F describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data;

Question 1

Direct v Indirect points to remember

Answer 1

CFO calc diff. under each but result is the same
Calc CFI and CFF is same as either method
Inverse relationship between changes in assets and changes in CF’s (an +asset account = use of cash, -asset account = source of cash)

Direct relationship between changes in L’s and changes in CF. +L = source of cash. -L = source of cash.

Sources of cash are + (cash inflows), uses of cash are - (cash outflows)

Question 2

Direct method brush up

Answer 2

Direct CFO shows only the sum of inflows (+receipts) and outflows (-payments)

Question 3

Direct method for the analyst

Answer 3

more info: Analyst can see the actual amounts that went to each use of cash and that were revived from each source of cash. This info can help the ana to better understand the firms performance over time and to forecast future CF’s

Question 4

Components of direct cash flow statement

Answer 4

CASH
+collected from customers (main component)
+(input) used in the production of goods and service
-operating expenses
-paid for interest, taxes

**When using depr. method, ignore the depr. exp. (its a non-cash charge)

Question 5

Calc direct CFI

Answer 5

Calc: Examine the change in the gross (BS pres. before depr. or amort deductions) asset accounts that result from investing activities
(PPE, intangibles, inv. sec’s) *Accum. depr. or amort. are ignored since they don’t represent cash expenses.

Calc cash paid for new asset: 1)determine if old assets sold. If yes, then Cash paid for new asset = ending gross asset + gross cost of old assets sold -beginning gross assets

2) G or L? use formula: Cash from asset sold = book value of the asset + gain (or -loss) on sale

Question 6

Direct CFF

Answer 6

Determined by measuring the CF’s occuring between the firm and the suppliers of capital

‘CF between firm and creditors’ = + CF: new borrowings or - CF: debt principal INTEREST PAID * technically CF to creditors but included in CFO under GAAP

CF’s between firm and its shareholders - occurs when equity is issued, shares are repurchased, or dividends are paid

Net CF from creditors = New borrowings - principal amounts paid

Net CF’s from shareholders = new equity issued - share repurchases - cash dividends paid

Question 7

Calc a total CF

Answer 7

A total CF = sum CFO + CFI + CFF

CORRECT CALC: Total CF will = change in cash from one balance sheet to the next.

Question 8

Indirect CF method

Answer 8

Begin w/ NI and adjust it for differences between accounting items and actual cash receipts and cash disbursements

Another NI adjustment: Subtract gains on the disposal of assets, and add back losses: Proceeds from the sale of fixed assets are an investing CF - gains are a portion of proceeds (so we subtract them from NI in calc indirect CFO)

**Also under indirect: Adjust NI for change in BS accounts

Ex: If AR inc. we know that sales>Cash collected from customers from the period, we needs to reduce NI to reflect the fact that credit sales rather than cash collected were used in Calc NI

Change in AP indicated a difference between purchases and the amount paid to supplies. An increase in AP for exmaple, results when purcahses are greater > cash paid to suppliers. Since purchases were subtracted in calculating NET Income, we need to add an increase in AP to NI so that the CFO relfects the actual cash disbursements for purchases (rather than total purchases)