(23) Understanding Cash Flow Statements Flashcards
LOS 26. a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.
Cash flow from operating activities (CFO) consist of the inflows and outflows of cash resulting form transactions that affect a firm’s net income.
LOS 26. a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.
Cash flow from investing activities (CFI) consists of the inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and certain investments.
LOS 26. a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items.
Cash flow from financing activities (CFF) consists of the inflows and outflows of cash resulting form transactions affecting a firm’s capital structure, such as issuing or repaying debt and issuing or repurchasing stock.
LOS 26. a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items. Inflows and outflows of cash.
LOS 26. a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items. Inflows and outflows of cash.
LOS 26. a: Compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items. Inflows and outflows of cash.
LOS 26. b: Describe how non-cash investing and financing activities are reported.
Noncash investing and financing activities, such as taking on debt to the seller of a purchased asset, are not reported in the cash flow statement but must be disclosed in the footnotes or a supplemental schedule.
LOS 26. c: Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP)
Under U.S. GAAP, dividends paid are financing cash flows. Interest paid, interest received, and dividends received are operating cash flows. All taxes paid are operating cash flows.
LOS 26. c: Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP)
Under IFRS, dividends paid and interest paid can be reported as either operating or financing cash flows. Interest received and dividends received can be reported as either operating or investing cash flows. Taxes paid are operating cash flows unless they arise from an investing or financing transaction.
LOS 26. d: Distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method.
Under the direct method of presenting CFO, each line item of the accrual-based income statement is adjusted to get cash receipts or cash payments.
LOS 26. d: Distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method. Argument for direct method.
The main advantage of the direct method is that it presents clearly the firm’s operating cash receipts and payments.
LOS 26. d: Distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method.
Under the indirect method of presenting CFO, net income is adjusted for transactions that affect net income but do not affect operating cash flow, such as depreciation and gains or losses on asset sales, and for changes in balance sheet items.
LOS 26. d: Distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method. Argument for indirect method.
The main advantage of the indirect method is that it focuses on the differences between net income and operating cash flow. This provides a useful link to the income statement when forecasting future operating cash flows.
LOS 26. e: Describe how the cash flow statement is linked to the income statement and the balance sheet.
Operating activities typically relate to the firm’s current assets and current liabilities. Investing activities typically relate to noncurrent assets. Financing activities typically relate to noncurrent liabilities and equity.
Timing of revenue or expense recognition that differs from the receipt or payment of cash is reflected in changes in balance sheet accounts.
LOS 26. f: Describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data. CFO.
The direct method of calculating CFO is to sum cash inflows and cash outflows for operating activities.
- Cash collection from customers – sales adjusted for changes in receivables and unearned revenue.
- Cash paid for inputs – COGS adjusted for changes in inventory and accounts payable.
- Cash operating expenses – SG&A adjusted for changes in related accrued liabilities or prepaid expenses.
- Cash taxes paid – income tax expense adjusted for changes in taxes payable and changes in deferred tax assets and liabilities.
