The cash that was used for operating and investing activities came from the stockholders (issuance of common stock) and creditors (borrowing with a notes payable). This is to be expected for a new company, or a company that is expanding, but should not be considered an ongoing way to finance the business. Cash from operating activities should be available to purchase assets and pay dividends to shareholders.
There is a concern that all proceeds raised from issuing stock have been used. If operating activities cannot generate positive cash flows, can the corporation issue additional stock to raise cash?
The corporation owes on the note payable. Will there be sufficient cash from operating activities to pay the interest and repay the principal?
Does the corporation need to acquire additional assets for use in the business? If so, will it be able to get the cash to pay for these future acquisitions?
The net of zero may be misleading. The reader may think that there are no potential problems because the cash flows netted to zero. The user of the Statement of Cash Flows needs to consider the activities of each of the sections – operating, investing, and financing.
S-A E 231
How are each of the following financial statements interrelated? (a) Retained earnings statement and income statement. (b) Retained earnings statement and balance sheet. (c) Balance sheet and statement of cash flows.
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 231
(a) Net income from the income statement is reported as an increase to retained earnings on the retained earnings statement.
(b) The ending amount on the retained earnings statement is reported as the retained earnings amount on the balance sheet.
(c) The ending amount on the statement of cash flows is reported as the cash amount on the balance sheet.
S-A E 232
Broadway Corporation’s stockholders’ equity equals one-fourth of the company’s total assets. The company’s liabilities are $270,000. What is the amount of the company’s stockholders’ equity?
Ans: N/A, LO: 3, Bloom: AN, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 232
$90,000: X = 270,000 + ¼X
S-A E 233
Which three items affect retained earnings, and how do they affect it?
Ans: N/A, LO: 3, Bloom: K, Difficulty: Easy, Min: 2, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 233
Net income increases retained earnings, whereas a net loss and dividends decrease it.
S-A E 234
The framework used to record and summarize the economic activities of a business enterprise is referred to as the accounting equation. State the basic accounting equation and define its major components. How are financial statements related to the accounting equation?
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Business Economics
Solution 234
The basic accounting equation is expressed as follows:
Assets = Liabilities + Stockholders’ Equity
Assets are defined as resources owned by the business. Liabilities are creditors’ claims against the assets of the business; or simply put, liabilities are existing debts and obligations. Stockholders’ equity is the ownership claim on the total assets of the business; it is equal to total assets minus total liabilities.
The financial statements report the results and effects of transactions on the business' assets, liabilities, and stockholders’ equity. The balance sheet is a summary expression of the basic accounting equation.
S-A E 235
What types of information are presented in the notes to the financial statements?
Ans: N/A, LO: 3, Bloom: C, Difficulty: Easy, Min: 3, AACSB: Communication, AICPA BB: Legal/Regulatory Perspective, AICPA FC: Reporting, AICPA PC: Communications, IMA: Reporting
Solution 235
Information included in the notes to the financial statements clarifies information presented in the financial statements and includes descriptions of accounting policies, explanations of uncertainties and contingencies, and details too voluminous to be reported in the financial statements.
S-A E 236 (Ethics)
Joe Laramie owns and operates Joe's Burgers, a small fast food store, located at the edge of City College campus in Newton, Ohio. After several very profitable years, Joe's Burgers began to have problems. Most of the problems were related to Joe's expansion of the eating area in the restaurant without corresponding increases in the food preparation area. Joe does not have the cash or financial backing to expand further. He has therefore decided to sell his business.