ACCT 1A Lecture Notes - Lecture 27: Money Market Fund, United States Treasury Security, Promissory Note

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rosebuffalo981

18 Aug 2020

School

Irvine Valley College

Department

Accounting

Course

ACCT 1A

Professor

seilo

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Document Summary

Cash flow permits a company to expand its operations, replace worn assets, take advantage of new investment opportunities, pay creditors, and pay dividends to owners. The statement of cash flows focuses attention on a firm"s ability to generate cash internally, its management of operating assets and liabilities, and the details of its investments and external financing. Briefly, the statement explains how the cash balance at the beginning of the period changed to another cash balance at the end of the period. Cash equivalents are short-term, highly liquid investments that are both (1) readily convertible to known amounts of cash and (2) less than three months to their maturity and subject to an insignificant risk of changes in value. Ex: treasury bills (a form of short-term government debt), money market funds, and commercial paper (short-term notes payable issued by large corporations) The statement reports cash inflows and outflows based on three broad categories:

Related Questions

Choose the correction answer

15. The statement of cash flowsprovides information to help investors and creditors assess thecash and noncash investing and financing transactions during theperiod.

T F

16. The net increase(decrease) in cash reported on the statement of cash flows shouldreconcile the beginning and ending cash balances reported in thecomparative balance sheets.

T F

17. Anobjective of the statement of cash flows is to

a. disclose changes during the period in all assetand all equity accounts.

b. disclose the change in working capital during theperiod.

c. provide information about the operating,investing, and financing activities of an entity during aperiod.

d. None of these answers are correct.

18. Theprimary purpose of the statement of cash flows is to provideinformation

a. about the operating, investing, and financingactivities of an entity during a period.

b. that is useful in assessing future cash flowprospects.

c. about the cash receipts and cash payments of anentity during a period.

d. about the entity's ability to meet itsobligations and to pay dividends.

19. Cash equivalents are

a. treasury bills, commercial paper, and moneymarket funds purchased with excess cash.

b. investments with original maturities of threemonths or less.

c. readily convertible into known amounts ofcash.

d. All of these answers are correct.

20. Xanthe Corporation had the following transactions occur in thecurrent year:

1. Cash sale of merchandise inventory.

2. Sale of delivery truck at book value.

3. Sale of Xanthe common stock for cash.

4. Issuance of a note payable to a bank forcash.

5. Sale of a security held as anavailable-for-sale investment.

6. Collection of loan receivable.

How many of the above items willappear as a cash inflow from investing activities on a statement ofcash flows for the current year?

a. Five items

b. Four items

c. Three items

d. Two items

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LuluCo reported the following on its 2014 income statement. Using the income statement and the balance sheet given below, prepare the statement of cash flows using the indirect method. Ignore required disclosures for cash flows associated with interest paid and received, dividends paid and received and income taxes as well as any non-cash disclosures that may have occurred in the current year.

Analysis of accounts:

1) Retired bonds, paid $11,500

2) Sold HTM investment in Lala Consulting common shares for $11,500

3) Purchased equipment $57,000 cash

4) Sold furniture, and settled in cash.

5) Purchased HFT investments $3,000 cash. This companyâs HFT investments are not readily convertible to a known amount of cash but will be traded within 12 months.

6) Paid cash dividends

7) Issued common shares, 2,300 shares at $5 per share.

8) Changes in other balance sheet accounts resulted from usual transactions and events

LuluCo
Income Statement
For the year ended December 31, 2014
Sales		$515,000
Operating expenses
Cost of goods sold	257,500
Depreciation expense	10,000
Interest expense	4,725
Amortization expense	19,000
Other operating expenses	97,600	388,825
Other revenues and expenses
Loss on sale of HTM investments		-1,000
Net income		$125,175


LuluCo
Balance Sheet
As of December 31, 2014	2014	2013
Cash	$16,000	$31,500
Investments (held for trading	61,000	58,000
Accounts receivable, net	72,500	89,000
Inventory	69,500	82,000
HTM investments	43,000	55,500
Property, plant, equipment, net	117,000	120,000
Patent, net	34,000	53,000
Total assets	$413,000	$489,000
Accounts payable	$68,500	$78,000
Salaries payable	53,500	43,000
Short-term notes payable	122,000	139,500
Bonds payable	83,000	94,500
Common shares	39,000	27,500
Retained earnings	47,000	106,500
Total liabilities and shareholders' equity	$413,000	$489,000

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1. A creditor is reviewing Hoffman Electronicsâ statements ofretained earnings for the last 3 years. The creditor is trying todetermine whether a substantial loan should be given to HoffmanElectronics. Which question will most likely be answered byreviewing the statement of retained earnings?

a. Does Hoffman Electronics make risky investments that impedethe cash flow of the firm?

b. What was the ending permanent account balance for HoffmanElectronics last quarter?

c. What assets owned by Hoffman Electronics are valuable enoughto cover debt repayment?

d. Does Hoffman Electronics have enough earnings to pay bothdividends and debts?

2. True or false. By reviewing a companyâs statement of retainedearnings over multiple reporting periods, an investor can evaluatethe companyâs future growth potential based on net incomechanges.

3. A creditor would most likely be interested in reviewing afirmâs statement of retained earnings to determine if the firm

a. exhibits liquidity.

b.can repay its debt obligations.

c.makes risky investments.

d.has sufficient receivables.

4. On statement of cash flow, the repayment of loans iscategorized as a cash flow from ____activities.

a. operating

b. financing

5."Fill in the blank" question: select the correct answer.

In a statement of cash flows, cash inflows that result fromproviding goods to customers are included in the section calledâcash flows from_______ activities.

a. investing

b. operating

c. sales

d. investing

6. Creditors want to know whether Photon, Inc. uses itsavailable cash to purchase new equipment. Which section of thestatement of cash flows would provide this information?

a.Cash flows from operating activities

b.Cash flows from sales activities

c.Cash flows from financing activities

d.Cash flows from investing activities

7. Creditors are examining the statement of cash flows forPhoton, Inc. Which of the following questions can be answered byreviewing the statement of cash flows?

a. What is the average net income of Photon?

b.What type of assets does Photon possess?

c.Does Photon reset its temporary accounts?

d.Does Photon pay its bills when they are due?

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ACCT 1A Lecture Notes - Lecture 27: Money Market Fund, United States Treasury Security, Promissory Note

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