F7 (Part 2) - Cash Flows

Question 1

The following are required disclosures of a statement of cash flows under the direct method under U.S. GAAP

Answer 1

1. The major classes of gross cash receipts and gross cash payments.
2. The amount of income taxes paid.
3. A reconciliation of net income to net cash flow from operations.

Question 2

Financing activities include…?

Answer 2

Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; borrowing money and repaying amounts borrowed. Dividends paid, not dividends declared, should be included as an outflow of cash from financing activities.

Question 3

Investing activities include…?

Answer 3

Investing activities include acquisitions and sales of long-term assets or investment assets.

Question 4

In the Statement of Cash Flows, Conversion of debt to equity should be..?

Answer 4

Conversion of debt to equity should be disclosed as supplemental information in the statement of cash flows. (Bonds to Equity conversion)

Note: **Cash flow per share should not be disclosed

Question 5

Supplemental Cash Flow Disclosures include:

Answer 5

1) Purchasing of Fixed Assets by issuance of stock, which is not a cash transaction.
2) Conversion of Bonds to Equity. (Debt to Equity)
3) Acquiring assets through a Capital Lease.
4) Exchange of 1 non-currant asset for another.

Question 6

Financial statements should not report an amount of cash flow per share. Neither cash flow nor any component of it is an alternative to net income as an indicator of an enterprise’s performance, as reporting per share amounts might imply. (Read)

Answer 6

Financial statements should not report an amount of cash flow per share. Neither cash flow nor any component of it is an alternative to net income as an indicator of an enterprise’s performance, as reporting per share amounts might imply. (Read)

Question 7

1) Interest paid, net of capitalized amounts.
2) Income taxes paid
3) Dividends paid on preferred stock

Are all included on which method?

Answer 7

The Indirect Method.

Question 8

Operating Cash Flows include what items?

Answer 8

1. Income Statement Items
2. Changes in Current Assets and Current Liabilities

Examples:

• Cash from customers
• Interest received
• dividends received
• insurance proceeds
• trading securities
• cash paid to suppliers/ employees
• Interest paid (Principal = Finc)
• Income taxes paid (Current and deferred)
• Rent, Insurance, utilities, marketing

Question 9

Investing Cash Flows include what items?

Answer 9

1) NonCurrent Assets

Note: * Outflow is usually a good sign of growth

Examples:

• Making loans to other companies
• Non-current trading securities
• AFS securities
• HTM securities
• Plant, Property, and Equipment
• Acquisitions

Question 10

Financing Cash Flows include what items?

Answer 10

1) Debt (Including non-current liabilities)
2) Equity

Examples:

• Issuing Stock
• Paying Dividends/ Repurchasing Treasury Stock
• Issuing Bonds, Notes, and other borrowings,
• Payments of Principal

Question 11

The Indirect Method is from what to what?

Answer 11

From:

Accrued NI –> Operating CF

Question 12

Direct Method is…

Answer 12

ff

Question 13

The primary purpose of a statement of cash flows is to provide relevant information about:

Answer 13

Relevant information about the cash receipts and cash disbursements of an enterprise during an accounting period.

Note: ** The statement of cash flows is an analysis of historical cash flows rather than a projection of an enterprise’s ability to generate future cash flows.

Question 14

Cash Paid to Suppliers

Answer 14

Cost of Goods Sold - OUT
\+ Increase in Inv. Buy = OUT
- Decrease in Inc. Sell = IN
- Increase in A/P Borrow = IN
\+Decrease AP Repay = OUT
= Cash Paid to Suppliers

Question 15

Cash Paid to Employees

Answer 15

Salaries and Wage Expense
- Increase in Wages Pay
+ Decrease in Wages Pay
= Cash Paid to Employees

Question 16

What is the formula for the indirect method?

Answer 16

NI per Income Statement
\+ Depr. & Amort. (Discount)
\+ "Losses"
- "Gains" and Amort. (Premium)
- Equity Earnings Affl. 
- Increase in OA = Buy = OUT
\+ Decrease in OA = Sell = IN
\+ Increase in OL = Borrow = IN
- Decrease in OL =Repay =OUT

= Cash Flow Operations

Question 17

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?

Answer 17

In a statement of cash flows using the indirect method, gain from the sale of used equipment for cash should be reported in operating activities as a deduction from income

Question 18

Amortization of bond discount is an income-related item. Do you add or Subtract it from NI to get to cash based in the indirect method?

Answer 18

Because the amortization of the discount was originally subtracted to get to net income in the first place, it is added back to net income for an indirect method statement of cash flows.

Question 19

Which of the following items is included in the financing activities section of the statement of cash flows?

Answer 19

Financing activities include the cash effects of transactions obtaining resources from owners and providing them with a return on their investment.