F7: Statement of Cash Flows Flashcards
Purpose of the Statement of Cash Flows:
- To provide info about the sources of cash and uses of cash and cash equivalents
- To know why cash has changed
3 types of cash flows on the statement:
1- Operating Cash Flows
2- Investing Cash Flows
3- Financing Cash Flows
Operating Cash Flows
- Cash receipts & disbursements from current assets and current liabilities
- Excluding notes payable and current portion of LT debt–those are included in financing cash flows
Investing Cash Flows
-Cash receipts & disbursements from noncurrent assets
Financing Cash Flows
- Cash receipts & disbursements from debt & equity
- Debt includes noncurrent liabilities
What is NOT disclosed under US GAAP?
Cash flow amounts per share
What is one more item that is presented on the statement of cash flows?
-Information about material noncash events
The statement of cash flows reconciles what?
- The change in cash for the period
- (the change in cash from the beginning balance on the balance sheet to the ending balance on the balance sheet)
Cash equivalents definition
Liquid investments 3 months or less
Bank overdrafts treatment: GAAP vs IFRS
GAAP- excludes from cash; classified as financing cash flows
IFRS- cash may include
Summarized Statement Format
Net cash- operating activities \+ Net cash- investing activities \+ Net cash- financing activities = Net increase (decrease) in cash \+ Cash & equivalents at beginning of year = Cash & equivalents at end of year
2 Ways to prepare Statement of Cash Flows
1- Direct method
2- Indirect method
Both GAAP & IFRS encourage the use of which method?
Direct
What is the most-commonly used method?
Indirect
What sections are the same regardless of method used?
- Investing
- Financing
What is the only section affected when deciding between direct or indirect method?
-Operating
Direct Method definition
Major classes of cash receipts and disbursements are presented in their gross amounts and totaled to arrive at “net cash flow” provided by operating activities
What is required if using Direct Method by US GAAP?
A reconciliation of net income to net cash flows from operating activities required in a separate schedule
Is this extra direct method requirement required under IFRS?
No
Assets have a _______ relationship with cash
Inverse
- If assets up, you bought, so cash outflow
- If assets down, you sold, so cash inflow
Debt & equity have a _______ relationship with cash
Direct
- If liabilities up, you’re borrowing, so cash inflow
- If liabilities down, you’re paying, so cash outflow
10 Categories included under Direct Method
(1-5 are inflows; 6-10 are outflows)
1- Cash received from customers
2- Interest received
3- Dividends received
4- Other operating cash receipts (settlements, etc)
5- Cash received from sale of trading securities
6- Cash paid to suppliers and employees
7- Interest paid
8- Income taxes paid
9- Cash paid to acquire trading securities
10- Other operating payments (rent, insurance, utilities)
Formula for Cash Received from Customers
Revenues
+- Change in AR
+- Change in Unearned Revenue
= Cash received from customers
Formula for Cash Paid to Suppliers
COGS
+- Change in Inventory
+- Change in AP
= Cash Paid to Suppliers
Formula for Cash Paid to Employees
Salaries and Wages Expense
+- Change in Wages Payable
= Cash Paid to Employees
How to use Indirect Method
Net income is adjusted to arrive at net cash flows from operating activities
What is additionally required when using this method?
Supplemental disclosure of cash paid for interest and income taxes
Indirect Method: Formula for finding cash flow from core business
NI per IS \+ Depreciation and amortization of bond discount \+ "Losses" - "Gains" and amortization of bond premium - Equity earnings \+- Change in Operating assets \+- Change in Operating liabilities = Cash Flow generated from core business
For the exam: easy way to remember 85% of the adjustments made to the operating activities section under the indirect method:
“CLAD”
- Current assets & liabilities
- Losses & gains
- Amortization and depreciation
- Deferred items
Investing activities have a _______ relationship with cash
Inverse
- If investing up, we’re buying, so cash outflow
- If investing down, we’re selling, so cash inflow
Financing activities have a _______ relationship with cash
Direct
- If financing up, cash inflow
- If financing down, cash outflow
Noncash Investing and Financing Activities- how to present
Should be provided separately in a supplemental disclosure
Examples of noncash investing and financing activities
- Purchase of fixed asset with issuance of stock
- Conversion of bonds to equity
- Acquiring assets through a capital lease agreement
- Exchange of one noncash asset of another
Thing to remember about IFRS reporting requirements
IFRS allows more flexibility, whereas GAAP rules are very rigid
Interest received: GAAP vs IFRS
GAAP: CFO
IFRS: CFO or CFI
Interest paid: GAAP vs IFRS
GAAP: CFO
IFRS: CFO or CFF
Dividends received: GAAP vs IFRS
GAAP: CFO
IFRS: CFO or CFI
Dividends paid: GAAP vs IFRS
GAAP: CFF
IFRS: CFO or CFF
Taxes paid: GAAP vs IFRS
GAAP: CFO
IFRS: CFO or CFI or CFF
