Ch 13_ SOCF Flashcards
what are the two ways we can prepare the operating activities section
INdirect, and direct method
What is the purpose of the socf
1) help users assets company ability to get cash from operating activities
2) how company recieved and used other cash flows in both investing and financing activities
3) helps determine company ability to get FUTURE cash flows
IFRS and ASPE is accrual based accounting, but what if you are interested in cash basis?
socf has no accounting for accruals!!!
what is included in cash flows
cash and cash equivalents, highly liquid (Easily sold), CONVERTED TO CASH <3 mos
what are operating activities
-related to principal income producing activities
-actvities relate to cash effects of transactions that create revenues and expenses
-includes relevant noncash current assets on the soofp where the related acct is a soi account
Investing activities
-related to the acquisiton and disposal of PPE
-related to long live assets and investments not held for trading
- related to lending money and collecting loans
- generally inludes non current asset on sofp
Financing activities
-related to changes in a company’s debt and equity
-obtaining cash from issuing debt and repaying the amount borrows
-obtaining cash from selling common shares, preferred shares, and paying dividends
-ncl and SE items
what are examples of significant non cash activities
ISSUE OF SHARES TO PURCHASE ASSETS/REDUCE LIABILITY
CONVERTING DEBT TO EQUITY
EXCHANGE PPEE
ACQURING ASSETS AND DIRECTLY ASSUMING RELATED LIABITLIES
do we report significant non cash activiies on socf?
NO!!!! if does not affect cash, do NOT report in socf
report in separate note to the fs
format of socf
Operating activities
=net cash provided/used by operating activits
investing activities
=net cash provided/used by investing activits
fianncing activitiess
=net cash provided/used by financing activits
net increase/decrease in cash
cash beinning of period
cash, end of period
note x: signficant noncash investing and financing activies include
heading for socf
company name
socf
for the – ended dec 31,2023
operating activities have two types of sections
indirect and direct method!!
what is the difference between indirect and direct method of recording operaitng actities
1) method used
2) presentation
the final value will awlways be the same
indirect method of recording operating activtiies
-start with net income
- ADD/DEDUCT ITEMS NOT AFFECTING CASH TO GET TO NET CAHS
=net cash
direct method of operating activities
-cash recipets from customers
-Cash payments
to suppliers
for operating expenses
to emplouees
for itnerest
for income tax
=net cash
preparing the socf
1) prepare operating
2) prepare investing
3) prepare financing
How to prepare operating activities section
1) determine net cash by converting net income from accrual basis to cash basis
- convert using indirect method or direct method
do most companies use the indirect method or direct method
indirect cuz it is easier to prepare
indirect method of preparing operating activites section:
+D/L
-G
+ dec in CA and inc in CL
- inc in CA and dec in CL
=start with net income/loss
+non cash expenses such as depreciation and losses
-non cash gains
+decrease in current asset accound and increases in current liability
-decrease in current liability account and increase in current asset account
examples of non cash gains and losses: inventory chanigng cuz of lcnrv rule, or depreicaiton
basically, you are removing all accruals from net income!
how to know what to add / subtract to net income for indirect method
whatever the signs are for the liabilites keep them, swap the signs for current assets
NOTE: ALL ACCOUNTS NEED TO BE NON CASH IMPACTING ACCOUNTS
- INV, A/R, PREP EXP, AP, IT PAYAB
Investing Activities
-measure cash flows realted to nca
- ASSET ACQUISITION (negatives)
- DISPOSALS (positivies)
- deprecaition is non cash
Financing Activities format
- analyze changes in ncl and equity
- cahgnes to ntoes/loans/ mortgages and bonds payable
- analyze share capital and RE for changes
- DO NOT CARE ABOUT AMMORTIZATION OF DISC OR PREMIUM (NONCAHS)
HOW to complete socf
determine increase/decrease in cash for period
ensure ending balance agrees with sofp!!
NOTE: any non cash disclosures
4 phases of a company
intro
growth
maturity
decline
what is the highest socf activitty in intro section
financing!!!! op is second highest and investing is lowest
what is the highest socf activitty in growth section
financing is the highest but declining, op increases a lot, investing lowest
what is the highest socf activitty in maturity section
op is the highest, then investing, financing is the lowest foing down
what is the highest socf activitty in decline section
op is the highest, investing is second, and financing is last
what is Free cash flow
measure of the DISCRETIONARY cash remaining from op activities
can be used to exapnd, reduce debt, pay more divs etc.
FREE CASH FLOW FORMULA
NET CASH FROM OP- NET CAPITAL EXPENDITURES- DIV PAID
is higher or lower better for free cash flow
higher
how to prepare the op activieis w direct method
you need to find net cash recipits and payments and subtract em
what does direct method DO
adjust sof from accrual basis to cash basis (build from ground up as opposed to net inncome odwn)
how to calculate cash recipeits from cust
sales + ( + dec in AR or - in AR) + ( + inc in Def rev or - dec in Def Rev)+ ( + inc in Ref Liab or - dec in ref liab)
basically swap sign for AR
keep sign for def rev and ref liab
NOTE: if any other reciepts like interest, adjust like it is AR
what are the 3 cash payments we need in direct method
to supliers
to other operating exp
to income tax
to interest
how to calc net cash pay to suppliers
COGS + ( + increase in inv or - dec in inv) + (+ inc in estim inv ret or - dec in estim inv ret) - ( + dec in a/p or - inc in a/p)
swap the signs for the liability!!!! a/p
keep sign for ca lik inv and estim inv
how to calc cash pay for other operating expenses
other operating expenses + ( + inc in prep exp or - dec in prep exp) + (+ dec in liab relating to other op exp or - inc in liab relating to other op exp)
SWAP SIGN FOR LIABILITIES
everything gets added
How to calc cash pay for income tax
income tax expense + (+ dec in it payable or - inc in IT payable)
swap signs for current liabilities
how to calc cash pay for interest expense
interst expense + (+ dec in int payable or - inc in int payable)
SWAP SIGNS FOR LIABILITY
IFRS RULES
-int and div recieved could be either operating or investing activities
-int and div paid could be financing or operating actitives
BUT U GOTTA PICK ONE AND STICK TO IT
ASPE RULES
int and div recieved= operating activiity
int paid is operating activity
div paid= financing activityi
