Chapter 22

Question 1

purpose of cash flow statement

Answer 1

determine a company’s sources and uses of cash and cash equivalents

Question 2

cash equivalents

Answer 2

near-cash items, convertible to cash in a short notice (90 days) i.e. T-bills, GICs and other low risk guaranteed short-term investments

Question 3

3 parts of cash flow

Answer 3

1. Operating activities (current assets and liabilities)
2. Investing activities (non-current assets)
3. financing activities (non-current liabilities and equity items) i.e. share issue, retirement and dividends

Question 4

direct and indirect method differ

Answer 4

on the presentation, but the amount should be the same

Question 5

Information to prepare cash flow statements come from

Answer 5

1. comparative B/S: amount of changes in assets, liabilities and equities from beg to end of period
2. current I/S data: help reader determine amount of cash provided by or used by operations during the period
3. Selected transaction data: from general ledger for additional detail on how cash was used or provided

Question 6

three steps to prepare the statements

Answer 6

1. Determine the change in cash & cash equivalents (difference on B/S comparative)
2. Determine net cash flow from operating activities: I/S, comparative B/S and selected transition data
3. Determine net cash flows from investing and financing activities: all other changes in B/S analyzed to determine their effects on cash

Question 7

why net income must be converted

Answer 7

most companies use accrual base of accounting so net income may include:
credit sales that were not collected in cash
expenses incurred that were not paid in cash

Question 8

To arrive at net cash flow from operating activities must report revenues/expenses

Answer 8

on cash basis: eliminate the effects of statement transactions that not result in corresponding increase or decrease in cash (direct or indirect method)

Question 9

Direct method

Answer 9

aka income statement method reports cash receipts minus cash disbursements from operating activities. The difference between these two amounts is the net cash flow from operating activities

Question 10

net cash provided(used) by operating activities is

Answer 10

cash basis net income(loss)

Question 11

Indirect method

Answer 11

or reconciliation method starts with net income and converts it to net cash flow from operating activities.
–>adjusts net income for items that affected reported net income but didn’t affect cash

Question 12

to compute net cash flow under indirect method

Answer 12

non cash changes in income statement are added back to net income (increase AP) and net cash credits are deducted (increase in AR)

Question 13

Increase in AR-indirect method

Answer 13

when increase in AR: revenues from accrual basis>cash basis bc goods sold on account are reported in the revenue (amount of change in AR deducted)

Question 14

increase in AP-indirect method

Answer 14

when increase in AP: expenses on accrual basis > cash basis, because expenses were incurred with no cash decrease (changes in AP must be added back)

Question 15

effect of issuance of common stock on cash

Answer 15

receipt of cash from a financing activity and reported as such in statement of cash flows

Question 16

dividend payment on cash flow statemetn

Answer 16

dividend payment on common stock is reported as cash outflow (financing activity)

Question 17

presentation of cash flows dividends IFRS

Answer 17

identical under IFRS, but cash flow from dividends can be as operating, investing or financing as long as it is consistent

Question 18

presentation of cash flow dividends ASPE

Answer 18

dividends MUST be a financing activity

interest expense/revenue, dividend revenues MUST be operating

Question 19

presentation of cash flow dividends CDN GAAP

Answer 19

dividends paid = financing and received or interest received/paid = operating

Question 20

In the future IASB wants cash flows from operations to be

Answer 20

presented only using direct method