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Chapter 2: 20BP (page 52)

Identify whether each of the following items increases or decreases cash flow:

Increase in accounts receivable

Decrease in prepaid expenses

Increase in notes payable

Increase in inventory

Depreciation expense

Dividend payment

Increase in investment

Increase in accrued expenses

Decrease in account payable

Short Answer

Expert verified

An increase in account receivable, decrease in prepaid expense, and increase in accrued expense cause an increase in the cash flow. Whereas an increase in notes payable, decrease in account payable, increase in investment, increase in inventory, and dividend payment causes the decrease in cash flow. In addition, depreciation expense is a non-cash transaction.

Step by step solution

01

Cash flow statement

A cash flow statement is defined as the statement prepared to show the cash inflow and outflow of the company.It represents the reconciliation of the opening and closing balance of the cash account.

02

Classification of the transaction as increase or decrease in the cash flows

Transaction

Classification

Increase in accounts receivable

Increase in cash flow

Increase in notes payable

Decrease in cash flow

Depreciation expense

Non-cash transaction

Increase in investment

Decrease in cash flow

Decrease in account payable

Decrease in cash flow

Decrease in prepaid expense

Increase in cash flow

Increase in inventory

Decrease in cash flow

Dividend payment

Decrease in cash flow

Increase in accrued expenses

Increase in cash flow

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Most popular questions from this chapter

Vriend Software Inc.’s book value per share is \(15.20. If earnings per share is\)1.88 and the firm’s stock trades in the stock market at 3.5 times book value pershare, what will the P/E ratio be? (Round to the nearest whole number.)

Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and explain the direction of the impact based on your assumptions.

b. Inventory turnover

The balance sheet for Stud Clothiers is shown below. Sales for the year were \(2,400,000, with 90 percent of sales sold on credit.

Stud Clothier

Balance sheet 20X1

Assets

Liabilities and Equity

Cash

\)60,000

Account payable

\(220,000

Account receivable

240,000

Accrued taxes

30,000

Inventory

350,000

Bonds payable (long term)

150,000

Plant and equipment

410,000

Common stock

80,000

Paid in capital

200,000

Retained earnings

380,000

Total assets

\)1,060,000

Total LIbilities and Equity

$1,060,000

Compute the following:

b. Quick ratio.

The Rogers Corporation has a gross profit of \(880,000 and \)360,000 in depreciation expense. The Evans Corporation also has \(880,000 in gross profit,

with \)60,000 in depreciation expense. Selling and administrative expense is $120,000 for each company. Given that the tax rate is 40 percent, compute the cash flow for both companies.

Explain the difference in cash flow between the two firms.

Using the income statement for Times Mirror and Glass Co., compute the following ratios:

The total assets for this company equal \(80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.

c. Profit margin.

Times mirror and glass company

Sales

\)126,000

Less: Cost of goods sold

93,000

Gross profit

\(33,000

Less: selling and administrative expenses

11,000

Lease Expenses

4,000

Operating profit*

\)18,000

Less: Interest expenses

3,000

Earning before taxes

\(15,000

Less: Taxes (30%)

4,500

Earning after taxes

\)10,500

*equal income before interest and taxes
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