CMA_P1_SCF

Question 1

What is The Statement of Cash Flows

Answer 1

One of the three main financial statements under US GAAP.

The SCF must be presented by all businesses whenever the company presents a balance sheet and income statement.

The primary purpose is to provide information regarding the receipts and uses of cash.

Question 2

Classification of Activities

Answer 2

1) Operating activities,
2) Investing activities, and
3) Financing activities.

Question 3

What is Operating Activities

Answer 3

Any item that is not classified as either an investing or financing activity is an operating activity.

• Interest paid on bonds and other debt (loans, leases, mortgages, etc.).
• Interest received and dividends received from debt and equity investments.
• Cash flows from the purchase, sale and maturity of trading securities.
• Cash paid to the government for taxes and cash received back from the government as a tax refund.

Question 4

What is Investing Activities

Answer 4

Activities the company undertakes to generate a future profit, or return.

• Purchasing and selling fixed assets.
• Making and collecting loans to other parties.
• Acquiring and disposing of stock of other companies.
• Acquiring and disposing of debt instruments.
• Acquiring and disposing of available-for-sale or held-to-maturity securities.

Question 5

What is Financing Activities

Answer 5

Activities that a company undertakes to raise capital to finance the business.

• Issuance of stock.
• Treasury stock transactions.
• Paying dividends.
• Issuing debt (bonds).
• Repayment of debt obligations.
• Obtaining and repaying a loan.

Question 6

Present Each Side of Transactions

Answer 6

Each activity in investing and financing activities has two sides.

The rule is to present cash inflows and cash outflows separately from each other for a particular activity.

Question 7

Noncash Investing and Financing

Answer 7

Either investing or financing in nature, but did not involve cash in the transaction.

• Converting debt to equity.
• Buying or selling fixed assets for something other than cash.
• Obtaining a building or other item by gift .
• Buying fixed asset by obtaining a loan.

These are presented separately in a schedule at the end of the SCF.

Question 8

Cash Equivalents on the SCF

Answer 8

Cash equivalents are considered to be cash and are therefore treated as cash in the SCF.

Question 9

IFRS Notes for Cash Flows

Answer 9

The main difference between US GAAP and IFRS in respect to the Statement of Cash Flows has to do with the classification of activities.

1. Interest and dividends received can be classified as either an operating or investing activity.
2. Interest and dividends paid can be classified as either an operating or financing activity.
3. Noncash investing and financing activities are disclosed in the Notes to the financial statements, and not on the Statement of Cash Flows.

Question 10

Preparing the SCF. What are the 2 Methods?

Answer 10

We know the final answer before we begin to prepare it.
There are two acceptable methods in US GAAP for the preparation and presentation of the statement of cash flows – the direct method and the indirect method.

Question 11

CFS Layout

Answer 11

Cash flows from operating activities
…… $X
Net cash flows from operating activities $X
Cash flows from investing activities
…… $X
Net cash flows from investing activities $X
Cash flows from financing activities
…… $X
Net cash flows from financing activities $X Net increase in cash and cash equivalents $X

Cash and cash equivalents at beginning of year $X
Cash and cash equivalents at end of year $X

Schedule of noncash investing and financing activities.

Question 12

Overview of the Two Methods

Answer 12

The direct method makes adjustments to each individual line to take out the effect of noncash and non-operating activity transactions.

The indirect method makes all of the adjustments to net income from the income statement.

Question 13

Direct Method explained

Answer 13

Revenue +/- adjustment Cash from customers
-COGS +/- adjustment Cash paid to suppliers
-Salary exp +/- adjustment Cash paid to emplees
-Rent exp +/- adjustment Cash paid for rent
-Deprec exp +/- adjustment ——————-
+Gain on sale of FA +/- adjustment ——————-

=Net income = Cash from Operating Activities

The Direct Method adjusts each individual line of the income statement

Question 14

Indirect Method explained

Net Income is the top line of the operating activities section and all adjustments are made to it.

Answer 14

=	Net income	
	\+/- adjustment
	\+/- adjustment
	\+/- adjustment
	\+/- adjustment
	\+/- adjustment
	\+/- adjustment
=	Cash from Operating Activities

The Indirect Method makes adjustments to net income.

Question 15

Indirect Method Adjustments

Answer 15

There are five steps for the indirect method:

1. Eliminate noncash items from the income statement.
2. Eliminate non-operating activity transactions that are included in the income statement.
3. Adjust for changes in operating account balances.
4. Adjust for trading securities activities.
5. Make required disclosures.

Question 16

1. Eliminate Non-Cash Items

Answer 16

The income statement includes some expense items that are not cash payments. These need to be eliminated.
The most common examples of this are:
- Depreciation expense
- Amortization expense

Question 17

2. Eliminate Non-Operating Activities

Answer 17

The income statement reports results of all transactions the company entered into during the period, including events that were not operating activities.
These non-operating transactions created gains and losses on the income statement.
-Gains are subtracted from net income
-Losses are added back to net income

Question 18

3. Individual Account Adjustments

Answer 18

After taking out the noncash items and investing and financing activity items, The company needs to make adjustments for operating activities that did not involve cash.
Individual asset and liability accounts that are related to operating activities need to be looked at.

The adjustments for a few of the individual accounts are discussed in detail, and then a general rule that can be used in this process is presented.

Question 19

Adjusting for Accounts Receivable

Answer 19

Net income needs to be adjusted for the change in the accounts receivable balance over the period.

• Increase in AR balance is subtracted from net income.
• Decrease in AR balance is added to net income.

Question 20

Adjusting for Accounts Payable

Answer 20

Similarly, net income must be adjusted for a change in accounts payable.

• An increase in AP must be added to net income.
• A decrease in AP must be subtracted from net income.

Question 21

Adjusting for Inventory

Answer 21

• An increase in inventory must be subtracted from net income.
• A decrease in inventory must be added to net income.

Question 22

Rule for Adjustments

Answer 22

Asset Accounts (adjustment is opposite of change)

Asset account incr Subtracted from net income
Asset account decr Added to net income

Liability Account (adjustment is same as change)

Liability account incr Added to net income
Liability account decr Substracted from net income

Question 23

4. Cash Flows and Trading Securities

Answer 23

Cash flows from the purchase, sale and maturity of trading securities are to be classified based on the nature and purpose for which the securities were acquired. Usually, this means they will be classified as operating activities, not investing activities.

Question 24

5. Indirect Method Disclosures

Answer 24

If a company uses the Indirect Method to prepare the SCF, it must also separately report the amount of cash paid for

1. Taxes, and
2. Interest.

Question 25

Investing Activities

Answer 25

Must look at all cash flows relating to the items included in investing activities.

Question 26

Financing Activities

Answer 26

As with investing activities, we are interested only in the amount of cash in the transaction.