01.06 Statement of Cash Flows Flashcards
True or false: a statement of cash flows is required for all companies that present both financial position (balance sheet) and results of operations (income statement) for a period.
True. The statement of cash flows is one of the basis financial statements.
What is the purpose of the statement of cash flows?
The purpose of the SCF is to provide detailed information about an entity’s cash inflows and outflows from operating, investing, and financing activities. The SCF also provides information about investing and financing activities that do not involve cash inflows or outflows (e.g. acquiring a major long-term asset by incurring a liability).
The statement of cash flows explains the changes in what?
The SCF explains the changes in cash, cash equivalents, and restricted cash between the beginning and end of the reporting period on the balance sheet.
What are cash equivalents?
Cash equivalents are short-term, highly liquid investments that are readily convertible into cash. The original maturity of these investments must be three months or less from the date of purchase.
What is restricted cash?
Restricted cash is identified by the entity as cash that is held for a specific purpose and is not available from the company to use freely.
How must the company disclose how the change in cash presented on the SCF reconciles to the components of cash presented on the balance sheet?
This reconciliation can be on the face of the SCF or in the notes to the financial statements. The net change in cash must be exactly explained by the cash flows associated with operating, investing, and financing activities.
What are the three classifications of cash activities?
Operating, investing, and financing.
What are operating activities?
Activities related to production of income from operations (i.e. normal business activities) (e.g. sales, purchase of inventory)
What are investing activities?
Activities related to investing in yourself or others (e.g. PP&E, AFS debt securitites)
What are financing activities?
Activities related to issuing or repaying debt or equity (issuing stock, issuing/repaying debt).
True or false: noncash investing and financing activities must be disclosed.
True. Those these transactions do not involve cash (e.g. the conversion of bonds to equity), significant noncash investing and financing activities must be disclosed on the face of the SCF, in a supplemental schedule, or in the notes to the FS.
What are the two methods that can be used to present the operating section of the SCF?
Direct method and indirect method.
the direct method is outside the scope of the CPA exam
What is the indirect method of presentation?
The indirect method can be used to calculate net cash provided (or used) by operating activities. Under the indirect method, income from continuing operations is reconciled to net cash flows from operating activities by adjusting for noncash items and nonoperating activities and changes in current assets (other than cash and cash equivalents) and current liabilities. It begins with the accrual based net income.
Presentation of cash flows from investing and financing activities does not change regardless of whether the direct or indirect method is used.
What are the required disclosures under the indirect method?
The following must be disclosed:
1. cash payments for interest and income taxes
2. noncash investing and financing activities
3. Reconciliation of the change in cash presented on the SCF to the components of cash presented on the balance sheet
4. Cash equivalents policy
5. Restrictions on cash and cash equivalents
