FAR-F7-M5-Statement of Cash Flows

Question 1

What does the statement of cash flows represent?

Answer 1

The statement of cash flows shows the changes in cash during the period.

Question 2

What are the three different types of cash flows on a cash flow statement?

Answer 2

Operating cash flows
Investing Cash Flows
Financing cash flows

Question 3

Does U.S. GAAP require a reconciliation of net income to net cash provided by operating activities under both the direct method and indirect method?

Answer 3

Yes, U.S. GAAP requires a reconciliation of net income to net cash provided by operating activities under both the direct method and indirect method.

Question 4

If the direct method is used, where will the reconciliation of net income to net cash provided by operating activities appear?

Answer 4

If the direct method is used, the reconciliation will appear in a supplemental schedule.

Question 5

If the indirect method is used, where will the reconciliation of net income to net cash provided by operating activities appear?

Answer 5

If the indirect method is used, the reconciliation is part of the body of the formal statement of cash flows.

Question 6

What are some examples of operating cash flows?

Answer 6

1. Cash received from customers.
2. Dividend income
3. Interest Income / expense
4. Cash paid for business expenses
5. GAINS ON THE SALE OF TRADING SECURITIES

Question 7

What are some examples of investing cash flows?

Answer 7

Investing activities include cash flows from the purchase or sale of NON-CURRENT ASSETS (like PPE)

1. Purchase or sale of investments or long term assets.
2. Making loans (getting a loan would be a financing activity)
3. Purchasing or disposing of trading securities if NONCURRENT.
4. Purchasing or disposing of available for sale securities and held to maturity securities

Question 8

What are some examples of financing cash flows?

Answer 8

Financing activities include cash flows from non-current liabilities (creditor oriented) and equity (owner oriented)

1. Issuing and selling company stock
2. Purchasing treasury stock
3. Getting a loan (also making payments on a loan, the principle portion, not interest as that is operating)
4. PAYING DIVIDENDS (have to actually paid, not just declared)
5. Issuing bonds

Question 9

Dividend income is considered a ?

Answer 9

Dividend income is an operating activity.

Question 10

Dividends paid are considered a ?

Answer 10

Dividends paid are a financing activity.

Question 11

Interest expense is considered a ?

Answer 11

Interest expense is considered an operating activity.

Question 12

Interest income is considered a?

Answer 12

Interest income is considered an operating activity.

Question 13

What is the main difference between the direct method and indirect method of establishing a statement of cash flows?

Answer 13

The only real difference deals with operating activities. With the direct method, each line is a direct statement showing cash paid or received such as “cash received from customers” or “cash paid to suppliers”.

With the indirect method, you are taking net income (accrual basis) and converting it to cash basis. In other words, you’re starting with net income and working backwards to cash provided by operating activities.

Question 14

With the indirect method of the statement of cash flows, operating section, a change in assets means cash moved in the same or opposite direction?

Answer 14

A change in assets means cash moved in the opposite direction.

Question 15

With the indirect method of the statement of cash flows, operating section, a change in liabilities means cash moved in the same or opposite direction?

Answer 15

A change in liabilities means cash moved in the same direction.

Question 16

What are the main disclosures required when using the direct method?

Answer 16

The major classes of gross cash receipts and gross cash payments.

The amount of income taxes paid

A reconciliation of net income to net cash flow from operations (as a separate schedule)

Question 17

Is the following statement true or false? When a payment is made for example on a note payable, the interest paid is an operating activity, however the portion that goes to settle the principle of the long term debt would be classified as a cash outflow from financing activity.

Answer 17

TRUE. When a payment is made for example on a note payable, the interest paid is an operating activity, however the portion that goes to settle the principle of the long term debt would be classified as a cash outflow from financing activity.

Question 18

Is supplemental disclosure of cash paid for interest and income taxes required when using the indirect method?

Answer 18

Yes, supplemental disclosure of cash paid for interest and income taxes is required.

Question 19

What are the main steps in adjusting net income to net cash flows from operating activities using the indirect method?

Answer 19

Step 1: Record Net Income

Step 2: remove the affects on net income from all items that are included in net income but do not affect operating cash receipts or disbursements such as ADDING DEPRECIATION AND AMORTIZATION and IMPAIRMENT OF GOODWILL and PROVISION FOR LOSSES ON A/R.

Step 3: Reverse the income statement gains and losses shown as the sale of nonoperating assets (PPE)
Basically, gains are subtracted from net income and losses are added back to net income.

Step 4: Adjust for changes in current assets and current liabilities (except for cash and current interest bearing debt (recorded in financing activity)
If current assets increase, then subtract
If current assets decrease, then add
If current liabilities increase, then add
If current liabilities decrease, then subtract

Question 20

Cash received from the sales of securities classified as trading securities if classied as a current asset should be included as?

Answer 20

Cash received from the sales of TRADING SECURITIES, if classified as current assets are included as CASH INFLOWS from operating activities.

Question 21

Cash paid to acquire securities classified as trading securities, if classified as a current asset, should be included as?

Answer 21

Cash paid to acquire TRADING SECURITIES, if classified as a current assets are included as CASH OUTLOFWS from operating activities.

Question 22

If the cash paid and cash received to and from trading securities are classified as cash outflows and cash inflows from operating activities, should the gain or loss be removed from net income when creating a statement of cash flows using the indirect method?

Answer 22

Cash flows from the sale of trading securities are classified as operating cash flows, therefore the gain on the sale of securities DOES NOT NEED TO BE SUBTRACTED FROM NET INCOME.

Question 23

If the trading securities are classified as noncurrent, where should the cash paid or received be included?

Answer 23

If non-current, then the cash paid and received are considered investing activities.

Question 24

The cash flows from available for sale securities and held to maturity securities are classified as?

Answer 24

The cash flows from available for sale securities and held to maturity securities are considered cash flows from INVESTING ACTIVITIES.

Question 25

Is there a difference between interest expense and interest paid?

Answer 25

Yes, interest expense is an operating cash outflow that must be removed from net income. Interest paid (actual cash paid) is a disclosure item.

Question 26

Should the conversion of debt to equity be disclosed as supplemental information in the statement of cash flows?

Answer 26

Yes, the conversion of debt to equity should be disclosed as supplemental information in the statement of cash flows.

Question 27

Is the following statement true or false? Information about MATERIAL noncash financing and investing activities should be provided separately as a supplemental disclosure.

Answer 27

TRUE. Information about MATERIAL noncash financing and investing activities should be provided separately as a supplemental disclosure.

Main examples icnlude
1. The purchase of fixed assets by issuing stock
2. Conversion of bonds to equity.