Chapter 23: Statement of Cash Flows Flashcards
The statement of Cash Flows is required for…
GAAP
- presents information about cash flows that the other statements only provide indirecty
- converts “accrual basis” net income to “cash basis”
Statement of cash flows
What are the GAAP requirements?
- explains the change in cash and cash equivalents
- cash equivalents: highly liquid investments that can be converted to cash in less than 3 month
- transactions between cash and cash equivalents are not reported
What are the major components of the statement of cash flows?
- operating activities (OA)
- investing activities (IA)
- financing activities (FA)
- Noncash investing and financing activities
Cash flows from ongoing operatiions.
operating activities (OA)
Purchase and disposal of operational assets, investments, and non-trade receivables.
investing activities (IA)
All debt and equity financing transactions.
financing activities (FA)
- reported as a supplement either narrative or schedule form
- noncash transactions that do not affect assets or liabilities (i.e. stock dividend) are not reported
noncash investing and financing activities
What are two examples of noncash investing and financing activities?
- conversion of debt to equity
- acquiring an asset through a capital lease
What are the two preparation methods for the statement of cash flows?
direct and indirect methods
Statement of Cash Flow Method?
- reports components of cash flows from OA as gross receipts (i.e. customers) and gross payments (i.e. suppliers)
- requires a reconciliation of net income to cash flows from OA
- FASB preferred method; however, it is not commonly used
direct method
Statement of Cash Flow Method?
- reports components of cash flows from OA as gross receipts (i.e. customers) and gross payments (i.e. suppliers)
- requires a reconciliation of net income to cash flows from OA
- FASB preferred method; however, it is not commonly used
direct method
Statement of Cash Flow Method?
- adjusts “accrual basis” net income to “cash basis” cash flows from operating activities
- Goal: reconcile earnings effect to operating cash flow effect
indirect method
Cash flows from what type of activities are the same under both the indirect and direct method?
- investing activities
- financial activities
In the indirect method, the items needed to prepare the statement are…
- comparative balance sheet
- income statement
- selected transaction data
- net income
- adjustments to reconcile net income to net cash provided
cash flows from operating activities
In the operating activities, depreciation, amortization of intangibles and bond discounts, and bad debt expense are all types of….
non-cash expenses
Non-cash expenses are ___ in the operating activities section in the statement of cash flow.
added
In the operating activities, income from an equity method investment and amortization for bond premium are types of…
non-cash revenues
Non-cash revenues are ___ in the operating activities section in the statement of cash flow.
subtracted
In the operating activities, lales of PPE, investments, and extraordinary items are types of…
losses/gains on peripheral activity
losses/gains on peripheral activity are ___ in the operating activities section in the statement of cash flow.
added/subtracted
Increases and decreases in current assets and liabilities are all types of…
changes in current assets and liabilities
Increases in current assets are ___ in the operating activity section in the statement of cash flow.
subtracted
Decreases in current assets are ___ in the operating activity section in the statement of cash flow.
added
Increases in current liabilities are ___ in the operating activity section in the statement of cash flow.
added
Decreases in current liabilities are ___ in the operating activity section in the statement of cash flow.
subtracted
What type of activity from the statement of cash flow is cash received from dividends and interest?
operating activity
Activity? Inflow or Outflow?
- purchase of property and equipment
investing activity; outflow
Activity? Inflow or Outflow?
- sale of property and equipment (total proceeds)
investing activity; inflow
Activity? Inflow or Outflow?
- purchase of investment
investing activity; outflow
Activity? Inflow or Outflow?
- sale of investments (total proceeds)
investing activity; infow
Activity? Inflow or Outflow?
- issuance of L/T notes receivables
investing activity; outflow
Activity? Inflow or Outflow?
- collections of principal of notes receivables
investing activity; inflow
Activity? Inflow or Outflow?
- issuance of debt (gross)
financing activity; inflow
Activity? Inflow or Outflow?
- payments on debt (gross)
financing activity; outflow
Activity? Inflow or Outflow?
- issuance of stock
financing activity; inflow
Activity? Inflow or Outflow?
- reacquisition of stock
financing activity; outflow
Activity? Inflow or Outflow?
- payment of dividends
financing activity; outflow
How is the total change in cash and cash equivalents calculated?
OA + IA + FA
Supplemental operating cash flow information includes…
- cash paid for interest
- cash paid for taxes
- changes in current taxes payable and deferred tax assets and liabilities are recorded in operating activities
- deferred tax expense is recorded as a reconciling item from net income to operating cash flows
income taxes, current and deferred
Adjust net income from the difference between Pension expense and funding.
postretirement benefits
- cash flows from purchase and sale of investments
- gains/losses on investment securities
investments in trading and available for sale securities
Trading securities falls under what activity in the statement of cash flow?
operating activities
Available for sale securities falls under what activity in the statement of cash flows?
investing activities
Type of security?
- record reconciling items to offset unrealized and realized gains/losses to reflect “actual cash flows.”
trading securites
Type of security?
- unrealized gains/losses dont affect income (only equity) or operating cash flows (only investing); no adjustment.
- record reconciling item to offset realized gains/losses to reflect operating cash flow effect of $0.
available for sale securities
- investor increases its investment for % of earnings and decreases its investment for % of dividends
- adjust the “income effect” by subtracting the % of investee earnings (noncash revenue item).
- record an operating cash inflow for dividends received
equity method investment
- present the net change in A/R (including the allowance)
- present the change in Gross A/R and a separate reconciling item for “bad debt expense”
accounts receivable
- usually affects investing or financing activities
- record and adjustment to offset the income effect of extraordinary items (gross amount) because they do not impact operating activities
extraordinary items
Operating, Investing, or Financing?
Proceeds from sale of land
investing
Operating, Investing, or Financing?
Purchase of treasury stock
financing
Operating, Investing, or Financing?
Issuance of long term bonds
financing
Operating, Investing, or Financing?
acquisition of stock of another corporation
investing
Operating, Investing, or Financing?
Payment of semi-annual interest on bonds payable
operating
Operating, Investing, or Financing?
Payment of a cash dividend
financing
Operating, Investing, or Financing?
Receipt of a cash dividend
investing
Operating, Investing, or Financing?
Purchase of a building
investing
Operating, Investing, or Financing?
Cash dividends received on an equity method investment
operating
Operating, Investing, or Financing?
Payment of income taxes
operating
Operating, Investing, or Financing?
Issuance of common stock for cash
financing
