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MS2 Accounting Intro Review > Chapter 17: Statement of Cash Flows > Flashcards

Chapter 17: Statement of Cash Flows Flashcards

1
Q

Operating Activities

A

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)

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2
Q

Financing Activities

A

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)

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3
Q

Investing Activities

A

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)

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4
Q

Indirect method of statement of cash flows: Items SUBTRACTED from Net Income

A

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
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5
Q

Indirect method of statement of cash flows: Items ADDED to Net Income

A

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
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6
Q

Direct Method for statement of cash flows

A

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

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7
Q

Direct Method statement of cash flows: Cash receipts from customers

A

Cash receipts from customers = sales revenue + decrease in accounts receivable (or - increase in accounts receivable)

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8
Q

Direct Method statement of cash flows: Cash Payments to Suppliers

A

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)

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9
Q

Direct Method statement of cash flows: Cash Payments for Operating Expenses

A

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)

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10
Q

Direct Method statement of cash flows: Cash Payments for income taxes

A

Cash Payments for income taxes = Income tax expense + Decrease in income taxes payable (or - increase in income taxes payable)

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11
Q

Direct Method statement of cash flows: Operating activities section

A 
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 Activities
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12
Q

Direct Method statement of cash flows: Investing and Financing Activities

A

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

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13
Q

Cash Flows from Operating Activities

A

Inflows:

  • Sales of goods or services
  • Interest and dividends received

Outflows:
- Operating expenses: to suppliers, employees (payroll), government (taxes), lenders (interest)

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14
Q

Cash Flows from Investing Activities

A

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
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15
Q

Cash Flows from Financing Activities

A

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)
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16
Q

Significant Non-Cash Activities on statement of cash flows

A
  • 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

17
Q

Classifications of cash flows

A

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

18
Q

Purpose / Use of statement of cash flows

A
  • 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
19
Q

Checking the statement of cash flows

A

Compare net change in cash on statement of cash flows with change in cash account on balance sheets to confirm agreement

20
Q

Sources of information for statement of cash flows

A
  • 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)
21
Q

statement of cash flows format

A

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

22
Q

Indirect Method: format of statement of cash flows

A

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

23
Q

Indirect Method: statement of cash flows

A

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

24
Q

Main Steps to preparing statement of cash flows

A

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)

25
Q

Common statement of cash flows adjustments to net income (loss)

A 
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

26
Q

Determining Net Cash Flow from Operating Activities

A

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

27
Q

Loss on Sale of equipment

A

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
28
Q

Determining Net Cash Flow from investing and financing activities

A

Analysis of comparative balance sheet data and selected additional information for effect on cash

(disclose non-cash transactions in notes/ separate schedule)

29
Q

To Determine cash received from disposal of plant assets

A

= cost - accumulated depreciation + gain - loss

30
Q

Free Cash Flow

A

= 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

31
Q

Net increase / decrease in cash

A

= Net cash provided by operating activities
- net cash used for investing activities
+ Net cash provided by financing activities

32
Q

To determine dividends paid in a period

A

= beginning retained earnings + Net income - Net Loss - Ending Retained Earnings

33
Q

statement of cash flows: IFRS vs GAAP

A

GAAP requires indirect method (check if still true)

IFRS permits use of either

34
Q

Operating section of statement of cash flows in IFRS

A

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)

35
Q

IFRS vs GAAP Classifications of interest, dividends and taxes

A

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
36
Q

Non-Cash Investing and Financing on statement of cash flows IFRS vs GAAP

A

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

37
Q

IFRS income statement and Balance sheet

A

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)

MS2 Accounting Intro Review (16 decks)

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