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Chapter 16

Reporting the Statement of Cash Flows

QUESTIONS

1. On a statement of cash flows prepared according to the direct method, operating activities generally include cash receipts from the sale of goods and services, cash dividends received from stock investments in other entities, and interest on loans to others. Operating activities also include cash outflows such as payments for merchandise, salaries, rent, income taxes, utilities, and other operating expense items.
2. The direct method of reporting cash flows from operating activities itemizes the major classes of cash receipts such as sales to customers, and also itemizes the major classes of cash payments such as for merchandise, interest, taxes, and other operating expenses.
3. The indirect method of reporting cash flows from operating activities begins with net income and then adjusts it for items that are necessary to reconcile net income to the net cash provided or used by operating activities.
4. On a statement of cash flows, investing activities include cash outflows from purchases of long-term investments such as stocks and bonds, from purchases of plant assets such as land, buildings, and machinery, and from purchases of other noncurrent assets such as natural resources and intangible assets. When these types of assets are sold, the cash inflows from the sales are also reported as investing activities.
5. On a statement of cash flows, financing activities include cash inflows such as those that result from issuing preferred or common stock, and from borrowing by issuing bonds or signing long-term or short-term notes payable. Financing activities also include cash outflows such as dividend payments to stockholders, purchases of treasury stock, and repayments of debt.
6. Payments of cash dividends should be reported on the statement of cash flows as financing activities.
7. The amount of the land purchase that was paid for in cash ($20,000) should be reported on the statement of cash flows as an investing activity. Also, a schedule of noncash investing and financing activities or the notes to the statement should show the $100,000 land investment, the $80,000 financing in the form of a long-term note payable, and the net $20,000 cash outflow.

8. Since this cash inflow results from borrowing money, it is reported on the statement of cash flows as a financing activity.
9.
Yes; even though a company reports positive net income for the year, it may still show a net cash outflow from operating activities. When net income is reconciled to the net cash flow from operating activities, the net effect of all the adjustment items may be a subtraction from net income (examples of such adjustments are accrued revenues, prepaid expenses, and other gains). If the amount of this net subtraction is larger than the net income, the result is net cash used by operating activities.



10. Depreciation is not a source or a use of cash, e