The following cash flow data of Signet Sales for the year ended December 31, 2005 are as follows:

$$\begin{array} { l r }
\text { Cash payment of dividends } & \$ 70,000 \
\text { Purchase of land } & 28,000 \
\text { Cash payments for interest } & 20,000 \
\text { Cash payments for salaries } & 90,000 \
\text { Sale of equipment } & 76,000 \
\text { Retirement of common stock } & 50,000 \
\text { Purchase of equipment } & 60,000 \
\text { Cash payment to suppliers } & 170,000 \
\text { Cash collection from customers } & 500,000 \
\text { Cash at beginning of year } & 100,000
\end{array}$$
a. Prepare a statement of cash flows for Signet Sales in accordance using the direct method.

b. Discuss, from an analyst's viewpoint, the purpose of classifying cash flows into the categories required by GAAP

Question

The following cash flow data of Signet Sales for the year ended December 31, 2005 are as follows:

$$\begin{array} { l r } 
\text { Cash payment of dividends } & \$ 70,000 \
\text { Purchase of land } & 28,000 \
\text { Cash payments for interest } & 20,000 \
\text { Cash payments for salaries } & 90,000 \
\text { Sale of equipment } & 76,000 \
\text { Retirement of common stock } & 50,000 \
\text { Purchase of equipment } & 60,000 \
\text { Cash payment to suppliers } & 170,000 \
\text { Cash collection from customers } & 500,000 \
\text { Cash at beginning of year } & 100,000
\end{array}$$
a. Prepare a statement of cash flows for Signet Sales in accordance using the direct method.

b. Discuss, from an analyst's viewpoint, the purpose of classifying cash flows into the categories required by GAAP

Quizplus · Accepted Answer

The Answer is a.

\begin{array}{lrr} ext { Cash collections from customers } & \$ 500,000 \ ext { Cash payments to suppliers } & (170,000) \ ext { Cash payments for salaries } & (90,000) \ ext { Cash payment for interest } & (20,000) \ ext { Total cash flow from operations } &&\$220,000 \ ext { Sale of equipment } & 76,000 \ ext { Purchase of equipment } & (60,000) \ ext { Purchase of land } & (28,000)\ ext { Total cash flow from investing } &&(12,000)\ ext { Retirement of common stock } &(50,000)\ ext { Cash payment of dividends} &(70,000)\ ext { Total cash flow from financing } &&(120,000)\ ext { Net change in cash } &&\$88,000\ ext { Beginning of year cash} &&100,000\ ext { Ending cash balance } &&\$188,000\\end{array}

b. Operating cash flows provide a measure of internally generated funds that can be used to fund expansion, pay off debt, and pay dividends to shareholders. Operating cash flows are not a performance measure, but rather should be considered a liquidity measure. The larger the operating cash flows the less likely a company will need external financing to fund growth, and the less likely they are to need to liquidate assets.

Investing cash flows show us where a company is investing its cash and whether it is liquidating assets. Examination of the investing section will determine if the company is maintaining and/or growing asset base. Financing cash flows provide information about the financing of a company—whether it is raising capital to support operations, to finance growth, or whether it is decreasing or increasing leverage.

The Following Cash Flow Data of Signet Sales for the Year