Financial Reporting & Analysis - Cash Flow Statements

Question 1

Definition: operating cash flows

Answer 1

Day to day activities that produce revenue. Also includes dealing or trading securities.

Question 2

Definition: investing cash flows

Answer 2

Purchasing & selling long-term assets. Excludes: 1) cash and cash equivalents, 2) securities held for dealing & trading (even if not the primary business activity).

Question 3

Definition: financing cash flows

Answer 3

Obtaining or repaying capital (FYI, indirect borrowing through accounts payable is an operating cash flow).

Question 4

Interest received (IFRS vs. GAAP)

Answer 4

1. IFRS: operating or investing

2. GAAP: operating

Question 5

Interest paid (IFRS vs. GAAP)

Answer 5

1. IFRS: operating or financing

2. GAAP: operating

Question 6

Dividends received (IFRS vs. GAAP)

Answer 6

1. IFRS: operating or investing

2. GAAP: operating

Question 7

Dividends paid (IFRS vs. GAAP)

Answer 7

1. IFRS: operating or financing

2. GAAP: financing

Question 8

Bank overdrafts (IFRS vs. GAAP)

Answer 8

1. IFRS: part of cash equivalents

2. GAAP: financing

Question 9

Taxes paid (IFRS vs. GAAP)

Answer 9

1. IFRS: generally ops, but can be financing or investing if tied to activity
2. GAAP: operating

Question 10

Format (IFRS vs. GAAP

Answer 10

1. IFRS: direct encouraged, but indirect okay

2. GAAP: direct encouraged, but indirect okay

Question 11

Direct method

Answer 11

shows specific operating flows that comprise the total. If using this method, indirect reconciliation required under GAAP.

Question 12

Indirect method

Answer 12

Begins with net income and shows how operating flows are achieved through adjustments.

Question 13

Formula: cash from customers

Answer 13

Revenue - increase accounts receivable

Question 14

Formula: cash paid to suppliers

Answer 14

Costs of goods sold + increase inventory - increase in accounts payable

Question 15

Formula: ending inventory

Answer 15

Beginning inventory + purchases - costs of goods sold

Question 16

Formula: cash paid to employees

Answer 16

Salary & wage expense - increase in wage payable

Question 17

Formula: ending salary payable

Answer 17

Beginning salary payable + salary expense - cash paid to employees

Question 18

Formula: cash paid for other operating expense

Answer 18

other operating expense - decrease in prepaid expense - increase in accrued liabilities

Question 19

Formula: cash paid for income taxes

Answer 19

Income tax expense - increase payable

Question 20

Formula: cost of equipment sold

Answer 20

Beginning equipment balance + equipment purchased - end balance

Question 21

Formula: accumulated depreciation of equipment sold

Answer 21

Beginning accumulated depreciation + depreciation expense - end accumulated depreciation

Question 22

Formula: cash received from equip sold

Answer 22

Historical cost - accumulated depreciation of equipment sold + gain on sale

Question 23

Formula: cash paid for dividends

Answer 23

Beginning retained earnings + net income - ending retained earnings

Question 24

Indirect adjustments

Answer 24

Should add items to net income that would have reduced net income through accruals and subtract those that helped through accruals

Question 25

Conversion of cash flows: indirect to direct

Answer 25

1. Segregate net revenue into revenue and expense 2. Remove any non-operating & non-cash items 3. Convert accrual amounts to cash flow amounts by adjusting for working capital (i.e. cash paid to employees, suppliers, etc)

Question 26

Cash flow analysis: step 1

Answer 26

- Determine major sources of cash. Can vary based on the company's stage of growth. - If ops cash flow is negative for a long time, will need to be fund by financing or investing, which is not sustainable indefinitely.

Question 27

Cash flow analysis: step 2

Answer 27

- Operations: for a mature company operation cash flow should be > net income. - Difference could indicate earnings quality (i.e. if much less cash, company may be using aggressive accounting.

Question 28

Cash flow analysis: step 3

Answer 28

- Investing: evaluate each line-item. If major investments are made, how are those financed? Ops cash, selling assets? Does it make sense to sell those assets? etc.

Question 29

Cash flow analysis: step 4

Answer 29

- Financing: company raising or paying down capital and what the nature of capital sources are.

Question 30

Common size analysis: cash flow

Answer 30

Two methods: 1. As a % of total cash inflows our outflows (if inflow or outflow). 2. As a % of net income

Question 31

Formula: free cash flow

Answer 31

Operating cash flow - capital expenditures

Question 32

Formula: free cash flow to firm (FCFF)

Answer 32

1. Net income + interest expense*(1-tax rate) - capital expenditures - working capital expenditures 2. Cash flow from operations + interest expense*(1-tax rate) - capital expenditures

Question 33

Formula: free cash flow to equity (FCFE)

Answer 33

1. CFO - capital expenditures + net borrowing | 2. Excess represents cash above fixed investments and repayment of debt that could be redistributed to investors.

Question 34

Ratio: cash flow to revenue

Answer 34

Cash flow from operations / net revenue

Question 35

Ratio: cash return on assets

Answer 35

Cash flow from operations / avg. total assets

Question 36

Ratio: cash return on equity

Answer 36

Cash flow from operations / avg. shareholder's equity

Question 37

Ratio: cash to income

Answer 37

Cash flow from operations / operating income

Question 38

Ratio: cash flow per share

Answer 38

(Cash flow from operations - preferred dividends) / # of common shares outstanding

Question 39

Ratio: debt coverage

Answer 39

Cash flow from operations / total debt

Question 40

Ratio: interest coverage

Answer 40

EBIT / Interest Expense

Question 41

Ratio: reinvestment

Answer 41

Cash flow from operations / cash paid for LT assets

Question 42

Ratio: debt payment

Answer 42

Cash flow from operations / cash paid for LT debt

Question 43

Ratio: dividend payment

Answer 43

Cash flow from operations / dividends paid

Question 44

Ratio: investing & financing

Answer 44

Cash flow from operations / cash outflows for investing & financing