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Changes In Cash Flow
Understanding The Changes In Cash
| Question | Answer |
|---|---|
| When Mary Smith invests her personal money into her new company, what will happen to her company's Cash account? | The Cash account increases, and because of the double-entry system, the owner's equity account Mary Smith, Capital also increases. |
| When a company purchases inventory (merchandise purchased in order to be resold) what will happen to its Cash account? | The Cash account decreases, and because of the double-entry system, the asset account Inventory increases. |
| What happens to the company's Cash account if it borrows money from the bank by signing a note payable? | The Cash account increases, and because of the double-entry system, the liability account Notes Payable increases.. |
| What happens to a company's Cash account if it declares and pays a dividend on its shares of stock? | When the company pays a dividend the Cash account decreases. Because of the double-entry system, the stockholders' equity account Retained Earnings also decreases. |
| What is the effect on its Cash account when a company pays some of its Accounts Payable? | The Cash account decreases, and because of the double-entry system, the liability account Accounts Payable is decreased. |
| What is the effect on its Cash account when a company prepays a 6-month insurance premium? | The Cash account decreases, and because of the double-entry system, the asset account Prepaid Insurance increases. |
| What is the effect on its Cash account when a company sells merchandise, but allows the customer to pay in 30 days? | There is no effect on the Cash account. The transaction does, however, result in a debit to the asset account Accounts Receivable and a credit to the income statement account Sales, which has the effect of increasing sales and net income on the income STM |
| What is the effect on its Cash account when a company receives payment from one of its customers 30 days after the sale was recorded? | On the day the cash is received, the Cash account increases, and because of the double-entry system, the asset account Accounts Receivable is decreased. (Be aware that this transaction has no effect on the income statement—there is no increase in Sales |
| If a company's Accounts Payable account decreased, what is the likely effect this will have on Cash? | If Accounts Payable decreased, we assume that the company paid some of its bills, therefore we assume that the Cash account also decreased. |
| If the asset account Prepaid Insurance increased, what is the likely effect on Cash? | If the asset account Prepaid Insurance increased, we assume that the company paid an insurance premium that covered more than the current month. Therefore, we assume that the Cash account decreased. Consider the general journal entry for this transaction |
| If the asset account Land increased, what's the likely effect on Cash? | If the asset account Land increased, we assume that the company paid cash to purchase the land, therefore, the Cash account decreased. |
| If the asset account Land decreased, what's the likely effect on Cash? | The Cash account increased because we assume that the company receives cash from the sale of any and all assets. |
| If the liability account Bonds Payable increases, what is the likely effect on Cash? | The Cash account increases because we assume the company receives cash when it issues bonds. |
| If the liability account Bonds Payable decreases, what is the likely effect on Cash? | The Cash account decreases because we assume that the company used cash or paid cash to repurchase/redeem/reduce its bonds that are outstanding. |
| change in assets (other than cash) | For a change in assets (other than cash), the change in the Cash account is in the opposite direction. |
| change in liabilities and owner's equity | For a change in liabilities and owner's equity, the change in the Cash account is in the same direction. |
| The statement of cash flows has four distinct sections: | 1) Cash involving operating activities 2) Cash involving investing activities 3) Cash involving financing activities 4) Supplemental information/disclosures |
| Cash Provided From or Used By Operating Activities | This section of the cash flow statement reports the company's net income and then converts it from the accrual basis to the cash basis by using the changes in the balances of the current asset and current liability accounts, such as: Accounts Receivable |
| Cash Provided From or Used By Investing Activities | This section of the cash flow statement reports the cash flows causing the balances of long-term asset accounts to change. Examples include: Long-term Investments Land Buildings Equipment Furniture & Fixtures Vehicles |
| Cash Provided From or Used By Financing Activities | This section of the cash flow statement reports the cash flows causing the balances of the long-term liability accounts, the stockholders' equity accounts, and the short-term loans payable accounts to change. |
Created by:
westwood15
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