Cash Flows Flashcards
Sections of Statement of Cash Flows
- Operating
indirect - simpler n cost effective n links b/s i/s to cf
direct - shows op. cash receipts n payments - Investing
- Financing
as a general rule (watch for exceptions):
- Operating activities impact current assets and liabilities.
- Investing activities impact long-term assets.
- Financing activities impact long-term liabilities and equity.
Direct Method
From operating activities
Cash receipts from customers
$ XXX
A
Cash paid to suppliers
(XXX)
B
Cash paid to employees
(XXX)
C
Cash paid for interest
(XXX)
D
Cash paid for taxes
(XXX)
E
Cash flows from operating activities
$ XXX
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(A) Cash receipts from customers are composed of:
Sales
+/– Change in deferred revenue
+/– Change in accounts receivable
(B) Cash paid to suppliers is composed of:
Cost of goods sold (COGS)
+ Other operating expense items as appropriate
+/– Change in accounts payable and accrued liabilities
+/– Change in inventory and prepaid expenses
Note that in the case of a manufacturing company, there may be items within COGS that require being deducted, such as amortization (a non-cash item) and wages paid to employees. (which are shown separately on the SOCF).
(C) Cash paid to employees is composed of:
Salaries and wages expense
+/– Change in wages payable
(D) Cash paid for interest is composed of:
Interest expense
+/– Change in interest payable
(E) Cash paid for taxes is composed of:
Income tax expense
+/– Change in taxes payable
When trying to determine whether a change should be added or subtracted, think about the balance sheet.
Items on the same side of the balance sheet as cash (assets) will move in the opposite direction of cash to stay in balance. That is, an increase in an asset will be a decrease in cash.
Assets - allowing people to owe u money so u deduct increases and add decreases
Liabilities - u owe others money that has inc. your stuff so u add increases and deduct decreases
Indirect Method
Net income
$ XXX
Adjust for non-cash items, such as:
Depreciation and amortization
XXX
Losses / gains on sale of assets
+/– XXX
Changes in working capital, such as:
Change in accounts receivable
+/– XXX
Change in inventory
+/– XXX
Change in prepaids
+/– XXX
Change in payables and accruals
+/– XXX
Change in deferred revenue
+/– XXX
Cash flows from operating activities
$ XXX
======
I
Investing CFs
The net book value before the sale plus the gain on the sale would equal the cash received. Conversely, in a loss situation, the net book value before the sale less the loss on sale equals the proceeds received.
Financing Cash Flows
monies expended and received with creditors and owners other than those of an operating nature
IFRS CF A/C policy choices?
here are accounting policy choices as to where these cash items are included:
- Interest paid may be shown as either an operating or financing activity.
- Interest received may be shown as either an operating or investing activity.
- Dividends received may be shown as either an operating or investing activity.
- Dividends paid may be shown as either an operating or financing activity.
Cash paid for income taxes is normally included as an operating activity.
ASPE
interest expense, interest income, and dividend income are all reported as operating activities. Dividends paid are part of financing activities. There is supplementary disclosure required for cash paid for interest and for cash paid for income taxes.
teven is preparing the cash flow statement for Light Fixtures Inc. (LFI). Below is an extract of selected information from the company’s balance sheet and income statement.
20X6 20X5 Current portion of long-term debt $30,000 $60,000 Long-term debt 790,000 850,000 Common shares 140,000 160,000 Preferred shares 35,000 — Retained earnings 1,431,000 1,205,000 Other information available:
Interest paid was $48,000.
During the year, LFI repurchased common shares for $29,000.
Net profit for the year was $275,000.
LFI follows IFRS and reports interest paid and dividends paid as financing activities.
What is the total cash flow related to financing activities for the year?
Incorrect Response
a)
($181,000)
Correct Answer
b)
($172,000)
c)
($163,000)
d)
($142,000)
Answer a) is incorrect. The dividends paid calculation was incorrect because the adjustment to the retained earnings for the repurchase of common shares was not included. Answer b) is correct. Cash flow from financing activities is calculated as follows:
Repayment on long-term debt ($60,000 + $850,000) – ($30,000 + $790,000) $(90,000)
Repurchase of common shares (29,000)
Issue of preferred shares 35,000
Dividends paid Closing retained earnings – net income + excess of share repurchase price over book value – opening retained earnings = $1,431,000 – $275,000 + ($29,000 – $20,000) – $1,205,000 (40,000)
Interest paid (48,000)
Cash flow used in financing activities (172,000)
