22.3: Format of the Statement Flashcards
What is the general order of sections in the statement of cash flows?
The general order is:
Operating activities
Investing activities
Financing activities
The statement also includes a reconciliation between the beginning and end-of-period cash balances.
What is the indirect method for preparing the operating activities section of the statement of cash flows?
The indirect method adjusts net income for changes in non-cash items and working capital to calculate net cash provided by (or used in) operating activities.
How is the direct method for preparing the operating activities section of the statement of cash flows different from the indirect method?
The direct method lists actual cash inflows and outflows from operating activities, such as cash receipts from customers and cash payments to suppliers, rather than starting with net income and making adjustments.
Which method—direct or indirect—is encouraged by both IFRS and ASPE?
Both IFRS and ASPE encourage the use of the direct method because it provides more detailed information about cash flows from operating activities.
What items are adjusted in the indirect method to reconcile net income to cash flows from operating activities?
Adjustments typically include:
Depreciation and amortization,
Changes in working capital (e.g., receivables, payables, inventories),
Non-cash expenses and gains,
Deferred taxes.
What are some common cash receipts included in the direct method for operating activities?
Cash receipts typically include:
Cash received from customers,
Cash received from other revenue sources.
What are some common cash payments included in the direct method for operating activities?
Cash payments typically include:
Cash paid to suppliers,
Cash paid to employees,
Cash paid for income taxes.
What is the main advantage of the direct method for preparing the statement of cash flows?
The direct method shows actual operating cash receipts and payments, providing more consistent and detailed information about cash flows than the indirect method.
What do supporters of the direct method argue regarding its usefulness?
They argue that knowing specific sources of cash receipts and the purposes of cash payments helps estimate future cash flows.
Information about major classes of operating cash transactions is also useful for decision-making.
Why do some preparers of financial statements prefer not to use the direct method?
Some argue that they do not currently collect the detailed information required to determine specific cash receipts and payments from customers and suppliers, and that accumulating such data may not be worth the effort.
What is the main advantage of the indirect method for preparing the statement of cash flows?
The indirect method focuses on the differences between net income and cash flow from operating activities, linking the statement of cash flows, the income statement, and the statement of financial position.
Why do some financial statement preparers prefer the indirect method?
The indirect method is seen as less costly to develop because it adjusts net income to cash flow from operating activities, and it provides useful performance insights, especially for those accustomed to accrual accounting.
How does familiarity affect the use of the indirect method?
Because the indirect method has been used almost exclusively in the past, many preparers and users are more familiar with it, which helps maintain its continued use.
What do supporters of the indirect method argue about net cash flow from operating activities?
Supporters argue that adjusting net income to net cash flow from operating activities may suggest that cash flow from operations is as good as, or better than, net income as a measure of performance.
