CHAPTER 14:
REVIEW QUESTIONS
1. What is the purpose of the statement of cash flows?
The major purpuse of the statement of cash flows is to provide relevant information about e cash
receipes and cash payments of a hospitalitiy business for a a stated period of time.
2. What kind of questions are answered by the SCF?
The SCF provides answers to such questions as:
* How much cash was generated from operation?
* How much cash was received from borrowings?
* How much cash was received from the issuance of common stock or sale of treasury stock?
* How much cash was received from the sale of property,equipment, investment, and marketable
securities?
* What amount of cash was used to pay back current loans and long-term debt?
* What amount of dividends was paid?
* What amount of cash was used to acquire property and equipment?
* What amount of cash was used to make investment?
3. How does the management of a hotel use the SCF?
Management uses the statement of cash flows to judge the company's abilitiy to meet is debt
obligations, estimate future borrowings, invest excess funds, plans for growth of facilities or locations,
and determine dividend policy.
4. What are some examples and brief description of cash equivalents?
Cash equivalents are highly liquid investment such as United States treasury bills, commercial
paper, and money market funds.
U.S treasury bills are borrowing by the United States government from investors.In the investment
community, they are called U.S. T-bills or simply T-bills.
Commercial paper is unsecured short-term obligations of major corporations issued through
brokers or directly by corporations.
A money fund is mutual fund that invests primarily in commercial paper, U.S. T-bills, and other f
financial instruments offering attractive interest rates.
5. What are not marketable securities considered to be cash eqivalents in the SCF?
Investments in the marketable securities (for example, common and preffered stock of other companies)
are not classified as cash equivalents because such securities do not have a maturity date and and may be
subject to significant fluctuations in the market value.
6.What are the three sections of the SCF?
The cash flows classified into three major sections:
* Operating activities
* Investing activities
* Financing activities
7.What is maent by the term "operating activities"?
Operating activities refer to hospitality company`s primary revenue-generating acticities.For a hotel,
revenue from all its operating centers, less expenses of operating centers, support centers, energy costs, and
fixed charges, is clasified as income from operating activities. Interest income and dividends income are
also included in income from operating activities.
8. Why are not gains and losses from the sale of property, equipment, and investment considered to
be a part of operating activities?
Cash flows from the sale of property, equipment, long-term investments are not considered as coming
from operating activities because these transactions are not part of a hotel`s primary business purpose or
day-to-day operations.
9. Why can`t the net income statement be used as cash flow from operating activities?
The statement of cash flows is base on cash transactions and not on accrual accounting for income and
expenses. Not sales on the income statement are cash sales and not all expenses were paid in the period
reported.
10. What are the two major noncash expenses?
Depriciation expense and amortization expense are noncash expenses that never affect cash flows.
They never require a cash outlay because this type of expense is derived from adjusting entries that merely
allocate the historical cost of a long-lived asset over an estimated useful life.
11. What are nonoperating gains and losses?
Nonoperating gains and losses result from the disposal or sale of assets such as property, equipment,
investment, and marketable securuties.
12. What kind of transactions would be entered in the investing activities section of the SCF?
Investing activities involve cash transactions that pertain to the buying and selling of marketable
securities and noncurrent assets suh as investment, property, plants, and equipment.
13. What kinds of transactions would be entered in the financing activities section of the SCF?
The financing activities saction deals with equity and dept transactions. It explains how cash was
obtained from investors (equity financing) and from creditors (dept financing). For example, cash can
be obtained by issuing capital stock or borrowings. These financing activities ultimately reguire paying
the debt principal, paying dividends, and possibly reacquiring stock (treasury stock).
14. What are three types of transactions that can appear in the footnotes disclosures sectionof the SCF?
Footnotes and disclosures are required for the following transactions:
* Income taxes and interes paid in the period
* Accounting policy regarding cash
* Noncash investing and financing transactions
15. What would the acquistion of land at a cost of $100.000, purchased with a $30.000 down payment and
the balance financed with a mortgage, be shown in the SCF?
