Cash Flow Flashcards
What is the purpose of the statement of cash flows
- Report cash receipts and payments of an entity over some time
- Detail the changes in the cash account on the balance sheet
- Classify the cash flows as operating, investing and financing activities
- Shows the relationship of net income to changes in cash balances
- Helps predict future cash flows
- Evaluates how management generates and uses cash
- Determines a company’s ability to pay interest, dividends and debt when they are due - highlights liquidity
- Identifies specific increases and decreases in a firm’s productive assets
What type of management decisions affect cash?
operating decisions, financing decisions or investing decisions
Define collectively exhaustive in the context of cash flow
Operating, investing and financing activities are collectively exhaustive - There are only 3 categories
Define mutually exclusive in the context of cash flow
Mutually exclusive as if one is one type of activity it cannot be another
Define cash equivalents
Cash equivalents are highly liquid short term investments that a company can easily and quickly convert into cash - Ex: money market fund with maturity of less than 90 days
What are operating activities
Operating activities are transactions that affect the purchase, processing and selling of a company’s products and services ex: making sales, collecting A/R, purchasing inventory, paying accounts payable
What section do operating activities go in on the SOCF
Cash flows from operating activities
How is interest treated on the SOCF
Interest on a loan in Europe can be treated in different ways. In America, it must be an operating activity. For this course, Interest is an operating activity
What are financing activities
Financing activities are a company’s transactions that obtain resources from debt and equity transactions
Ex: Issuance of additional stock, repayment of a principal loan, borrowing money from the bank, repaying previous loans
Where do financing activities go in on the SOCF
Cash flows from financing activities
Where do investing activities go in on the SOCF
Cash flows from Investing activities
Define investing activities
Investing activities are transactions that acquire or dispose of assets that are expected to provide services for more than one year - Purchasing and disposing of equipment
What is the equation of cash flow
CFO +CFF+CFI = cash flow
How do I determine cash inflows and outflows of investing activities
Increases in cash (inflows) front decreases in long-lived assets, loans and investments
Decreases in cash (outflows) from increases in long-lived assets, loans and investments
How do I determine cash inflows and outflows of financing activities
Increases in cash (inflows) from increases in long term liabilities or paid-in capital
Decreases in cash (outflow) from decreases in long term liabilities or paid-in capital
What is the direct method of calculating CFO
Subtract operating cash disbursements from operating cash collections
Examining what transactions are left over after investing and financing activities and adding them up.
What si the theory behind the Indirect method of calculating the CFO
Adjusts accrual-based net income from the income statement to reflect only cash receipts and disbursements - used by most companies
Explain the indirect method
Adjust from revenues and expenses not requiring cash: Add back depreciation and any other adjustments like it
Then adjust for changes in non-cash assets/liabilities relating to operating activities:
Add decreases in assets: Prepaid asset, A/R, inventory
Deduct increases in assets
Add increases in liabilities ex: wages payable, A/P
Deduct decreases in liabilities
What is the schedule of noncash investing and financing activities
Report of and items as such: financing and investing activities that do not affect cash
Explain why most companies use the indirect method
If you use the direct method you also prepare a report or Reconciliation statement to reconcile net income to net cash using the indirect method. So you ahve to do the same thing anyways
Explain free cash flow
A measure of cash management performance. Refers to cash flows from operations fewer capital expenditures (and sometimes fewer dividends)
What does US GAAP stand for
General accounting accepted practice in America
What does IFRS stand for
International financial reporting standard - Europe, Australia
What are the practices of IFRS and GAAP on interest in the SOCF
IFRS allows preparers to choose to include interest expense as financing or operating activity
The US has an interest as operating activity
