Ch 23 Flashcards
Primary purpose of statement of cashflows
Secondary purpose?
Provide info about company’s cash receipts and cash
Payments during a period
Secondary purpose: provide cash-basis information about company’s operating, investing and financing activities
Many analysts like stocks of companies trading at low multiples of their…
Free cash flow
The statement of cashflows provides info for investors and creditors to asses the following 4 areas?
1 entities ability to generate future cash flows
2 entities ability to pay dividends and meet obligations
3 reasons for difference btw net income and net cash flow
From operating activities
4 cash and non cash investing and financing transactions
During the period
Entity’s ability to generate future cashflows
Primary objective of financial reporting is to provide info to
Predict amounts, timing and uncertainty of future cashflows
Operating activities
Cash effects of transactions that enter into determination
Of net income
Ex. Cash receipts from sales if goods and services
Investing activities
Generally involve Longterm assets and include:
1 making + collecting loans
2 acquiring and disposing of investments and productive
Long lived assets
Financing activities
Involve liability and stockholders equity items:
1 obtaining cash from creditors and repaying borrowed
amounts
2 obtaining capital from owners and providing them with
Investment return
Operating: 2 major types of cash inflows
1 from sales of goods and services
2 from returns on loans (interest) and on equity securities (dividends)
Operating: 5 major cash outflows
1 to suppliers for inventory 2 to employees for services 3 to government for taxes 4 to lenders for interest 5 to others for expenses
Operating cash inflows and outflows are generally…
Income statement items
Investing: 3 general types of cash inflows
1 from sale of property, plant, equipment
2 from sale of debt or equity securities of other entities
3 from collection of principal on loans to other entities
Investing: 3 major types of cash outflows
1 to purchase property, plant, equipment
2 to purchase debt or equity securities of other entities
3 to make loans to other entities
Investing cash inflows and cash outflows generally involve…
Changes in investments and Long term asset items
Financing: 2 general types of cash inflows
1 from sale of equity securities
2 from issuance of debt (bonds and notes)
Financing: 2 general types of cash outflows
1 to stockholders as dividends
2 to redeem Longterm debt or reacquire capital stock
Financing cash inflows and outflows are generally involve…
Changes in Long term liability and stockholders’ equity items
What can IFRS define “cash and cash equivalents” as?
Net monetary assets
IFRS: equation for net monetary deposits
Net monetary deposits =
(Cash and demand deposits and highly liquid investments)
- (short term borrowings)
Both IFRS and GAAP specify that companies must classify cash flows as…
Operating, investing, financing
What 3 sources are used to prepare the statement of cash flows?
1 comparative balance sheets
2 current income statement data
3 selected transaction data
Comparative balance sheets
Provide amount of changes in assets, liabilities and equities
From beginning to end of period
Current income statement data
Help determine amount of cash provided by or used by
Operations during the period
Selected transaction data
From general ledger, provide additional detailed info
needed to determine how company provided or used cash
During period
3 steps used to prepare cash flow statement from the 3 sources
1 determine change in cash
2 determine the net cash flow from operating activities
3 determine net cash flows from investing and financing
Activities
How does a company determine revenues and expenses on a cash basis?
By eliminating the effects of income statement transactions
That don’t result in increase or decrease of cash
Indirect method AKA reconciliation method
Adjusts net income for items that affected reported net
Income but did not affect cash
2 ways companies can boost operating cashflows that are bad for investors?
1 securitizing receivables
2 timing recognition of non cash gains
ex. Chesapeake energy’s sale of Pipeline assets
Net cashflows: the direct method
Deducts operating cash disbursements from operating
Cash receipts
Under the direct method, companies compute net cash provided by operating activities by adjusting…
Each item in the income statement from accrual basis
To cash basis
Formula to compute cash receipts from customers
Cash receipts from customers = Sales revenue (+ decrease in A/R or - increase in A/R)
Formula to compute cash payments to suppliers
Cash payments to suppliers =
COGS (+ increase in inventory or - decrease in inventory)
(+ decrease in A/P or - increase in A/P)
Formula to compute cash payments for operating expenses
Cash payments for operating expenses =
Operating expenses
(+ increase in prepaid expense or - decrease in prepaid expense) (+ decrease in accrued exp. payable or - decrease in accrued exp. Payable)
The principal advantage of the direct method is?
That it shows operating cash receipts and payments
The principal advantage of the indirect method is that it?
Focuses on differences between net income and net
Cash flow from operating activities
Companies at use the direct method must report separately the following 3 classes of operating cash receipts?
1 cash collected form customers (including lessees and
licensees)
2 interest and dividends received
3 other operating cash receipts
Companies at use the direct method must report separately the following 4 classes of operating cash payments
1 cash paid to employees and suppliers of goods and Services 2 interest paid 3 interest taxes paid 4 other operating cash payments
5 common problems in preparing statement of cash flows
1 adjustments to net income 2 A/R (net) 3 other working capital changes 4 net losses 5 significant non cash transactions
FASB requires companies to classify all income taxes paid
As…
Operating cash outflows
6 Significant non cash transactions omitted by the statement of cash flows that must be disclosed in separate notes
1 acquisition of assets by assuming liabilities or issuing
Equity securities
2 exchanges of nonmonetary assets
3 refinancing of Longterm debt
4 conversion of debt or preferred stock to common stock
5 issuance of equity securities to retire debt
6 stock dividends, stock splits, restrictions on retained earnings
How can analysts detect suspicious accounting practices?
Use relationship between earnings and operating cash flows
Because accounting practices generally don’t change
Operating cashflows
3 steps companies use to prepare worksheets to assemble the statement of cash flows
1 enter balance sheet accounts and their beginning and
Ending balances in the balance sheet accounts section
2 enter data that explain changes in balance sheet accounts
3 enter the increase or decrease in cash on the cash line
And at bottom of worksheet
“enter the increase or decrease in cash on the cash line
And at bottom of worksheet” what does this enable
Enable the totals of reconciling columns to be in agreement