Only the cash down payment of $30.000 would appear in the investing activities section of the statement
of cash flows. This transaction would require disclosure in the footnotes, which might take the following
form.
Acquisition cost of land
100.000
Cash down payment
30.000
Balance finaned by mortgage
70.000
PROBLEMS:
1.
Operating Act.
Investing Act.
Financing Act.
Amortization
Proceeds from sale of marketable securities
x
Payment of principal on debt
x
Cash used to acuire investment
x
Depriciation
x
Gain on sale of assets
x
Increase or decrease in accrued liabilities
x
Cash borrowing
x
Proceeds from sale of property and equipment
x
Increase or decrease in prepaid expenses
x
Issue capital stock
x
Cash used to acquire marketable securities
x
Loss on sale of assets
x
Increase or decrease in receivables
x
Net income
x
Payment of dividends
x
Proceeds from sale of investments
x
Increase or decrease in inventory
x
Purchase of treasury stock
x
Proceeds from sale of treasury stock
x
Cash used to acquire property and equipment
x
Increase or decrease in accounts payable
x
2.
Operating Act.
Amortization
Proceeds from sale of marketable securities
Payment of principal on debt
Financing Act.
+
+
-
Cash used to acquire investments
Depriciation
Gain on sale of assets
Increase in accrued liabilities
Decrease in accrued liabilities
Cash borrowings
Proceeds from sale of property and equipment
Increase in prepaid expenses
Decrease in prepaid expenses
Issue capital stock
Cash used to acquire marketable securities
Loss on sale of assets
Increase in accounts receivable
Decrease in accounts receivable
Net income
Payment of dividends
Proceeds from sale of investments
Increase in inventory
Decrease in inventory
Purchase of treasury stock
Proceeds from sale of treasury stock
Cash used to acquire property and equipment
Increase in accounts payable
Decrease in accounts payable
3.
Davdeg Motel
Cash Flows from Operating Activities
Net Income
Adjustment to reconcile net income to net
Cash flows from operating activities:
Depriciation expense
Loss on sale of equipment
Gain on sale of investment
Decrease in accounts receivable
Increase in inventories
Increase in prepaid expenses
Increase in accounts payable
Decrease in taxes payable
Net cash provided by operating activities
Investing Act.
+
+
+
+
+
+
+
+
+
+
+
+
+
-
$53.000
40.000
12.000
(5.000)
10.000
(3.000)
(1.000)
7.000
(1.000)
59.000
112.000
4.
Lizdale Bistro
Cash Flows from Operating Activities
Net Income
Adjustment to reconcile net income to net
Cash flows from operating activities:
Depreciation expense
Gain on sale of equipment
Gain on sale of marketable securities
Increase in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Decrease in accounts payable
Increase in accrued payables
Net cash provided by operating activities
$25.000
10.000
(2.000)
(3.000)
(15.000)
2.000
1.000
(8.000)
3.000
12.000
13.000
5.
Bessdoon Restaurant
Cash Flows from Operating Activities
Net Income
Adjustment to reconcile net income to net
Cash flows from operating activities:
Depriciation expense
Loss on sale of equipment
Loss on sale of marketing securities
Increase in accounts receivable
Increase in inventories
Decrease in prepaid expenses
Decrease in accounts payable
Increase in accrued payables
Net cash provided by operating activities
6.
Walkam Ristorante
$5.000
8.000
1.000
2.000
(18.000)
(5.000)
2.000
(6.000)
1.000
(15.000)
10.000
Note: The fist step required was to compute the changes in the current asset and current liabilities accounts.
Cash Flows from Operating Activities
Net Income
Adjustment to reconcile net income to net
Cash flows from operating activities:
Depriciation expense
Amortization expense
Gain on sale of investment
Increase in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Increase in accounts payable
Decrease in wages payable
Net cash provided by operating activities
$54.000
80.000
10.000
(4.000)
(30.000)
5.000
2.000
20.000
(7.000)
76.000
130.000