23.1: Cash Flow Introduction

Question 1

What information does the cash flow statement provide (3)?

Answer 1

Cash flow statement provides information beyond that available from the income statement, which is based on accrual accounting.

1. Information about company’s receipts and cash payments during an accounting period.
2. Information about a company’s operating, investing, and financing activities.
3. An understanding of the impact of accrual accounting events on cash flows.

Question 2

Which two statements are the items on a cash flow statement from?

Answer 2

1. Income statement

2. Changes in balance sheet accounts

Question 3

How are cash receipts and payments classified on the cash flow statement? Define each classification.

Answer 3

1. CFO: inflows and outflows of cash resulting from transactions that affect a firm’s net income
2. CFI: inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and certain investments
3. CFF: inflows and outflows of cash resulting from transactions affecting a firm’s capital structure

Question 4

What is the advantage of the direct method of presenting B/S?

Answer 4

Advantage of the direct method is that it presents the firm’s operating cash receipts and payments, while the indirect method only presents the net result of receipts and payments. This means that the direct method provides more information that the indirect method.

Question 5

What is the advantage of the indirect method of presenting B/S?

Answer 5

Advantage of the indirect method is that it focuses on the difference between net income and operating cash flow, providing a useful link to the I/S when forecasting future CFO.

Question 6

What are the disclosure requirements under US GAAP under the direct method presentation?

Answer 6

Under US GAAP, a direct method presentation must disclose the adjustments necessary to reconcile net income to CFO.

Question 7

What are the disclosure requirements under IFRS under direct or indirect method presentation?

Answer 7

Under IFRS, payments for interest and taxes must be disclosed separately in the cash flow statement under either direct or indirect method.

For GAAP, payments for interest and taxes can be reported in the cash flow statement or disclosed in the footnotes.

Question 8

How is cash reconciled over an accounting period?

Answer 8

Operating cash flow
\+ Investing cash flow
\+ Financing cash flow
= Change in cash balance
\+ Beginning cash balance 
= Ending cash balance

Question 9

How are noncash investing and financing activities reported in the cash flow statement? Provide examples.

Answer 9

Noncash investing and financing activities are not reported in the cash flow statement since they do not result in inflows nor outflows of cash.

Noncash transactions must be disclosed in either a footnote or supplemental schedule to the cash flow statement.

Examples: exchange of debt for equity

Question 10

How does the indirect method differ from the direct method?

Answer 10

CFO presentation differs; CFF and CFI are the same.

Under the direct method, each line item of the accrual-based income statement is converted into cash receipts or cash payments. The sum of the inflows and outflows is the company’s CFO.

Under the indirect method, net income is converted to CFO by making adjustments for transactions that affect net income but are not cash transactions.

Question 11

How are dividends and interest classified under IFRS vs. GAAP?

Answer 11

Under GAAP, dividends paid is classified as CFF while interest paid is reported as CFO. Both interest received and dividends received from investments are reported as CFO.

Under IFRO, dividends and interest paid are reported as CFF or CFO. Both dividends and interest received can be either CFI or CFO.

Question 12

How is income tax paid classified under IFRS vs. GAAP?

Answer 12

Under GAAP, all taxes paid are reported as CFO.

Under IFRS, income taxes are reported as CFO unless the expense is associated with an investing or financing transaction.