Chapter 22 (Statement of Cash Flows)

Question 1

Cash & Cash Equivalents

Answer 1

Cash, Treasury bills, commercial paper, money market funds, trading debt

Securities purchased within 3 months of their maturity date

Never report exchanges of items within the cash & cash equivalent account

Question 2

Operating cash flows

Answer 2

Cash receipts and disbursements from transactions reported on the I/S

Question 3

Cash Inflows from (Operating)

Answer 3

Sale of goods or services

Royalties, fees, commission revenue

Interest revenue, dividend revenue

Interest revenue earned on loans to others

Question 4

Cash outflows to (Operating)

Answer 4

Suppliers for goods and services

Employees

Pay for taxes, fines, fees

Pay interest (not principal) on debt

Question 5

Investing cash flows

Answer 5

Cash receipts and disbursements from purchase or sale of noncurrent assets

Property, plant and equipment, intangible assets, available-for-sale and held-to-maturity debt securities,
loans made to others (loans receivable)

Question 6

Financing cash flows

Answer 6

Cash receipts and disbursements from transactions involving debt and equity accounts

Bonds payable (issuance and repayment of principal) and s/t and l/t notes payable, (issuance 
and repayment of principal), issuance and repurchase (treasury) of stock, payment of dividends

Question 7

Noncash Investing and Financing Activities must be disclosed under both methods, typically below the
Statement of Cash Flows

Answer 7

Purchase of PP&E by issuing stock

Acquiring a noncurrent asset by gift

Converting bonds to stock

Acquiring noncurrent asset via capital lease

Question 8

Indirect Method or Reconciliation Method

Answer 8

Reconciles accrual-based net income to net cash flows from operating activities (or cash-basis operating income).

Question 9

Operating Activities Section (Indirect)

Answer 9

Start with net income (from I/S) then make the following adjustments:

Add back noncash expenses and losses (reduces net income, but does not reduce cash)

Depreciation expense
Amortization expense (amortization of intangible assets and bond discount)
Loss on sale of investments or PP&E*
Loss on redemption of bonds*
*Why? To remove items from the operating activities section since the cash effects are reflected in the investing or financing section, as appropriate

Subtract noncash income and gains (amounts that increase net income, but do not increase
cash)

Earnings from equity method investments that were credited to Investment Income
Amortization of bond premium
Gain on sale of investments or PP&E*
Gain on redemption of bonds*
*Why? To remove items from the operating activities section since the cash effects are reflected in the investing or financing section, as appropriate

Question 10

Add back increases in current liabilities or decreases in current assets. Why?

Answer 10

To remove accruals of expected future operating cash receipts and disbursements

Question 11

Deduct increases in current assets and decreases in current liabilities. Why?

Answer 11

To remove deferrals of past operating cash receipts and disbursements

Question 12

Supplemental disclosures when using the Indirect Method are required for

Answer 12

Interest paid (net of capitalized amounts)

Income taxes paid

Significant noncash investing and financing transactions

Question 13

Cash collected from customers

Answer 13

Sales Revenue + Decrease in A/Rec
OR
– Increase in A/Rec

Question 14

Interest and dividends received

Answer 14

Interest Revenue + Decrease in Int. Rec.
OR
– Increase in Int. Rec.

Question 15

Cash paid to employees

Answer 15

Salaries & Wage expense – Increase in Wages Pay.
OR
+ Decrease in Wages Pay

Question 16

Cash paid for merchandise

Answer 16

COGS + (Increase in Inv. OR – Decrease in Inv.)
AND
+ (Decrease in A/Pay OR – Increase in A/Pay)]

Question 17

Interest paid

Answer 17

Interest Expense – Increase in Interest Payable
OR
+ Decrease in Interest Pay

Question 18

Income taxes paid

Answer 18

Income Tax Expense account – Increase in Inc. Tax Payable

OR + Decrease in Inc. Tax Payable

Question 19

Other operating cash payments

Answer 19

[Operating Expenses (Selling, General & Administrative)
+ (Increase in Prepaid Exp. OR – Decrease in Prepaid Exp.)
AND
+ (Decrease in Accrued. Expense
Payable OR – Increase in Accrued Exp. Pay.)]

Question 20

Supplemental disclosures required when using the Direct Method

Answer 20

Reconciliation of net income to net cash flow from operating activities (same as Operating
Activities section under the Indirect Method)

Significant noncash investing and financing transactions

Question 21

Indirect Method

Answer 21

Firm adds increases in DTL or decreases DTA back to net income in operating activities

Firm subtracts decreases in DTL or increases in DTA back to net income in operating activities