Ch 23

Question 0

Primary purpose of statement of cashflows

Secondary purpose?

Answer 0

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

Question 1

Many analysts like stocks of companies trading at low multiples of their…

Answer 1

Free cash flow

Question 2

The statement of cashflows provides info for investors and creditors to asses the following 4 areas?

Answer 2

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

Question 3

Entity’s ability to generate future cashflows

Answer 3

Primary objective of financial reporting is to provide info to
Predict amounts, timing and uncertainty of future cashflows

Question 4

Operating activities

Answer 4

Cash effects of transactions that enter into determination
Of net income

Ex. Cash receipts from sales if goods and services

Question 5

Investing activities

Answer 5

Generally involve Longterm assets and include:
1 making + collecting loans
2 acquiring and disposing of investments and productive
Long lived assets

Question 6

Financing activities

Answer 6

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

Question 7

Operating: 2 major types of cash inflows

Answer 7

1 from sales of goods and services

2 from returns on loans (interest) and on equity securities (dividends)

Question 8

Operating: 5 major cash outflows

Answer 8

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

Question 9

Operating cash inflows and outflows are generally…

Answer 9

Income statement items

Question 10

Investing: 3 general types of cash inflows

Answer 10

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

Question 11

Investing: 3 major types of cash outflows

Answer 11

1 to purchase property, plant, equipment

2 to purchase debt or equity securities of other entities

3 to make loans to other entities

Question 12

Investing cash inflows and cash outflows generally involve…

Answer 12

Changes in investments and Long term asset items

Question 13

Financing: 2 general types of cash inflows

Answer 13

1 from sale of equity securities

2 from issuance of debt (bonds and notes)

Question 14

Financing: 2 general types of cash outflows

Answer 14

1 to stockholders as dividends

2 to redeem Longterm debt or reacquire capital stock

Question 15

Financing cash inflows and outflows are generally involve…

Answer 15

Changes in Long term liability and stockholders’ equity items

Question 16

What can IFRS define “cash and cash equivalents” as?

Answer 16

Net monetary assets

Question 17

IFRS: equation for net monetary deposits

Answer 17

Net monetary deposits =
(Cash and demand deposits and highly liquid investments)
- (short term borrowings)

Question 18

Both IFRS and GAAP specify that companies must classify cash flows as…

Answer 18

Operating, investing, financing

Question 19

What 3 sources are used to prepare the statement of cash flows?

Answer 19

1 comparative balance sheets

2 current income statement data

3 selected transaction data

Question 20

Comparative balance sheets

Answer 20

Provide amount of changes in assets, liabilities and equities
From beginning to end of period

Question 21

Current income statement data

Answer 21

Help determine amount of cash provided by or used by

Operations during the period

Question 22

Selected transaction data

Answer 22

From general ledger, provide additional detailed info
needed to determine how company provided or used cash
During period

Question 23

3 steps used to prepare cash flow statement from the 3 sources

Answer 23

1 determine change in cash

2 determine the net cash flow from operating activities

3 determine net cash flows from investing and financing
Activities

Question 24

How does a company determine revenues and expenses on a cash basis?

Answer 24

By eliminating the effects of income statement transactions

That don’t result in increase or decrease of cash

Question 25

Indirect method AKA reconciliation method

Answer 25

Adjusts net income for items that affected reported net

Income but did not affect cash

Question 26

2 ways companies can boost operating cashflows that are bad for investors?

Answer 26

1 securitizing receivables

2 timing recognition of non cash gains
ex. Chesapeake energy’s sale of Pipeline assets

Question 27

Net cashflows: the direct method

Answer 27

Deducts operating cash disbursements from operating

Cash receipts

Question 28

Under the direct method, companies compute net cash provided by operating activities by adjusting…

Answer 28

Each item in the income statement from accrual basis

To cash basis

Question 29

Formula to compute cash receipts from customers

Answer 29

Cash receipts from customers =
Sales revenue (+ decrease in A/R or - increase in A/R)

Question 30

Formula to compute cash payments to suppliers

Answer 30

Cash payments to suppliers =
COGS (+ increase in inventory or - decrease in inventory)
(+ decrease in A/P or - increase in A/P)

Question 31

Formula to compute cash payments for operating expenses

Answer 31

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)

Question 32

The principal advantage of the direct method is?

Answer 32

That it shows operating cash receipts and payments

Question 33

The principal advantage of the indirect method is that it?

Answer 33

Focuses on differences between net income and net

Cash flow from operating activities

Question 34

Companies at use the direct method must report separately the following 3 classes of operating cash receipts?

Answer 34

1 cash collected form customers (including lessees and
licensees)
2 interest and dividends received

3 other operating cash receipts

Question 35

Companies at use the direct method must report separately the following 4 classes of operating cash payments

Answer 35

1 cash paid to employees and suppliers of goods and 
Services
2 interest paid
3 interest taxes paid
4 other operating cash payments

Question 36

5 common problems in preparing statement of cash flows

Answer 36

1 adjustments to net income
2 A/R (net)
3 other working capital changes
4 net losses
5 significant non cash transactions

Question 37

FASB requires companies to classify all income taxes paid

As…

Answer 37

Operating cash outflows

Question 38

6 Significant non cash transactions omitted by the statement of cash flows that must be disclosed in separate notes

Answer 38

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

Question 39

How can analysts detect suspicious accounting practices?

Answer 39

Use relationship between earnings and operating cash flows

Because accounting practices generally don’t change
Operating cashflows

Question 40

3 steps companies use to prepare worksheets to assemble the statement of cash flows

Answer 40

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

Question 41

“enter the increase or decrease in cash on the cash line

And at bottom of worksheet” what does this enable

Answer 41

Enable the totals of reconciling columns to be in agreement