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Chapter 14: Q14-10RQ (page 769)

Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

Short Answer

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Answer

If current liabilities increase it is an increased adjustment to the net income. If there is a decrease in current liabilities it causes a decreasing adjustment from the net income.

Step by step solution

01

If current liabilities increase it is an increased adjustment to the net income

An increase in current liabilities means cash is not yet paid only expenses are recorded. Therefore, an increase in current liabilities causes an increased adjustment to the income.

02

If current liabilities decrease it is a decreasing adjustment from the net income

Decrease in current liabilities is the opposite of an increase in current liabilitiesand hence it causes a decreasing adjustment to the net income.

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Most popular questions from this chapter

Preparing the statement of cash flows—indirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset were $13,240. Plant asset was acquired for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Question: Muench, Inc.’s accountant has partially completed the spreadsheet for the statement of cash flows. Fill in the remaining missing information.

Question: Describe the three basic types of cash flow activities.

Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flows

The comparative balance sheet of Robeson Educational Supply at December 31, 2018, reported the following:

2018 2017 Current Assets: Cash \( 83,900 \) 20,500 Accounts Receivable 14,500 21,800 Merchandise Inventory 61,800 60,400 Current Liabilities: Accounts Payable 29,600 28,100 Accrued Liabilities 10,500 11,900 Robeson’s transactions during 2018 included the following:

Payment of cash dividends \( 21,200

Depreciation expense \) 17,400

Purchase of equipment with cash 54,400

Purchase of building with cash 103,000

Issuance of long-term notes payable to borrow cash 44,000

Net income 63,600

Issuance of common stock for cash 111,000

Requirements

1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.

2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.

3. If Robeson plans similar activity for 2018, what is its expected free cash flow?

Question: Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

  1. Collections from customers are \(13,000 more than sales.
  2. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
  3. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
  4. Payments to employees are \)3,000 more than salaries expense.
  5. Cash payment for the acquisition of plant assets is \(102,000.
  6. Cash receipts from sale of land total \)29,000.
  7. Cash receipts from issuance of common stock total \(38,000.
  8. Payment of long-term notes payable is \)10,000.
  9. Payment of dividends is \(9,000.
  10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.

Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method.
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