Chapter 17: Statement of Cash Flows Flashcards
Operating Activities
A section of the statement of cash flows
Activities that create revenue or expense in the entity’s business.
Day to day operations
- Plus interest revenue, dividend income, interest expense and income tax expense
(Current Assets and liabilities)
Financing Activities
A section of the statement of cash flows
Activities that increase or decrease long term liabilities or equity.
- issuing stock and paying dividends
-buying and selling treasury stock
- borrowing and paying off long term liabilities (bonds, notes, mortgages.)
(Long-term liabilities and equity)
Investing Activities
A section of the statement of cash flows
Activities that increase or decrease long term assets
- PP&E
-Notes Receivable
- Investments
- Sale and purchase of long term assets
- Lending and collection of long-term notes receivable
(long term assets)
Indirect method of statement of cash flows: Items SUBTRACTED from Net Income
Anything that increased net income without changing cash available:
- gains on disposal on long-term assets (moved to investing section)
- Increase in non-cash current assets
- Decrease in current liabilities
Indirect method of statement of cash flows: Items ADDED to Net Income
Anything that decreased net income without changing cash available:
- Depreciation, depletion and amortization expense
- Loss on disposal of long term assets (moved to investing section)
- Decrease in non-cash current assets
- Increase in current liabilities
Direct Method for statement of cash flows
Restates the income statement in terms of cash.
1) Compute net cash from operations activities by adjusting each income statement item from accrual basis to cash basis
2) companies report only major classes of operating cash receipts and cash payments
3) for these major classes the difference between cash receipts and cash payments is net cash provided by operating activities
Direct Method statement of cash flows: Cash receipts from customers
Cash receipts from customers = sales revenue + decrease in accounts receivable (or - increase in accounts receivable)
Direct Method statement of cash flows: Cash Payments to Suppliers
Cash Payments to Suppliers = Cost of goods sold + increase in inventory (or - decrease in inventory) AND + decrease in accounts payable (or - increase in accounts payable)
Direct Method statement of cash flows: Cash Payments for Operating Expenses
Cash Payments for Operating Expenses = Operating Expenses + increase in prepaid expenses (or - decrease in prepaid expenses) AND + decrease in accrued expenses payable (or - increase in accrued expenses payable)
Direct Method statement of cash flows: Cash Payments for income taxes
Cash Payments for income taxes = Income tax expense + Decrease in income taxes payable (or - increase in income taxes payable)
Direct Method statement of cash flows: Operating activities section
Cash Flows from Operating Activities
Cash Receipts from Customers
Less: Cash Payments
To Suppliers
For Operating Expenses
For interest expense
For income tax
Net Cash Provided by Operating ActivitiesDirect Method statement of cash flows: Investing and Financing Activities
Assess investing and financing transactions for period, list cash transactions in relevant (investing vs financing section) Only list totals for each type (eg TOTAL cash received from selling stock, not each separate sale of stock)
List non-cash investing and financing activities separately - below statement of cash flows or in the notes
Cash Flows from Operating Activities
Inflows:
- Sales of goods or services
- Interest and dividends received
Outflows:
- Operating expenses: to suppliers, employees (payroll), government (taxes), lenders (interest)
Cash Flows from Investing Activities
Changes in Investments and Long-Term Assets
Inflow:
- sale of PP&E
- Sale of investments (debt or equity in other corporations)
- Collection of principal on loans made
Outflow:
- Purchase of PP&E
- purchase of investments
- loans made to other entities
Cash Flows from Financing Activities
Changes in long-term liabilities and stockholders’ equity
Inflows:
- Sale of common stock
- Issuance of debt (bonds/ notes)
Outflow:
- Dividends to Stockholders
- Redemption of long-term debt
- Re-acquisition of capital stock (treasury stock)
Significant Non-Cash Activities on statement of cash flows
- Direct issuance of common stock to purchase assets
- conversion of bonds to common stock
- issuance of debt to purchase assets
- Exchange of plant assets
Reported in a separate schedule at the bottom of the statement of cash flows or in a note to the financial statements
Classifications of cash flows
Operating Activities: Transactions from income statement
Investment activities:
- Changes in investments and long-term assets
Financing activities:
- Changes in long-term liabilities and stockholders’ equity
Purpose / Use of statement of cash flows
- To predict future cash flows
- To evaluate management decisions
- To predict ability for entity to pay debts and dividends
- To assess reasons for differences between net income and net cash provided / used by operating activities
- To see cash investing and financing activities during a period
Checking the statement of cash flows
Compare net change in cash on statement of cash flows with change in cash account on balance sheets to confirm agreement
Sources of information for statement of cash flows
- Comparative balance sheets (including an analysis of retained earnings)
- Current income statements
- Select transaction data (write downs, amortization charges, book entries such as depreciation that have no effect on cash)
statement of cash flows format
Cash flows from operating activities
Net cash provided (used) by operating activities
Cash flows from investing activities
Net cash provided (used) by investing activities
Cash Flows from Financing Activities
Net cash provided (used) by financing activities
Net Increase/ Decrease in cash
Cash at beginning of period
Cash at end of period
Non-Cash investing and financing activities
Indirect Method: format of statement of cash flows
Cash Flow from Operating Activities
Net Income
Adjustments to reconcile net income to net cash provided by operating activities
List of item that cause changes in cash
Net cash provided (used) by operations
Cash Flows from Investment Activities
Net cash provided / used by investment activities
Cash Flow from financing activities
Net cash provided / used by financing activities
Net increase (decrease) in cash
Indirect Method: statement of cash flows
GAAP requires indirect method to be shown in notes if direct method is use (FASB prefers direct method?)
