FAR 1A5 CFS Flashcards
What is the direct method of reporting cash flows?
✅ Reports major classes of gross cash receipts and payments
✅ Directly lists cash inflows and outflows from operating activities
✅ Examples: Cash received from customers, cash paid to suppliers and employees
What is an important tip when answering questions about cash flows?
⚠️ Be careful! Some items belong to different categories:
✅ Operating – Day-to-day business activities
✅ Investing – Buying/selling assets
✅ Financing – Debt and equity transactions
a) Where is the proceeds from sales of equipment reported in SOCF?
b) Where is the gain on sale of investments reported?
a) Investing Activities 💰
b) Operating Activities 📈 (because it was included in net income and must be removed when using the indirect method)
How do you classify a cash flow based on whether it is asset-related or liability-related?
✅ Asset-related → Investing Activities
✅ Liability-related → Financing Activities
What does the redemption of bonds payable represent?
Paying back the principal amount → Cash Outflow in Financing Activities 💸
How can you solve for net income in cash flow problems?
Net Income − Gain on Sale + Loss on Sale + Depreciation = Cash Provided by Operating Activities
Then rearrange the equation to solve for net income! 🔢
If a company buys treasury bills or short-term investments as cash equivalents, where is this reported in SOCF?
❌ Not reported in SOCF, since these are classified as cash equivalents, not cash transactions.
Where are non-cash investing and financing activities reported?
In the related disclosures, since they do not involve cash flow 💡
✅ Example: Acquiring assets by issuing stock instead of paying cash.
What are common supplemental disclosures in the SOCF?
📌 Acquisition of assets for stock
📌 Cash paid for interest
📌 Cash paid for taxes
If PP&E is acquired but paid for with stock or a note payable, what is included in investing activities?
✅ Only the cash portion is included!
❌ Stock or note payable transactions are not included in investing cash flows.
How do you handle accounts receivable and payable in SOCF when only one year of the balance sheet is provided?
⚠️ Assume:
✅ Beginning balance = 0
✅ Ending balance = What’s shown on the balance sheet
a) Do dividends declared appear in the SOCF?
b) Where are dividends paid reported?
c) b) Where are dividends received reported?
a) ❌ No! Declared dividends create a liability but do not impact cash flow until paid.
b) ✅ Financing Activities
c) ✅ Operating Activities (under U.S. GAAP, unless donor-restricted for NFPs)
How is cash paid to suppliers calculated under the direct method?
✅ COGS + Increase in Inventory + Decrease in Accounts Payable
How do you classify PP&E acquisitions when financing is used?
✅ Cash paid for PP&E → Investing Activities
✅ Principal payments on the loan → Financing Activities
What are the main components of the direct method in SOCF?
✅ Cash Received from Customers
✅ Interest & Dividends Received (excluding donor-restricted items)
✅ Other Operating Cash Receipts (lawsuit settlements, refunds, etc.)
✅ Cash Paid to Employees & Suppliers
✅ Interest Paid
✅ Income Taxes Paid
✅ Grants Paid (for NFPs)
✅ Miscellaneous Receipts & Payments
How can you identify if a transaction affects cash flow?
📝 Write a journal entry → If cash isn’t involved, there’s no impact on SOCF!
🔍 If cash is involved, determine where it goes:
✅ Operating?
✅ Investing?
✅ Financing?
What amounts must be disclosed separately in SOCF?
💵 Amount of income taxes paid
💵 Interest paid
How to handle Gain/Loss of Sale, proceeds of selling assets?
✅ Net income is adjusted by removing non-cash items, including depreciation and gains/losses on sales
✅ Investing activities always report the full cash flow (actual cash received/proceeds from the sale)
❌ not adjusted for gain or loss.
Why is a note receivable an investing activity, while a note payable is a financing activity in SOCF?
Notes Receivable → Investing 💰 → The company lends money and later collects it back (like an investment).
Notes Payable → Financing 💳 → The company borrows money and later repays it (like a loan).
📌 Rule:
Investing = Lending & collecting (Notes Receivable)
Financing = Borrowing & repaying (Notes Payable)
🚀 Tip: Ask: Is the company lending (investing) or borrowing (financing)?
How do you calculate cash disbursements for expenses in the statement of cash flows (direct method)?
CashPaid = ExpenseIncurred + ΔPrepaid − ΔPayable
📌 Breakdown:
- Increase in prepaid → Add 🔼 (More cash was spent)
- Decrease in prepaid → Subtract 🔽 (Less cash was spent)
- Increase in payable → Subtract 🔽 (Some expenses were not yet paid)
- Decrease in payable → Add 🔼 (More cash was paid to settle liabilities)
🚀 Tip: Adjust expenses based on changes in related prepaids or payables to determine actual cash paid!
Where does the purchase of treasury stock go in the statement of cash flows (SOCF)?
📉 Treasury stock purchases are reported in financing activities as a cash outflow 💳.
📌 Why?
- Treasury stock transactions involve a company buying back its own shares, which impacts equity financing rather than operating or investing activities.
- This is similar to repaying shareholders, making it a financing activity.
How is a decrease in unamortized bond premium reported in the statement of cash flows (SOCF) using the indirect method?
📉 A decrease in bond premium is subtracted from net income in the operating activities section.
📌 Why?
Bond premium amortization reduces interest expense, artificially increasing net income.
Since it’s a non-cash item, it must be subtracted from net income to reflect actual cash flows.
🚀 Rule:
Increase in bond premium → Add to net income ✅
Decrease in bond premium → Subtract from net income ❌
How is the sale of bonds (as an investment) reported in the statement of cash flows (SOCF)?
📈 Investing Activity 💰
📌 Why?
Buying and selling bonds as an investment falls under investing activities, not financing.
Financing activities relate to issuing or repaying the company’s own debt or equity, but this is an investment in another company’s bonds.
🚀 Rule:
Buying bonds as an investment → Investing Outflow 🔽
Selling bonds as an investment → Investing Inflow 🔼
