Your banker confides to you after looking at a number of financial statements that she is confused about the difference between two operating measures, net income and cash from operations.
Required:
a. Explain the purpose and significance of these two operating measures.
b. Several financial transactions or events follow. For each transaction or event, indicate whether it yields an increase (+), decrease (-), or no effect (NE) on each of the two measures.
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EFFECT OF TRANSACTION/EVENT ON: |
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Net Income |
Cash from Operations |
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1. Sales of marketable securities for cash at more than their carrying value. |
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2. Sale of merchandise with deferred payments (one-half within one year and one-half after one year). |
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3. Reclassify noncurrent receivable as current receivable. |
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4. Payment of current portion of long-term debt. |
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5. Collection of an account receivable. |
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6. Recording the cost of goods sold. |
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7. Purchase of inventories on account (credit terms). |
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8. Accrual of sales commissions (to be paid at a later date). |
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9. Payment of accounts payable (resulting from purchase of inventory). |
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10. Provision for depreciation on a sales office. |
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11. Borrowing cash from a bank on a 90-day note payable. |
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12. Accrual of interest on a bank loan. |
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13. Sale of partially depreciated equipment for cash at less than its Book value. |
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14. Flood damage to merchandise inventories (no insurance coverage). |
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15. Declaration and payment of a cash dividend on preferred stock. |
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16. Sale of merchandise on 90-day credit terms. |
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17. Provision for uncollectible accounts receivable. |
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18. Write-off of an uncollectible receivable. |
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19. Provision for income tax expense (to be paid the following month). |
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20. Provision for deferred income taxes (set up because depreciation |
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for tax reporting exceeded depreciation for financial reporting). |
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21. Purchase of a machine (fixed asset) for cash. |
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22. Payment of accrued salary expense to employees. |
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