FAR Statement of Cashflows Flashcards
Dividends received recaptured where on a statement of cashflows
Operating - because you get the money as part of Net Income
Under IFRS - where are dividends paid and received captured on Cash Flow - Different than GAAP
Dividends Paid - can be either operating or financing (GAAP - finance)
Dividends received are either operating or investing (GAAP - Operating)
A change in asset means
cash moving in opposite direction
Example: Inventory:
An increase in inventory mean less inventory sold than purchased so subtract from net income
A decrease in inventory means more inventory sold than purchased so add to net income
An increase in a receivable means more money accrued than received so subtract from net income
A change in liability means
cash moving in same direction
Example: Payables
An increase in A/P means more payables accrued than paid - add to net income
A decrease in A/P means more paid than accrued so subtract from net income
What do you do with depreciation
This is non cash - but decreases net income on an accrual basis so add to net income
Do you net the sale of equipment and the purchase of equipment on a statement of cash flow
No - they are separate transactions and not netted
sale of equip - cash inflow in investing section - in the amount you paid
Purchase of equipment - cash outflow - investing section -in amount you paid
when you use the indirect method what are you doing
You start with net income on an accrual basis and convert it to a cash basis
when you sell equipment and you have a loss or gain - what do you put in the statement of cash flows
the cash you get is an inflow in the investing section
the cash will = carrying value plus gain or carrying value - loss
Then in the operating section you would subtract the gain or add the loss
Do you disclose cashflows per share
No - this is not disclosed because it may imply that it is the amount paid in cash
How do you report if you get a property dividend or distribute property as compensation to employees
These two events are not cash events and therefor wont be on statement of cashflow - instead it will be reported in supplementary disclosures as a non cash activity
How do you report the purchase of a 3 month treasury bill classified as a cash equivalent on the statement of cashflows
When you purchase a cash equivalent - like a treasury bill you spend cash, but get a cash equivalent.
Therefore there is not net effect on cashflow and therefore it would not be reported on the statement of cashflows
What must you disclose when preparing a statement of cashflows using the indirect method
- amounts paid for interest (net of capitalized amounts
- amounts paid for income tax
Where are dividends paid on preferred stock reported on statement of cashflows
- a cash outflow for financing activities
What do you do with the conversion of debt to equity
This is disclosed in supplemental information because it does not involve cash but is a financing activity.
It does not show up on the statement of cashflows
Cash versus accrual: effect on net income
What is the affect of having a lower accrued expense in year 2 than in year 1
A decrease in accrued expenses means that more expense were paid for the year than were incurred
This means that more cash would be used in year 2.
the result is that net income under cash would be lower ( because you paid more cash expenses) and accrual income would be higher because you did’t recognized
Cash versus accrual: effect on net income
sold used equipment for cash at a gain
A sale for used equipment for cash would have the same effect on both cash and accrual net income
Cash versus accrual: effect on net income
Wrote off more accounts receivable balances than it reported as uncollectible accounts expense in 20X2.
uncollectible account expense is not reported under cash based net income ( so income under cash would be higher)
It is under accrual and would then lower net income
Uncollectible accounts expense in not recognized under the cash basis, making accrual basis income lower as a result of the recognition of bad debts expense, since only collected sales are recognized as revenue under the cash basis of accounting
Cash versus accrual: effect on net income
declare a cash dividend and pay next year
a cash dividend decreases RE and therefore has not effect on either cash basis or accrual basis net income
What is an accrued expense - examples
salaries payable, interest payable, wages payable
these are expenses accrued in one period, but are not paid until another period
When you use the indirect method - how do you handle the decrease in unamortized bond discount
JE
dr Interest Expense
cr Discount on bonds
cr Cash
The discount increases the interest expense, but this is a non cash event so you ADD it back to net income in the operating section of the statement of cashflows
therefor it is added back to income in determining cash flows from operating activities
When using the indirect method you need to report supplemental information on tax and interest - what are the details
For tax - its income taxes that were paid this year
For Interest it is required to show cash paid for interest
This includes amounts that you paid against interest payable as well as interest expense
JE:
dr Decrease in Interest payable 10
dr Interest expense for year 20
cr Cash 30
Report the 30 that you spent on interest this year
what is distribution of cash dividend declared on preferred stocks
this is included in the financing section
Under the direct method ( JE Method) is a loss on the sale of equipment reported on the statement of cashflows
NO - The loss is not reported on the statement of cashflows
The cash proceeds from the sale of the equipment minus the loss would be reported as a cash inflow from investing activities
What is the primary purpose of a statement of cashflows
The primary purpose of the statement of cashflow is to provide relevant information about the cash receipts and cash disbursements of an enterprise during a period
What do you do when you have a conversion of debt to equity
It doesn’t involve cash so its not in the statement of cashflows
Instead you are required to be disclosed as supplemental information on the statement of cash flows
Differences between using the direct and indirect methods
- under both - organize into 3 sections, operating, investing, financing
- under both - the major classes of gross cash receipts and gross cash payments are reported
- direct - (JE) WILL report the amount if income tax paid and interest expense paid. Also a supplemental schedule is required reconciling net income to cashflows from operating activities
Indirect (reversing) - No interest or income tax is reported so must disclose these
How is gain or loss on sale of equipment reported or discussed on statement of cashflows - indirect or direct
On indirect (reversing)- gain an loss is shown in operation section
Operating activities. The amount paid to retire debt, including any loss and net of any gain, is considered a cash outflow for financing activities. A gain on early extinguishment is included in net income but is not a cash inflow from operating activities. Under the indirect method, the gain is deducted from net income in calculating cash flows from operating activities.
Direct ( JE) not shown in statement of activities
How do you classify cash paid to employees for general and administrative purposes
This is in the operating section as wages
How do you figure out cash paid for selling expenses
dr. selling expense ( this year) 141,500
chg in ADA cr 200
chg in A/D cr 500
cr cash 140800
A company recently acquired a copyright that now has a remaining legal life of 30 years. The copyright initially had a 38-year useful life assigned to it. An analysis of market trends and consumer habits indicated that the copyrighted material will generate positive cash flows for approximately 25 years. What is the remaining useful life, if any, over which the company can amortize the copyright for accounting purposes?
25 years
An intangible asset of finite duration must be amortized over the shorter of its legal or useful life. Because the current analysis has determined that the copyright’s useful life will only be 25 years, it must be amortized over 25 years instead of the 30 years remaining under copyright law.
