1.06 Statement Of Cash Flow Flashcards
Statement of cash flow also provides information about investing and financing activities that do NOT involve cash flows. Eg. acquiring a major long-term asset by incurring a liability.
Cash equivalents are short term, highly liquid investments, original maturity 3 months or less.
Eg. treasury bills, commercial paper, money market funds
OPRATING activities - related to production of income from operations eg. sales, purchase of inventory.
Generally a teams from operating cash flows are associated with et income.!!
*includes any cash outflow not properly classified as investing or financing eg. Collection of lawsuit settlement.
Inflow from:
- customers
- dividends from investments ***
- interest received
- from disposal of trading securities
- collection of lawsuit settlement
Outflows:
- to suppliers for goods and services and SG&A expenses, or to employees, payroll
- interest paid
- income taxes
- for acquisition of trading securities
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Cash flow from operating activities - indirect method
Noncash expenses and nonoperating items that Decreased net income
+ depreciation
+ amortization expense eg. Bond discount, patents
+ loses from sales of assets
Noncash revenues and nonoperating items that increased net income
- equity in earnings from investee
- amortization of bond premium
- gain from sales of assets
Changes in current assets and current liabilities
+ decreases in current assets, source of cash
- increases in current assets, use of cash
+ increase in current liabilities, source of cash
- decrease in current liabilities, use of cash
INVESTING activities - related to investing in yourself or others eg. PPE, AFS debt securities, land, HTM. Relate to purchase and sale of “long-term assets”!!!!
Cash inflow or outflow:
- loans made to others or principal collections, interest and dividends received are operating**
- acquisition or disposal of AFS or HTM investments **trading securities are operating *
- acquisition or disposal of PPE and intangible, including cash paid for capitalized cash paid for capitalized repairs*
- proceeds from a corporate owned life insurance policy *****
- paid for major equipment repair, it is financing
FINANCING activities - related to issuing or repaying debt or equity eg. issuing stock, issuing/ repaying debt.
- dividends paid* associated with reduction to retained earnings.
- issuance of Common Stocks and Preferred stock
- treasury stock transactions
- borrowing and repaying debt eg. Bonds payable, notes payable, mortgages payable ***principal payments
Noncash investing and financing transactions may be disclosed on the face of SCF, in a supplemental schedule or in the notes to the FS.
Statement of Cash Flow
Cash flows form Operating activities
- cash flows related to the production of income from continuing operations
Cash flows from Investing activities
- cash flows from purchase and sale of long-term assets
Cash flows from Financing activities
- cash flow from issuance and repayment of debt and from transactions with owners
Net Increase / decrease in cash XXX
+ Begining cash balance XXX
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Ending cash balance XXX
Certificate of Deposit CD are considered cash equivalent when original maturity of 3 months or less from the date of purchase. If maturity date greater then 1 year, is reported as long term investment —— Investing Activities!!!
The indirect method for the operating activities section of the statement of cash flows reconciles net income to net cash used or provided.
AR up, subtract
Prepared expenses up, subtract
AR down, add to net income
Prepaid down, add
AP up, add
AP down, subtract
For the INDIRECT METHOD:
* if included cash eg. decrease in AR or AP follow the cash direction.
Eg. Decrease in AR meaning the cash in, then add to Net Income.
* if there is no cash involved then follow the direction of Expenses or Revenue eg. Prepaid rent expenses decrease (cr) expenses increased (dt);
Prepaid insurance increased (dr), Cash (cr) then subtract.
Pay attention to what is not included in Operating like Nontrade notes payable increase, this is Financing.
Nontrade notes payable increase is Financing activities.
Non-trade payables are costs that a business incurs that don’t directly impact its daily operations. They are different from trade payables, which are amounts owed to suppliers for goods or services. Here are some examples of non-trade payables:
Utility bills, Maintenance fees, Interest payable on loans, Taxes, Payroll, and Dividends.
A cash and cash equivalent (treasury bill, money market fund) is a financial instrument easily convertible to cash which has an original maturity of 3 months or less from purchase date it is included in cash activities, NOT part of Operating, Financing or Investing activities. !!! Very important !!!!
If they ask in question where would 3 month treasury bill be classified - not reportable.
The “cash proceeds” (NOT the gain) from the sale of long term assets (eg. equipment, investments) are reported as inflows under Investing activities.
The gain/loss is added / deducted from Net Income from Operating activities.
Gain or loss on the disposal is a nonoperating item included in net income.
PROCEEDS are reporting under Investing and
GAIN/LOSS is deducted/added under Operating to Net Income.
Only the cash components is reported in cash flow.
Conversion of preferred stock to common stock is a noncash transaction, not included in cash flow statement.
