Analyzing Cash Flow Statements

Question 1

What are the four primary financial statements?

Answer 1

Balance sheet
Income statement
Cash flow statement
Statement of Shareholder’s Equity

Question 2

What is a balance sheet?

Answer 2

Shows the financial position of an entity at a point in time, reporting the balances of “permanent” or “stock” accounts showing the entity’s assets and how those assets are financed.

Question 3

What is an income statement?

Answer 3

Provides information about a company’s financial performance between balance sheet dates. The income statement is made up of revenue, expense, gain and loss accounts. In contrast to the balance sheet, the income statement is a “flow” statement as it captures income activity better between two balance sheet dates.

Question 4

What is the statement of cash flows?

Answer 4

Reports the change in an entity’s cash, cash equivalents, and restricted cash between balance sheet dates. The statement classifies cash inflows and outflows during the period as operating, investing, or financing activities. Because the cash flow statement reports performance over a period of time, it is also a “flow” statement.

Question 5

What is the Statement of Shareholder’s Equity?

Answer 5

Provides information about how a company’s equity has changed between balance sheet dates. The statement identifies the significant components of shareholders’ equity that are reported on the balance sheet and the activities that occurred during the period that impacted these accounts.

Question 6

Describe a cash flow statement.

Answer 6

Beginning cash
+ / - operating cash flow
+ / - investing cash flow
+ / - financing cash flow
Ending cash

Question 7

What part of the business is covered in the operating cash flows?

Answer 7

How much cash is generated with the actual operations of the business.

Question 8

What part of the business is covered in the investing cash flows?

Answer 8

Cash spent or received from investments

Question 9

What part of the business is covered in the financing cash flows?

Answer 9

Cash transactions that involved raising, borrowing and repaying capital

Question 10

What are the two methods to prepare operating activities cash flows?

Answer 10

Direct method and indirect method

Question 11

Describe the direct method.

Answer 11

The direct method uses the major categories of gross cash receipts and payments.

Question 12

Describe the indirect method.

Answer 12

Start with net income and list the adjustments until you arrive at net cash flow.

Question 13

What is the first step for the direct method?

Answer 13

Determine how much cash a company received from its customers = cash collections, followed by how much was paid to suppliers and employees and other operating expenses, interest and taxes.

Question 14

How to calculate the cash collection from an income statement and balance sheet?

Answer 14

Revenue + / - net change in accounts receivable. If accounts receivable increase, we deduct them from revenue and vice versa. Also, deferred or unearned revenue must be adjusted from revenue.

Question 15

How to calculate the cash paid to suppliers?

Answer 15

Cost of goods sold + / - changes in inventory + / - changes in accounts payable

Question 16

How to calculate cash paid to employees?

Answer 16

Adjust salary and wage expenses by change in salary and wages payable

Question 17

IFRS allows more flexibility in the reporting of such items as interest paid or received and dividends paid or received. US GAAP classifies interest and dividends received from investments as operating activities, where IFRS allows both operating and investing activities.