Chapter 14 (Week 6) Flashcards
Usefulness of the Statement cash flows
It reports the cash receipts, cash payments and net change in cash resulting from operating, investing and financing activities during a period
Its information helps investors and creditors assess:
–> The entity’s ability to generate future cash flows
–> The entity’s ability to pay dividends and meet obligations
–> The reasons for the difference between net income and net cash provided (used) by operating activities
Operating activities
Core business transactions
Differ within the 2 methods: direct and indirect
include the cash effects of transactions that create revenues and expenses. They enter into net income
Involve income statement items
Investing activities
include acquiring and disposing of investments and property, plant and equipment, and lending money and collecting the loans
Involve cash flows resulting from changes in investments and non current asset items
Financing activities
include obtaining cash from issuing debt and repaying the amounts borrowed, and obtaining cash from shareholders, repurchasing shares and paying dividends
Involve cash flows resulting from changes in non current liability and equity items
The financing and investing activities that dont affect cash
are reported in a separate note or supplementary schedule to the financial statements
Information to prepare the statement of cash inflows
Comparative statements of financial position: indicates the amount of changes in assets, liabilities, and equities from the beginning to end of the period
Current income statement: helps determine the amount of net cash provided or used by operating activities during the period
Additional information: includes transaction data that are needed to determine how cash was provided or used during the period
Net cash provided used by operating activities formula
net income +/- adjustments
Adjusting net income for the indirect method
Add back non cash expenses (depreciation expense)
- Depreciation expense: non cash charge. The company must add it back to net income to arrive at net cash provided by operating activities
Deduct gains and add losses that resulted from investing and financing activities
Analyse changes to non cash current asset and current liability accounts
–> Current asset increases, deduct from net income
–> Current liability increases, add to net income
Direct method what to do
Go over income statement elements and heck if the reported amount as revenue/expense is also received/paid
Free cash flow formula
net cash provided by operating activities - capital expenditures - cash dividends
Change in cash Formula
Change in liabilities + change in equity - change in non cash assets
