Ori: As a privately held corporation, TOMS can potentially raise cash
financing for expansion by selling shares in the company or by borrowing the
Title: Entrepreneurial Decision
QA_Ori:
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
Consequently, my evaluation is positive. Operating cash flows are very good and
Title: Hitting the Road 1
QA_Ori:
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
Title: Hitting the Road 2
QA_Ori: Some analysts tend to focus on this particular earnings definition
(earnings before interest and taxes or EBIT) as it purportedly allows a focus
Title: Hitting the Road 3
QA_Ori: Answer depends on the links visited and chosen for the report.
Title: Global Decision 1
QA_Ori:
Piaggio’s cash flow on total assets ratio follows (in Euro thousands):
Current Year = Operating cash flows / Average total assets
Prior Year = Operating cash flows / Average total assets
Title: Global Decision 2
QA_Ori:
For the current year, Piaggio’s ratio (10.2%) is lower than Polaris’s (26.4%)