a. Comparative balance sheets.
b. Current income statement.
c. Additional information.
2. Preparing the statement of cash flows from these data sources involves
three major steps:
balance sheets and selected additional data.
b. Analyze changes in noncurrent asset and liability accounts and
with the change in the cash account reported on the balance sheet
to make sure the amounts agree.
3. A company must convert net income from an accrual basis to a cash
basis to determine net cash provided/used by operating activities by
using either (1) the indirect method or (2) the direct method.
F. Preparing the Statement of Cash Flows—Indirect Method.
1. Step 1: Determine net cash provided/used by operating activities by
converting net income from an accrual basis to a cash basis.
a. Under the accrual basis of accounting, net income is not the same
as net cash provided by operating activities.
cash basis.
c. Noncash charges (depreciation expense, amortization, depletion)
activities.
d. A final adjustment in reconciling net income to net cash provided by
operating activities involves examining all changes in current asset
and current liability accounts.
e. Deduct from net income increases in current asset accounts, and
net cash provided by operating activities.
(1) When the Accounts Receivable balance increases, cash receipts
are lower than revenue earned under the accrual basis. The
company deducts from net income the amount of the increase in
accounts receivable, to arrive at net cash provided by operating
activities.
not taken place. The company adds to net income the amount of
the increase in accounts payable to arrive at net cash provided
by operating activities.
2. Step 2: Analyze changes in noncurrent asset and liability
accounts and record as investing and financing activities, or as noncash
investing and financing activities.
(Common Stock) accounts represent cash inflows from financing
activities. Decreases in long-term debt or paid-in capital accounts
of dividends.
3. Step 3: Compare the net change in cash on the statement of cash flows
make sure the amounts agree.
G. Using Cash Flows to Evaluate a Company.
2. Cash provided by operating activities fails to take into account that a
current levels to satisfy investors.
a company’s cash generating ability.
4. Free cash flow is calculated as cash provided by operations less capital
expenditures and cash dividends.
*H. Statement of Cash Flows—Direct Method.
1. Step 1: Determine the net cash provided/used by operating activities by
converting net income from an accrual basis to a cash basis.
13–12 Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only)
a. Companies compute net cash provided by operating activities by
adjusting each item in the income statement from the accrual basis
to the cash basis.
(1) Increase in accounts receivable: when accounts receivable
increase during the year, sales revenue on an accrual basis is
higher than cash receipts from customers.
(2) Increase in accounts payable: when accounts payable
payments is the net cash provided by operating activities.
*I. Preparing the Worksheet—Indirect Method.
The steps in preparing a worksheet are:
and their effects on the statement of cash flows.
c. Enter on the cash line and at the bottom of the worksheet the
2. Step 2: Analyze changes in noncurrent asset and liability accounts and
record as investing and financing activities, or as significant noncash
activities.
Copyright © 2014 John Wiley & Sons, Inc. Weygandt, Financial Accounting, 9/e, Instructor’s Manual (For Instructor Use Only) 13–13
b. Increases in long-term debt (Bonds Payable) or paid-in capital
accounts (Common Stock) represent cash inflows from financing
activities. Decreases in long-term debt or paid-in capital accounts
represent cash outflows from financing activities as does the payment
of dividends.
3. Step 3: Compare the net change in cash on the statement of cash flows
with the change in the cash account reported on the balance sheet to
make sure the amounts agree.
20 MINUTE QUIZ
Circle the correct answer.
True/False
on the statement of cash flows.
True False
2. In addition to the adjusted trial balance, information for the statement of cash flows is taken
True False
3. The purchase of inventory and investments in property, plant, and equipment are considered
cash outflows from operations.
True False
True False
5. When accounts receivable increases during the year, revenues on a cash basis are
higher than revenues on an accrual basis.
True False
6. Cash outflows to purchase property, plant, and equipment would be reported in the investing
section of the statement of cash flows.
True False
7. A statement of cash flows starts with net income and adds (or deducts) items that did not
used.
True False
8. The only use of a statement of cash flows is to help investors, creditors, and others assess
activities.
True False
9. The amortization of a patent is added back to net income to arrive at net cash provided
by operating activities.
True False
10. The issuance of shares of stock for plant assets is a significant noncash transaction.
True False
Multiple Choice
1. A company has credit sales of $900,000 and cash sales of $540,000 during the same
year that the Accounts Receivable account decreased by $120,000. What was the total
of cash receipts from sales?
a. $1,320,000.
b. $1,560,000.
c. $1,020,000.
d. $780,000.
2. Cash inflows from investing activities include
a. sale of common stock.
b. purchase of equipment.
c. sale of land.
d. issuance of long-term debt.
3. Operating activities do not include cash
a. inflows from revenue.
b. inflows from sale of equipment.
c. outflows for income taxes.
d. outflows for wages.
a. Decrease in short-term notes payable.
b. Depreciation expense.
c. Decrease in inventory.
d. Loss on sale of equipment.
5. Noncash investing and financing activities
d. all of the above.
ANSWERS TO QUIZ
True/False
Multiple Choice