CMA_P1_SCF Flashcards
What is The Statement of Cash Flows
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.
Classification of Activities
1) Operating activities,
2) Investing activities, and
3) Financing activities.
What is Operating Activities
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.
What is Investing Activities
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.
What is Financing Activities
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.
Present Each Side of Transactions
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.
Noncash Investing and Financing
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.
Cash Equivalents on the SCF
Cash equivalents are considered to be cash and are therefore treated as cash in the SCF.
IFRS Notes for Cash Flows
The main difference between US GAAP and IFRS in respect to the Statement of Cash Flows has to do with the classification of activities.
- Interest and dividends received can be classified as either an operating or investing activity.
- Interest and dividends paid can be classified as either an operating or financing activity.
- Noncash investing and financing activities are disclosed in the Notes to the financial statements, and not on the Statement of Cash Flows.
Preparing the SCF. What are the 2 Methods?
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.
CFS Layout
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.
Overview of the Two Methods
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.
Direct Method explained
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
Indirect Method explained
Net Income is the top line of the operating activities section and all adjustments are made to it.
= Net income \+/- adjustment \+/- adjustment \+/- adjustment \+/- adjustment \+/- adjustment \+/- adjustment = Cash from Operating Activities
The Indirect Method makes adjustments to net income.
Indirect Method Adjustments
There are five steps for the indirect method:
- Eliminate noncash items from the income statement.
- Eliminate non-operating activity transactions that are included in the income statement.
- Adjust for changes in operating account balances.
- Adjust for trading securities activities.
- Make required disclosures.
- Eliminate Non-Cash Items
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
- Eliminate Non-Operating Activities
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
- Individual Account Adjustments
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.
Adjusting for Accounts Receivable
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.
Adjusting for Accounts Payable
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.
Adjusting for Inventory
- An increase in inventory must be subtracted from net income.
- A decrease in inventory must be added to net income.
Rule for Adjustments
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
- Cash Flows and Trading Securities
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.
- Indirect Method Disclosures
If a company uses the Indirect Method to prepare the SCF, it must also separately report the amount of cash paid for
- Taxes, and
- Interest.
Investing Activities
Must look at all cash flows relating to the items included in investing activities.
Financing Activities
As with investing activities, we are interested only in the amount of cash in the transaction.
