AFM 191 - Chp 10 - Cash flow statement

Question 1

which stakeholders care about cash flows?

Answer 1

both external + internal

Question 2

why is it important for a business to have cash?

Answer 2

a business cannot operate if it runs out o cash + cannot meet the expectation of external stakeholders without sufficient cash to operate and grow the business

Question 3

what’s the role of internal stakeholders for cash flows?

Answer 3

they must monitor cash flow to understand if and when the company needs to obtain additional cash from investors or banks - management monitors cash flows from operating activities and assesses if these cash flows are sufficient to cover investing and financing activities

when cash flows from operating activities are insufficient, financial activities take place.

Question 4

what’s the importance of internal stakeholders understanding cash?

Answer 4

to forecast or predict future cash flows

Question 5

what’s the use of cash flows for external stakeholders

Answer 5

to analyze cash flows ot determine a company’s continued ability to pay dividends and to assess whether a company is investing enough cash to fund future growth - e.g. banks analyze cash flows to assess whether the company will be able to make interest payments and repay its debt

Question 6

why is cash important in start-ups?

Answer 6

to ensure that the company has sufficient cash to cover day-to-day operating activities and grow their business

Question 7

what’s the importance of cash in mature private companies

Answer 7

cash is required to operate, repay debt, make investments, and pay dividends to owners

Question 8

define operating activities

Answer 8

activities related to operating the core business

Question 9

define investing activities

Answer 9

business activities related to purchasing or disposing of long-term assets and investments that are not cash equivalents or held for trading - activities related to making cash advances and loans to other parties are also investing activities

Question 10

define financing activities

Answer 10

business activities related to raising capital

Question 11

what are the following classifications in the cash flow statement in ASPE

Answer 11

1. cash flows from interest paid and received which are included in net income should be classified as cash flows from operating activities
2. cash flows from income taxes should be classified as cash flows from operating activities
3. cash flows from dividends paid are charged to retained earning and should be classified as cash flows used in financing activities

Question 12

what are the 2 ways to prepare a cash flow statement

Answer 12

1. direct method
2. indirect method

Question 13

what information is required to prepare an indirect cash flow statement

Answer 13

1. income statement for the period (to obtain net income, depreciation)
2. statement of retained earning (to obtain dividends paid)
3. balance sheet for the most recent and prior period (to adjust net income for non-cash working capital transactions and investing and financing activities)
4. other financial information, as required

Question 14

what’s the indirect method to calculate cash flow from/used in operating activities - define

Answer 14

a method used to calculate cash flows from/used in operating activities that uses accrual net income and adjusts it to determine operating cash flows

net income + non-cash items + changes in current assets + changes in current liabilities = cash flows from/used in operating activities

Question 15

why do we use the indirect method?

Answer 15

this is the most widely used method in practice

Question 16

what’s the relationship between the indirect method and accrual accounting/accrual net income

Answer 16

accrual net income does not consider when cash is received and/or disbursed

indirect method uses net income form the income statement as a starting point and adjusts it to determine cash flows from/used operating activities

Question 17

what are the 3 main categories of adjustments that are made to net income and their adjustments

Answer 17

1. non-cash items
   a. add depreciation/amortization to net income
   b. add losses on long-term asset disposals to net income
   c. remove gains on long-term asset disposals from net income
2. changes in current assets (other than cash)
   a. remove increases in current assets from net income
   b. add decreases in current assets to net income
3. changes in current liabilities
   a. add increases in current liabilities to net income
   b. remove decreases in current liabilities from net income

Question 18

why does net income need to be adjusted for non-cash items

Answer 18

these non-cash item impact net income but do not involve cash

Question 19

how to adjust net income for cash flows for depreciation/amortization? why?

Answer 19

to increase net income by $Y to remove this non-cash transaction from net income when calculating cash flows from/for operating activities

we adjust it bc depreciation reduces net income as depreciation expense = debited but it does not involve cash

Question 20

how to adjust net income for cash flows for gain/loss on long-term asset disposal? why?

