MUHASEBE II

Operating activities create revenues, expenses, gains, and losses net income, which is a product of accrual basis accounting. Operating activities reflects day to day operations of the business such as cash receipts form customers for sales of merchandise inventory and services and cash outflows for purchases of merchandise inventory or payment of operating expenses. This section also includes cash receipts for interest and dividend income and cash payments for interest expense and income tax expense. The correct answer is C.

Investing activities are the activities that increase or decrease long term assets such as property, plant, equipment, notes receivable and investments. This section of statement of cash flows shows cash inflows from selling long term assets and collecting of long term notes receivable and cash outflows for the purchase of long term assets and loaning long term notes receivable The. orrect answer is A.

Financing activities are the activities that increase or decrease long term liabilities and equity. So in the cash flow statement, financing activities include cash inflows and outflows involved in long term liabilities and equity such as issuing shares, paying dividends and buying and selling treasury shares, borrowing money and paying off long term liabilities such as notes payable, bonds payable. The correct answer is D.

Financing activities are the activities that increase or decrease long term liabilities and equity. So in the cash flow statement, financing activities include cash inflows and outflows involved in long term liabilities and equity such as issuing shares, paying dividends and buying and selling treasury shares, borrowing money and paying off long term liabilities such as notes payable, bonds payable. The correct answer is B.

The statement of cash flows reports:

• Where cash came from (receipts) and how cash was spent (payments)

• Why cash increased or decreased during period

• Covers a span of time and is dated the same as the income statement

The correct answer is E.

The statement of cash flows explains the inequality of cash and profit. The reason of the difference between cash and profit is the application of different rules for income statement and the statement of cash flows. Income statement takes into account expenses or revenues whether or not they create cash movements. Items such credit sales, accrued but not yet collected revenues, depreciation expenses, provision expenses are included in the income statement and they are not included in the cash flows statement.

On the other hand, the cash flows statement takes into account the transactions that require cash, related to the activities whether or not they provide income. For example, transactions such as the collection of receivables, payment of debts and the prepayment of fixed assets are not reported in the income statement, but they are considered in the cash flow statement because they cause cash flow. In addition, income and expense items included in the income statement on a cash basis are also included in the statement of cash flows.

The correct answer is E.

Investing activities are the activities that increase or decrease long term assets such as property, plant, equipment, notes receivable and investments. This section of statement of cash flows shows cash inflows from selling long term assets and collecting of long term notes receivable and cash outflows for the purchase of long term assets and loaning long term notes receivable.  The correct answer is D.

These two methods differ in the calculation manner for reporting operating cash flows. The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. Indirect method relies on necessary additions and subtractions from net profit to find operating cash flows. Indirect method starts with net income and reconciles to net cash provided by operating activities. The direct method shows each major class of gross cash receipts and gross cash payments. The direct method shows all cash receipts and cash payments from operating activities. It shows cash inflows and outflows more clearly, and it is more comprehensible than indirect method. The correct answer is C.

Acquiring a building by issuing common share, acquiring a land by issuing notes payable and retiring notes payable by issuing common share are the examples for non-cash investing and financing activities. These transactions don’t create a cash activity, but they are important. For this reason, non-cash investing and financing activities are reported in a separate part of the statement of cash flows. The correct answer is E.

Below you will find some explanations about the changes in the current assets and current liability accounts that create adjustments to net income:

• An increase in a current asset other than cash causes a decrease in cash.

• A decrease in a current asset other than cash causes an increase in cash.

• A decrease in a current liability decreases cash.

• An increase in a current liability increases cash.

The correct answer is E.