Book 3_FinAn_Reading-32_ANALYZING-STATEMENTS-OF-CASH-FLOWS-I

Question 1

To calculate CFO

Answer 1

balance sheet operating assets and liabilities are used to adjust income statement revenues and expenses to cash flows.

Question 2

Cash flows computation

Answer 2

the income statement figure
- increase in related operating assets
+ decreases in related operating assets
+ increases in related operating liabilities
- decrease in related operating liabilities

Question 3

Operating activities

Answer 3

relate to the firm’s current assets and current liabilities

Question 4

Investing activities

Answer 4

relate to noncurrent assets

Question 5

Financing activities

Answer 5

relate to noncurrent liabilities and equity

Question 6

The main advantage of the direct method

Answer 6

it presents clearly the firm’s operating cash receipts and payments.

Question 7

The main advantage of the indirect method

Answer 7

• it focuses on the differences between net income and operating cash flow and
• gives the user of the accounts an indication of earnings quality

Question 8

CFI calculation

Answer 8

consists of the cash inflows and outflows that result from acquiring or disposing of longterm assets and certain investments.

Question 9

CFF calculation

Answer 9

consists of the cash inflows and outflows that result from transactions affecting a firm’s capital structure, such as borrowing, repaying debt, and issuing or redeeming equity securities

Question 10

Differences in cash flow classifications between U.S. GAAP and IFRS

Answer 10

• Interest:
  + US GAAP: CFO
  + IFRS: CFO or CFI/CFF
• Dividend
  + US GAAP: CFO
  + IFRS: CFO or CFI/CFF
• Bank overdraft: US GAAP as debt, IFRS as cash
• Tax: US GAAP as CFO, IFRS can separate by nature
• CFO: IFRS if use direct method, must have reconcilation between income and CFO