FAR Statement of Cashflows

Question 1

Dividends received recaptured where on a statement of cashflows

Answer 1

Operating - because you get the money as part of Net Income

Question 2

Under IFRS - where are dividends paid and received captured on Cash Flow - Different than GAAP

Answer 2

Dividends Paid - can be either operating or financing (GAAP - finance)

Dividends received are either operating or investing (GAAP - Operating)

Question 3

A change in asset means

Answer 3

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

Question 4

A change in liability means

Answer 4

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

Question 5

What do you do with depreciation

Answer 5

This is non cash - but decreases net income on an accrual basis so add to net income

Question 6

Do you net the sale of equipment and the purchase of equipment on a statement of cash flow

Answer 6

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

Question 7

when you use the indirect method what are you doing

Answer 7

You start with net income on an accrual basis and convert it to a cash basis

Question 8

when you sell equipment and you have a loss or gain - what do you put in the statement of cash flows

Answer 8

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

Question 9

Do you disclose cashflows per share

Answer 9

No - this is not disclosed because it may imply that it is the amount paid in cash

Question 10

How do you report if you get a property dividend or distribute property as compensation to employees

Answer 10

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

Question 11

How do you report the purchase of a 3 month treasury bill classified as a cash equivalent on the statement of cashflows

Answer 11

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

Question 12

What must you disclose when preparing a statement of cashflows using the indirect method

Answer 12

• amounts paid for interest (net of capitalized amounts

- amounts paid for income tax

Question 13

Where are dividends paid on preferred stock reported on statement of cashflows

Answer 13

• a cash outflow for financing activities

Question 14

What do you do with the conversion of debt to equity

Answer 14

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

Question 15

Cash versus accrual: effect on net income

What is the affect of having a lower accrued expense in year 2 than in year 1

Answer 15

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

Question 16

Cash versus accrual: effect on net income

sold used equipment for cash at a gain

Answer 16

A sale for used equipment for cash would have the same effect on both cash and accrual net income

Question 17

Cash versus accrual: effect on net income

Wrote off more accounts receivable balances than it reported as uncollectible accounts expense in 20X2.

Answer 17

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

Question 18

Cash versus accrual: effect on net income

declare a cash dividend and pay next year

Answer 18

a cash dividend decreases RE and therefore has not effect on either cash basis or accrual basis net income

Question 19

What is an accrued expense - examples

Answer 19

salaries payable, interest payable, wages payable

these are expenses accrued in one period, but are not paid until another period

Question 20

When you use the indirect method - how do you handle the decrease in unamortized bond discount

Answer 20

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

Question 21

When using the indirect method you need to report supplemental information on tax and interest - what are the details

Answer 21

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

Question 22

what is distribution of cash dividend declared on preferred stocks

Answer 22

this is included in the financing section

Question 23

Under the direct method ( JE Method) is a loss on the sale of equipment reported on the statement of cashflows

Answer 23

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

Question 24

What is the primary purpose of a statement of cashflows

Answer 24

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

Question 25

What do you do when you have a conversion of debt to equity

Answer 25

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

Question 26

Differences between using the direct and indirect methods

Answer 26

• 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

Question 27

How is gain or loss on sale of equipment reported or discussed on statement of cashflows - indirect or direct

Answer 27

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

Question 28

How do you classify cash paid to employees for general and administrative purposes

Answer 28

This is in the operating section as wages

Question 29

How do you figure out cash paid for selling expenses

Answer 29

dr. selling expense ( this year) 141,500
chg in ADA cr 200
chg in A/D cr 500
cr cash 140800

Question 30

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?

Answer 30

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.