- shows more detail than direct method
- easier, less costly to prepare
- Focuses on difference between net income and net cash flow from operating activities (starts with net income and adjusts it to the net cash provided by operating activities)
Investing and Financing sections are the same in direct and indirect methods
Main Steps to preparing statement of cash flows
1) Determine change in cash
2) Determine net cash flow from operating activities
3) Determine net cash flows from investing and financing activities
(4) Insure net change in cash of statement of cash flows matches the change from one balance sheet to the next)
Common statement of cash flows adjustments to net income (loss)
Liabilities (short term): - Deduct decrease - Add increase Assets (short term): - add decrease - Deduct increase
- Add back non- cash expenses (depreciation, amortization, depletion)
- Deduct gains, add losses for sale of PP&E (to put into investing section)
- Adjust for changes in non-cash current assets and liabilities:
- Accounts Receivable (add year-to-year decrease, subtract increase)
- Inventory (deduct year-to-year increase, add decrease)
- Prepaid Accounts (deduct year-to-year increase, add increase)
- Payables (add year-to-year increase, deduct decrease)
ALL of these effect income but not cash
Determining Net Cash Flow from Operating Activities
Looking at cash provided or used by operating activities
To find have to take net income from accrual to cash basis
Need: Current Year’s income statement, comparative years balance statements
Loss on Sale of equipment
Actual cash received shown in INVESTING section of statement of cash flows
- Loss must be added to net income in operations section
- Gain must be subtracted from net income in operations section
Determining Net Cash Flow from investing and financing activities
Analysis of comparative balance sheet data and selected additional information for effect on cash
(disclose non-cash transactions in notes/ separate schedule)
To Determine cash received from disposal of plant assets
= cost - accumulated depreciation + gain - loss
Free Cash Flow
= Net cash provided by operating activities
less: capital expenditures (planned expenditures)
less: cash dividends
Describes cash remaining from operations after adjustments for capital expenditures (expenditures on PP&E) and dividends
Net increase / decrease in cash
= Net cash provided by operating activities
- net cash used for investing activities
+ Net cash provided by financing activities
To determine dividends paid in a period
= beginning retained earnings + Net income - Net Loss - Ending Retained Earnings
statement of cash flows: IFRS vs GAAP
GAAP requires indirect method (check if still true)
IFRS permits use of either
Operating section of statement of cash flows in IFRS
IFRS: Some companies present cash flows from operating activities in a single line item with full reconciliation in the notes
(not done this way in GAAP)
IFRS vs GAAP Classifications of interest, dividends and taxes
Interest Paid:
- IFRS: Operating or Investing
- GAAP: Operating
Interest Received:
- IFRS: Operating or Investing
- GAAP: Operating
Dividends Paid:
- IFRS: Operating or Financing
- GAAP: Financing
Dividends Received:
- IFRS: Operating or Investing
- GAAP: Operating
Taxes Paid:
- IFRS: Operating (unless specific identification with financing or investing activities)
- GAAP: Operating
Non-Cash Investing and Financing on statement of cash flows IFRS vs GAAP
IFRS: Non-cash investing and financing activities must be EXCLUDED from statement of cash flows and reported elsewhere.
(Interpreted as non-cash investing and financing is disclosed in notes, not in a separate schedule on statement of cash flows)
GAAP: Company MAY present non-cash investing and financing on a separate schedule on the statement of cash flows
IFRS income statement and Balance sheet
in the future it appears likely that the income statement and balance sheet will have headings of operating, investing and financing (like statement of cash flows)
