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Chapter 14: Q14-1SE (page 769)

Question: Describing the purposes of the statement of cash flows Financial statements all have a goal.

The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions:

a. Predict future cash flows.

b. Evaluate management decisions.

c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.

Short Answer

Expert verified

Answer

The statement of cash flows reports cash inflow and cash outflow from the business during a specified period.

Step by step solution

01

How investors and creditors can predict future cash flows

With the help of statement of cash flows, free cash flowcan be easily calculated that can help investors and creditors to predict future cash flows.

02

How investors and creditors can evaluate management decisions

Mainly the investing and financing decisions are taken by the management of the company so, if the cash flow of investing and financing activity is positive it means management take decisions wisely.

03

How investors and creditors can predict the ability to make debt payments to lenders and pay dividends to stockholders.

The consistency in making debt payment and dividends to stockholdersby the company help investors and creditors to predict the ability to make debt payments to lenders and pay dividends to stockholders.

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Most popular questions from this chapter

Question: Big Island, Inc. began 2018 with cash of \(40,000. During the year, Big Island earned revenue of \)200,000 and collected \(120,000 from customers. Expenses for the year totaled \)160,000, of which Big Island paid \(65,000 in cash to suppliers and \)80,000 in cash to employees. The company received \(2,000 cash for interest revenue and paid \)10,000 for income taxes. Big Island also paid \(35,000 to purchase equipment and a cash dividend of \)15,000 to its stockholders during 2018. Prepare the company’s operating activities section of the statement of cash flows for the year ended December 31, 2018. Use the direct method.

Question: What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?

Question: Describe the five steps used to prepare the statement of cash flows by the indirect method.

Computing operating activities cash flow—indirect method

The records of Vintage Color Engraving reveal the following:

Net income \( 36,000

Depreciation expense \) 5,000

Sales revenue 53,000

Decrease in current liabilities 19,000

Loss on sale of land 4,000

Increase in current assets other than cash 10,000

Acquisition of land 35,000

Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.

Question: Computing cash flows from operating activities—indirect method

Winding Road Cellular accountants have assembled the following data for the year ended April 30, 2018:

Cash receipt from sale of land \( 27,000

Net income \) 55,000

Depreciation expense 2,000

Cash purchase of equipment 44,000

Cash payment of dividends 5,800

Decrease in current liabilities 20,000

Cash receipt from issuance of common stock 17,000

Increase in current assets other than cash 27,000

Prepare the operating activities section using the indirect method for Winding Road Cellular’s statement of cash flows for the year ended April 30, 2018.
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