Financial Accounting- Income Statement

Question 1

What is an income statement?

Answer 1

This measures the results of operations over a period of time using accrual accounting

Question 2

What is income smoothing?

Answer 2

This is when a company makes it look like they are meeting annual forecasts when they are actually not

Question 3

What are the three classifications of cash flows?

Answer 3

• Operating Cash Flow: Cash flows related to selling goods and services
  -Investing Cash Flow: Cash flows relating to the acquisition or sale of non-current assets; long-term investments
• Financing Cash Flow: Long-term and short-term cash flows related to interest-bearing liabilities and shareholders’ equity

Question 4

How do you calculate operating cash flow?

Answer 4

Cash received from sale of goods and services - Cash paid for operating goods and services

Question 5

How do you calculate investing cash flow?

Answer 5

Cash received from sales of investments and PPE - Cash paid for acquisition of investments and PPE

Question 6

How do you calculate financing cash flow?

Answer 6

Cash received from issue of debt or capital stock - Cash paid for dividends and reacquisition of debt or capital stock

Question 7

What are the operating cash inflows?

Answer 7

-Collections from customers

Question 8

What are the operating cash outflows?

Answer 8

-Payments of interest
-Payments to suppliers
-Payments to employees
-Payments of tax
-Other operating disbursements

Question 9

What are investing the cash inflows?

Answer 9

-Receipts of interest and dividends on investments
-Divestitures of businesses
-Sale of PPE and intangibles
-Sale of investment

Question 10

What are investing the cash outflows?

Answer 10

-Acquisition of businesses
-Acquisition of PPE and intangibles
-Purchase of investments

Question 11

What are the financing cash inflows?

Answer 11

-Issue of new shares
-Reissue of treasury shares
-Borrowing money

Question 12

What are the financing cash outflows?

Answer 12

-Dividend payments
-Payments of treasury shares
-Payments of principal on debt

Question 13

What is interest paid classified under?

Answer 13

-IFRS: Operating or financing cash flows
-US GAAP: Operating cash flows

Question 14

What is interest received classified under?

Answer 14

-IFRS: Operating or financing cash flows
-US GAAP: Operating cash flows

Question 15

What are dividends classified under?

Answer 15

• Operating, investing or financing cash flows

Question 16

What is taxations classified under?

Answer 16

• Operating cash flows

Question 17

What is the direct method of preparing the Cash Flow Statement?

Answer 17

Subtracting cash disbursements from suppliers, employees and others from cash receipts from customers
-This method requires you to explain the difference between net income and cash flow, which is already part of the method for preparing the cash flow statement in the indirect method

Question 18

What is the indirect method of preparing the Cash Flow Statement?

Answer 18

Adjusts net income for non-cash revenues and expenses

Question 19

What are the steps for preparing the CFS in the indirect method?

Answer 19

1. Start with net income (income statement)
2. Adjust net income for non-cash items
3. Adjust net income to operating cash flow by working capital adjustments
   
   • Add to profit: decrease in inventory, trade receivables, prepayments and increase in trade payables and accruals as they increase cash flow
   • Deduct from profit: increases in inventory, trade receivables, prepayments and decreases in trade payables and accruals as they decrease cashflow

Question 20

What is the equation for working capital?

Answer 20

Working Capital= Current Assets - Current Liabilities