Answer 20

net income is adjusted to remove the gain/loss when calculating cash flows from/used in operating activities

as gain/loss does not impact cash

Question 21

what must companies do to understand the adjustments that need to be made to net income to add/remove changes in the non-cash operating working capital

Answer 21

companies must calculate the changes in the current assets and liabilities from the prior period

balance sheet for the most recent and prior period are required to calculate the changes in current assets and liabilities from 1 period to another

Question 22

changes in current assets (other than cash) are adjusted on the net income for cash flows as:

Answer 22

1. remove period-over-period increases in current assets from net income
2. add period-over-period decreases in current assets to net income

Question 23

why do we remove period-over-period increases in A/R to the net income for cash flows?

Answer 23

net income increases but this transaction does not involve cash, so if A/R increases, the increase is removed from net income when calculating operating cash flows

Question 24

why do we add period-over-period decreases in A/R to the net income for cash flows?

Answer 24

this transaction does not impact net income but it does involve cash

if A/R decreases, the decrease is added to net income to calculate operating cash flows

Question 25

why do we remove period-over-period increases in inventory to the net income for cash flows?

Answer 25

when inventory increases, Cash decrease - this transaction does not impact net income does it involves cash if inventory increases, the increase is removed from net income when calculating operating cash flows

Question 26

why do we add period-over-period decreases in inventory to the net income for cash flows?

Answer 26

when inventory decrease, COGS increases this transaction decreases net income but it does not involve cash - if inventory decreases, the decrease is added to net income to calculate operating cash flows.

Question 27

why do we remove period-over-period increases in prepaids to the net income for cash flows?

Answer 27

when prepaids increase, cash decreases this transaction does not impact net income but it involves cash - if prepaids increase, the increase is removed from net income when calculating operating cash flows

Question 28

why do we add period-over-period decreases in prepaid to the net income for cash flows?

Answer 28

when prepaid decrease, prepaid expense increase this transaction deceases net income but it does not involve cash - if prepaid decrease, the decreases if added to net income to calculate operating cash flows

Question 29

how are current liabilities adjusted on net income for cash flows;

Answer 29

1. add period-over-period increases in current liabilities to net income 2. remove period-over-period decreases in current liabilities from net income

Question 30

why do we add period-over-period increases in A/P or accrued liabilities to the net income for cash flows?

Answer 30

when A/P increases, the company has incurs an expense but has not paid for it this transaction decreases net income but it does not involve cash - if A/P increases, the increase is added to net income to calculate operating cash flows

Question 31

why do we remove period-over-period decreases in A/P or accrued liabilities to the net income for cash flows?

Answer 31

when A/P decrease, the company paid back a supplier what it owed them this transaction does not impact net income but it involves cash - if A/P decreases, the decrease is removed from net income to calculate operating cash flows

Question 32

why do we add period-over-period increases in unearned revenue to the net income for cash flows?

Answer 32

when unearned revenue increases, a customer pays the company before the good/services are delivered this transaction does not impact net income but it involves cash - so if unearned revenue increases the increases added to net income to calculate operating cash flows

Question 33

why do we remove period-over-period decreases in unearned revenue to the net income for cash flows?

Answer 33

when unearned revenue decreases, revenue is recognized this transaction increase net income but it does not involve cash - if unearned revenue decreases, the decrease is removed from net income to calculate operating cash flows

Question 34

what's the formula to calculate the cash flows from/used in operating activities

Answer 34

net income +/- non-cash items +/- changes in current assets +/- changes in current liabilities

Question 35

in investing activities - what are some examples of cash inflows

Answer 35

cash is received from: 1. disposing of a long-term asset 2. sale of investments (excluding cash equivalents or investments held for trading) 3. collection of advances and loans

Question 36

in investing activities what are some examples of cash outflows

Answer 36

cash used in: 1. purchasing new equipment or intangible asset 2. purchasing a new store 3. purchasing investments (excluding cash equivalents or investments held for trading) 4. advances and loans made to other parties

