Q Bank 18

Reinvestment ratio
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Terms in this set (20)
Reinvestment ratio
Measures the firm's ability to
acquire long term assets with
operating cash flow;
R = CFO/Cash Paid for Long-
Term Assets
Investing and finance ratio
which is more comprehensive, measures the firm's ability to purchase assets, satisfy debts, and pay dividends.
Cash to income ratio
measures the ability to generate cash from firm operations.

= CFO / operating income.
Debt payment ratio
Measures the firm's ability to satisfy LTD with Op CF. CFO / Cash LT Debt Repayment

More of a coverage ratio vs a performance ratio
Operating Liability
resuts from the operations of the firm and consists of operating and trade liabilities such as accounts payable, customer advances, and accrued liabilities
Financing Liabilities
are a result of prior financing inflows. Financing liabilities (current) include short-term notes payable and the current maturities of long-term debt.
What is a dividends paid to stockholders that doesn't represent cash flow relating to operating activity
U.S. GAAP requires dividends paid to stockholders to be classified as cash flow relating to financing activity, and interest paid to bondholders to be classified an operating activity.
Darth Corporation's net income was $1,200 in the most recent period. Its depreciation expense was $800 and its accounts receivable increased by $1,000. Based only on this information, cash flow from operating activities reported by Darth should be:
Adjustments to reconcile net income to cash flow from operating activities will require that depreciation ($800) be added back, and the increase in accounts receivable ($1,000) be subtracted: $1,200 + 800 - 1,000 = $1,000.
Which of the following statements regarding depreciation expense in the cash flow statements is CORRECT? Depreciation is added back to net income when determining CFO using:
Depreciation is a non-cash expense. Only in the indirect method is depreciation added back to net income when determining CFO because net income is only used in the indirect method and not the direct method. The direct method instead starts with cash sales and works down the income statement.
CFO
Cash flow relating to operating activities includes cash paid to suppliers, cash received from customers, interest received, and wages paid. -5,000 + 14,000 + 1,000 + -4,000 = 6,000.
Cash flow from investing in PP&EInvesting cash of $2 million was used to purchase the cargo plane. Proceeds from the sale of the plane were a source of $12 million of investing cash. Net CFI is $12 million − $2 million = $10 million. Under U.S. GAAP, the interest payment is included in cash from operations (CFO) and the dividend payment in cash from financing (CFF). Redemption of the bonds is a use of cash from financing (CFF).Indirect MethodA method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities. When recognizing a gain on the sale of fixed assets, the amount is a deduction to operating cash flows. This is because the gain would be double counted in the investing section and in net income. Therefore, the gain must be removed from net income. The direct method of cash flow calculation converts the income statement items to their cash equivalents, not the indirect method. Also, depreciation is added to net income in order to calculate CFO using the indirect method.Galaxy's net income in 20X4 was $800,000. What was Galaxy's cash flow from financing (CFF) in 20X4?Dividends declared are net income less the increase in retained earnings ($800,000 - $300,000 = $500,000). Dividends declared less the increase in dividends payable is dividends paid ($500,000 - ($300,000 - $200,000) = $400,000). This is a cash outflow so it is a negative number. ***Dividends paid are always cash flow from financing under U.S. GAAP. Note that accounts payable changes are included in cash flow from operations (CFO).Given the following information, what is the adjustment to net income when calculating cash flow from operations using the indirect method? Increase in accounts payable of $25. Sold one share of stock for $15. Paid dividends of $10 to shareholders. Depreciation expense of $100. Increase in inventory of $20. A)Using the indirect method, the increase in accounts payable is a source of cash from operations (+25), depreciation expense is a non-cash expense added back in computing cash from operations (+100), and increase in inventory is a use of cash from operations (-20) = 25 + 100 - 20 = 105. The sale of stock and the dividends paid are financing cash flows that are not included in net income, so they do not require adjustment when calculating CFO.Direct Methodeach line item of the accrual based income statement converted into cash recipts or payments undner accrual of accounting the timing of revenue and expense recognition occur when cash is recieved or paidDepreciation expense impactNone on cash flowHow is a stock split reported on SCFNo cash changes hands in a stock split. If a stock split is mentioned in the statement of cash flows, it will be disclosed in the footnotes as a noncash transaction.Interest payments, either as part of a coupon payment or to creditors, are considered which type of cash flow under U.S. GAAP?Under U.S. GAAP, interest paid is an operating cash flow.Under U.S. GAAP, taxes paid are classified in the statement of cash flows:Taxes paid are classified as operating cash outflows under U.S. GAAP.At the end of 20X8, Wichita, Inc., purchased equipment totaling $500,000. The seller of the equipment provided 100% debt financing with payments, including interest, that begin in 20X9. How does the equipment purchase affect Wichita's 20X8 cash flows?The seller financing is a noncash transaction. Accordingly, Wichita's 20X8 cash flows are unaffected. The noncash transaction should be disclosed in the footnotes to the 20X8 cash flow statement.