1.06 Statement Of Cash Flow

Question 1

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.

Question 2

Cash equivalents are short term, highly liquid investments, original maturity 3 months or less.
Eg. treasury bills, commercial paper, money market funds

Question 3

OPERATING 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
—————————————————
Cash flow from operating activities - indirect method

Noncash expenses and nonoperating items that Decreased net income
+ depreciation
+ amortization expense eg. Bond discount, patents
+ losses 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

Question 4

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

Question 5

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
- principal payments for borrowing and repaying debt eg. Bonds payable, notes payable, mortgages payable

Question 6

Noncash investing and financing transactions may be disclosed on the face of SCF, in a supplemental schedule or in the notes to the FS.

Question 7

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
—————————————————-
Ending cash balance XXX

Question 8

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!!!

Question 9

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

Question 10

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.

Question 11

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.

Question 12

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.

Question 13

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.

Question 14

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.

Question 15

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.

Question 16

Investment in “Trading securities” are short term debt, not cash equivalent. They are included in operating activities.

Question 17

Cash inflows and outflows from purchases and sale of fixed assets and certain debt securities ( and certain debt securities) are reported gross ie. SEPARATELY in the Investing activities section of SCF.

Question 18

DIRECT method lists the sources and uses of cash related to each account in net income eg. sales, cogs, interest expenses). It excludes any non cash items eg. depreciation, gains, losses.

Question 19

Question 28
* Investment in Sub, equity method $5,500 increase —- deducted from net income (increase on BS, Investment in Sub and decrease in IS, Equity in earnings)
* Premium on bond payable - decrease in premium on bond payable is due to Amortization, premium amortization results in lower interest expenses and higher NI, $1,400 deducted from NI***
* deferred income tax liability $1.800 increase, added to NI.
* accumulated depreciation caused by major repair to project equipment is reported in Investing activities section since it is a long term asset.

Question 20

Cash flow per share in a not reported, providing such information could be misleading by the SCF users as measure of performance.

Question 21

When you calculating cash flow taking the Net Income you only add or subtract or add items from operating activities. If there are activities from Financing just leave it out.

Question 22

When you calculating cash flow from investing do you take it from net income?
Q21 didn’t include net income

Question 23

The Financing activities section of the statement of cash flow involves cash flows from issuing and repaying debt or equity to finance the company. Typical debt transactions include proceeds from borrowings and principal repayments of debt eg. lease liability.
With finance lease, at the lease inception the lessee recognizes a right of use asset and a lease liability at the PV of the lease payment. This is non cash transaction.

Q22
Co signed a 20-years building lease that is reported as a finance lease. Co paid the monthly lease payments when due. How should Co report the effect of the lease payments in the financing activities of the year 2 statement of cash flow?
* an outflow equal to the year 2 principal payments Only
The principal portion of the payments is reported as a cash flow under financing activities. The interest are under operating.

Question 24

dividends
Q27

Information available at the end of year 3:
Dividends payable increase 160
Co declared cash dividends of $500 in year 3.

Dividends declared amounted to $500 in year 3. However, the $160 increase in dividends payable indicates that a portion of the declared dividends was NOT paid during that year. The cash outflow is only $340 (500-160).

Common stock $10 par increase $100.
APIC increase $120

The common stock was issued for $22.
* you might have a question about dividends and would need to make sure the cash inflows equal.

Question 25

Operations activities should be:

Investment in V inc stock, carried on the equity basis $5,500 increase

Because the equity method is used, CO’s $5,500 share of the investee’s income increases the investment account (on the balance sheet) and equity in earnings (on the income statement). Since no cash was received the $5,500 is deducted from NI.

Question 26

Operating activities should be:

Premium on bonds payable $1,400 decrease.

A decrease in the premium on bond payable is due to amortization. Premium amortization results in a lower interest expense and consequently a higher NI. Therefore the $1,400 is deducted from NI.

Question 27

Operating activities should be:
Deferred income tax liability (long term) $1,800 increase

An increase in deferred income taxes payable indicates that some of the income tax expense deducted in calculating NI was not paid. The $1,800 unpaid portion is added to NI.

Question 28

Dividends payment and Treasury stock transactions are reported in Financing activities.

Question 29

Cash flow is a result of net cash used from investing activities.
Proceeds from sales of equipment $10
Purchase of bond $180
—————————————————
Total cash out -$170
The answer had $170 not -$170.

Question 30

Investing activities
I missed the wording. It doesn’t say how much cash Co received. 25-12=13 cost
13+5 =18 cash in

Equipment $25 increase

During year 2, Co sold equipment costing $25, accumulated depreciation of $12 for a gain of $5.
During year 2, Co purchased equipment costing $50 with $20 cash and a 12% note payable of $30.

What should the investing activities be?

Cash (plug) $18
Accumulate depreciation $12
Equipment $25
Gain $5

$20 outflow - $18 inflow = $2.

Question 31

Solving for cash paid for interest
Interest expense (accrual basis) $20
Add: beginning payable $15
Less: ending payable ($5)
—————————————————-
Cash payment for interest $30

Interest payable at the beginning of year $15
Interest expense during the year $20
Interest payable at end of year $5

Question 32

Examples of significant noncash financing and investing activities
* property dinidends paid
* conversion of bonds to stock
* issuance of common stock to retire debt
* purchase of property or equipment with note payable

Question 33

Typical debt transactions include using proceeds from borrowings to finance the company eg. bonds payable, notes payable, mortgage payable) and principal repayments of the debt.

Question 34

Statement of cash flow
Net cash from operating $209
Net cash from investing ($354)
Net cash from financing $190
—————————————————
Net increase in cash $45

Had to find net cash from financing?

Question 35

Company purchased commercial paper issued by another company and that matures in 60 days - not be presented in statement of cash flow.

Question 36

Amortization bond discount account decreased - add to net income

Cash flow from operating activities
+ depreciation
+ amortization expense eg. bond discount, patents
+ losses from sale of asset

• equity in earnings from investing
• amortization of bond premium
• gain from sale of assets

Question 37

Q64
Accumulated depreciation increased $50,000
Equipment was sold for $350 that had a cost of $600 and accumulated depreciation of $250.
For calculating cash flow from operating:
Accumulated depreciation is increased for depreciation expense and decreased for disposal. The account was decreased by $250 when the equipment was sold. Since there was a $50 increase in the account, the depreciation expense must have been $300. The non cash expense is added back to NI.

Question 38

Q64
Available for sale debt securities decrease $100
The AFS debt securities were sold for $135.
For calculating cash flow from operating:
The $100 decrease in AFS debt securities is from a sale that resulted in a $35 gain ($135-100). The cash inflow of $135 is reported under investing activities. However the $35 gain included in NI must be deducted.

Question 39

Q65
Co has a tax benefit and cash retained of $20 as a result of shares-based payments to employees. How is it disclosed in FS?
As a cash inflow from financing activities on the statement of cash flows.

Question 40

Q72
Co forgot to record depreciation expense for the current year. How did it affect Net income and Cash flow from operating activities?
Net income - overstated
Cash flow from operating activity - No effect. Depreciation expense is subtracted from net income to get to cash flow from operating activity, in this case it was just didn’t need to be deducted. ! ! !