Question 37

what is needed to prepare cash flows from/used in investing activities

Answer 37

look at the period-over-period changes in the net book value of long-term assets

Question 38

how to calculate the net book value of a long-term asset

Answer 38

beginning net book value of long-term assets + purchase of long-term assets - dispositions of used long-term assets - depreciation/amortization of long-term assets

Question 39

repaying a loan is considered as a ______ activity

Answer 39

financing

Question 40

interest payments are a part of of net income and ASPE considers these cash outflows part of ______ activities

Answer 40

operating

Question 41

what happens when companies have more cash from operating activities than they need for investing activities

Answer 41

the company can decide to repurchase equity and/or pay dividends to shareholders

Question 42

in financing activates what are some examples of cash inflows

Answer 42

cash received form 1. borrowing (bonds, loans) 2. issuing equity (selling company shares)

Question 43

in financing activities - what are some examples of cash outflows

Answer 43

cash used in: 1. repaying debt (bonds, loans) 2. repurchasing equity (buying back shares) 3. paying dividends to shareholders

Question 44

how to prepare cash flows from/used in financing activities

Answer 44

look at period-over-period change sin the balance sheet: current portion of long-term debt (current liabilities), changes in long-term liabilities and owner's equity look at the retained earning statement to determine if dividends were paid! (not declared) to shareholders and additional info will be required such as amount of new loans, repayment of loans of bonds and amount of shares repurchased

Question 45

define a bank statement

Answer 45

a document that includes all cash transaction that impacted the bank accounts during the month

Question 46

does the ending balance in the bank statement always match the ending cash balance in the cash general ledger

Answer 46

no

Question 47

every reporting period a company prepare a _____

Answer 47

bank reconciliation

Question 48

define a bank reconciliation

Answer 48

a report that reconciles the bank statement with the ending cash in the general ledger

Question 49

what are the 2 components to a bank reconciliation

Answer 49

1. banks side (start with the bank statement balance) 2. book side (start with the general ledger ending cash balance)

Question 50

why is reconciliation between the bank and book side necessary

Answer 50

there are often cash items that are missing on both bank and book side

Question 51

define the adjusted book balance

Answer 51

the correct cash balance after the bank reconciliations is complete

Question 52

the adjusted book balance. should be ....

Answer 52

should be the same as the adjusted bank balance after the bank reconciliation is complete

Question 53

on the bank side what are some items that require adjustments? do these adjusted require journal entries?

Answer 53

1. deposits in transit - amounts added to bank side when preparing the bank reconciliation 2. outstanding cheques - amount for cheques outstanding is deducted from the bank side they do not require journal entries for these transaction as they have been recorded in the books but not included in the bank statement

Question 54

define deposits in transit

Answer 54

cash deposits that have been reocreded in the general ledger but have not been processed by the bank yet

Question 55

define outstanding cheques

Answer 55

cheques issued by the company (recorded in the books) but have not yet been cleared by the bank

Question 56

what's the starting point to adjustments on the bank side?

Answer 56

the ending cash balance on the bank statement

Question 57

what's the starting point to adjustments on the book side

Answer 57

the ending cash balance on the cash flow statement

Question 58

what are some adjustments to items on the book side? do they require journal entries?

Answer 58

1. bank collections - amounts are added to the book side 2. ETFs (electronic funds transfers) -ETF receipts are added to the book side and ETF payments are deducted from the book side 3. service charges - service charges are deducted from the book side 4. interest income - interest income amounts are added to the book side they require an adjusted journal entry bc it has not been recorded in the books - if an item is added to the book side, cash is debited and if an item is deducted from the book side, cash is credited

Question 59

define bank collections

Answer 59

customers have paid for goods and services, the bank has reflected these transaction in is record but the company has not recorded the transaction yet

Question 60

define ETF

Answer 60

the bank has processed payment to/from the company, but the company has not recorded the payment yet

Question 61

define service charges

Answer 61

bank fees charged to the company that have not been recorded in the books

Question 62

define interest income in the contest of book side - bank reconciliation

Answer 62

interest income earned by the company on certain savings accounts that have net been recorded in the books this is not the same as interest income as interest earned on notes receivables or loans the company may issue to other parties