chapter 5: inhale cash flows Flashcards
what does the statement of cash flow explain?
how the cash balance at the beginning of the period changed to another cash balance at the end of the period
what are cash equivalents?
short term highly liquid investments
readily convertible to known amounts of cash
less than three months to their maturity
subject to insignificant risks fo changes in value
cash flows from operating activities
cash inflows and outflows directly related to earnings from normal operations
what are the two alternatives to represent the operating activities section?
the direct method
the indirect method
what is the direct method
reports components of cash flows from operating activities listed as gross receipts and gross payments
more expensive to implement that the indirect method
indirect method
presents operating activities section of the statement of cash flow starting with net earnings
eliminates non cash items from revenues and expenses
will arrive to cash inflow (outflow) from the operating activities
does the indirect and direct method make a difference to find the total amount of cash inflows or outflows from operating activities? or does it remain the same?
the cash outflow or inflow result is the same with both methods
what are cash flows from investing activites?
cash inflows and outflows related to acquisition or sale of long lived productive assets and investments in securities of other companies
the difference between inflows and outflows is called net cash inflows (outflows) from operating activities
what are cash flows from financing activites?
cash inflows and outflows related to owners and creditors that finance enterprise and operations
difference between inflow and outflow is Calle ent cash inflow(outflow) form financing activities
what is the net increase or decrease in cash
the combination of outflows and inflows of cash from operational, financing and investing activities
what type of data do you need to prepare the statement if cash flow and why?
comparative statement of financial position to compute cash flows from all activities
complete statement of earnings to identify cash flows form operating activities
additional details about selected accounts because often times net change In account balance does not reveal underlying nature of cash flows
true or false
any transaction that results in a change in cash must be accompanied by a shaven in liabilities, SE, or non-cash assets?
true
when theres an increase in cash, what does in mean for either the liabilities, SE, and non cash assets
liabilities should increase, SE should increase, and non cash assets should decrease
or
liabilities should decrease, SE should decrease, and non cash assets should increase
in the indirect method for cash flows regarding operating activities, what should you record to cash inflow if current non-cash assets decrease or current non-cash liabilities increase?
cash inflow increases
ex: when accounts receivable decrease because cash is collected, more cash is in the back account
in the indirect method for cash flows regarding operating activities, what should you record to cash inflow if current non-cash assets increase or current non-cash liabilities decrease?
cash inflow decreases
ex: AR are more than the cash collected because revenues are more than cash collected
must substract the non-cash current asset from net earnings
if inventories decrease, does cash flow increase or decrease?
why?
increase because the cash collected from the sale of inventory is more than the costs of selling
if a prepaid expense is a used up (decrease in a prepaid expense), what happens to the cash inflow?
the cash inflow increases
if accounts payable decrease, what happens to cash inflow?
it decreases
you paid cash to suppliers
what are the two types of accounts mostly affected when recording cash flows from investing activities?
purchase and sale of property, land, land, equipment or intangibles assets (trademarks and patents) by cash
these are non current assets
purchase or sale of short or long-term investments by cash
what type of securities (such as government securities) are the equivalent of cash?
securities of maturities of three months or less
securities with maturities of more than three months are considered what?
investments
how do you calculate the cash flows with property, plant, and equipment (Investing activities)
you look at the change (bought and sold), then take off depreciation (operating activities)
the difference will be the cash flow
what is the quality of earnings ratio
you try to calculate how many dollars were generated from operating activities per dollar of retained earnings
what is the capital expenditure ratio ?
you calculate how many many dollars were generated from operating activities per dollar spent PPE, intangibles, and investments
what does a higher ratio of capital expenditure mean?
less need for financing for current and future operations
allows strategic acquisition, avoids debt, reduces risks of bankruptcy
what does a higher ratio of capital expenditure mean?
greater ability to finance operations from cash flows
less likely that company using aggressive revenues recognition strategies to increase net earnings
what is the free cash flow measurement and how do you calculate it?
a measure of firm’s ability to pursue long term investment opportunities
cash flows from operating activities - dividends -capital expenditures
what are capital expenditures
PPE
intangibles
investments
what are the changes presented in cash flows from financing activities
notes payable to financial institutions (short term debt) and portions of long term debt
non current liabilities
shareholders’ equity
what are non cash investing and financing activities?
transactions that do not have direct cash flow effects
reported as supplement to the statement of cash flows in narrative or shcedule form
can gains or losses of a long lived asset be recorded as operating activity, financing activity, or investment activity depending on the situation? indirect method
yeeee
where do you record an adjustment made to gain or losses made from the sale of a long lived asset?
why?
indirect method
on the operating activities section
to avoid double counting the gain or loss
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
purchase of short term investments
cash flow from investing activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
net earnings
cash flow from operating activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
change in accounts receivable
cash flow from operating activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
additions to property, plant, and equipment
cash flow from investing activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
change in prepayments and other current assets
cash flow from operating activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
change in inventories
cash flow from operating activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
change in accrued liabilities
cash flow from operating activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
depreciation and amortizationn
cash flow from operating activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
issuance of shares
cash flow form financing activities
state wether the following belongs in cash flow from operating activities, cash flow from investing activities, or cash flow form financing activities:
changes in accounts payable
cash flow from operating activities
indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method)
increase in inventories
decrease
indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method)
repayment of loans and borrowings
no effect
indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method)
depreciation expense
increase
indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method)
decrease in accounts receivable
increase
indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method)
increase in accounts and other payables
increase
indicate if the following item would be added, subtracted or non included in the reconciliation of net earnings to cash flow form operations (indirect method)
increase in prepaid expenses
decrease
what do cash inflows from operating activities include?
cash sales
collections on Accounts receivable and notes receivable arising from sales
dividends on investments (?)
interest on loans and investments (?)
what do cash outflows from operating activities include?
payments to suppliers and employees
payments for operating expenses, taxes, and interest
what do cash inflows from investing activities include?
cash received from sale of operational assets
sale of investments
maturity value of bond investments
principal collections on notes receivable that are not related to operations
what do cash outflows from investing activities include?
cash payments to purchase operational assets and investments, and to make loans
what do cash inflows from financing activities include?
contributed capital
loans
what do cash outflows from financing activities include?
payments for dividends
the purchase of the company’s own shares
principal payments on borrowing
true or false
Interest on borrowings may also be classified as a financing activity under IFRS
true
what are non-cash investing or financing activities?
give two examples
activities that would normally be classified as investing or financing activities, except no cash was received or paid
ex: purchase of assets by issuing shares or bonds
the repayment of loans using non-cash assets
the conversion of bonds into shares
how are non-cash investing or financing activities reported in statement of cash flows?
are not reported in the statement of cash flows, because there was no cash received or cash paid
however, the activities are disclosed in a note or a separate schedule
using the indirect method, depreciation expense and amortization are supposed to turn into a positive or negative cash flow?
positive cash flow
do the depreciation and amortization accounts affect the cash flows from investing activities?
nah boy
what does a capital expenditure ration of 1.57 indicate?
The ratio of 1.57 indicates that the cash generates from operations is more than sufficient to pay for the company’s investing activities
no finance from external sources of pre-existing cash balances
when you use the indirect method, do you add and debut items affecting cash, items not affect cash or both?
items not affect cash
what does it mean if the capital expenditure ration is negative?
it means that the company did not invest with cash used from operating activities but cash from shareholders and creditors (financing)
what is the free cash flow formula?
cash from operating activities - dividends - capital expenditures
