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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

Expert verified

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 operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.

Boundary Rare Coins (BRC) was formed on January 1, 2018. Additional data for the year follow:

  1. On January 1, 2018, BRC issued no-par common stock for \(475,000.
  2. Early in January, BRC made the following cash payments:For store fixtures, \)53,000;For merchandise inventory, \(260,000;For rent expense on the store building, \)13,000
  3. Later in the year, BRC purchased merchandise inventory on account for \(240,000. Before year-end, BRC paid \)160,000 of these accounts payable.
  4. During 2018, BRC sold 2,200 units of merchandise inventory for \(450 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)330,000, and ending merchandise inventory totaled \(170,000.
  5. The store employs three people. The combined annual payroll is \)80,000, of which BRC still owes \(4,000 at year-end.
  6. At the end of the year, BRC paid income tax of \)24,000. There are no income taxes payable.
  7. Late in 2018, BRC paid cash dividends of $40,000.
  8. For store fixtures, BRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

  1. Prepare BRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
  2. Prepare BRC’s balance sheet at December 31, 2018.
  3. Prepare BRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method.

Computing cash flow items—direct method Consider the following facts:

  1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000.
  2. Cost of goods sold is \)77,000.
  3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000.
  4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively.

Requirements

  1. Compute cash collections from customers.
  2. Compute cash payments for merchandise inventory

Julie Lopez Company expects the following for 2018:

  1. Net cash provided by operating activities of \(148,000.
  2. Net cash provided by financing activities of \)56,000.
  3. Net cash used for investing activities of \(77,000 (no sales of long-term assets).
  4. Cash dividends paid to stockholders of \)7,000.

How much free cash flow does Lopez expect for 2018?

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

  1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?
  2. Under what condition would the reclassification of the receivables be ethical? Unethical?
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