HBX- Accounting 5 Flashcards
OPERATING Categories: Cash Flow Statement.
Cash received from customers & Cash paid to suppliers:
- Interest Paid (OR Financing Section for IFRS)
- Interest Received (OR Investing section for IFRS)
- Dividends Received (OR Investing section for IFRS)
- Cash Paid to a Vendor for Inventory
- Cash received in advance for services
- Cash received from current period sales
- Cash collections from precious period credit sales
- cash received in advance for future period sales
- cash paid for current period operation activity purchase
- cash paid for previous period credit purchases
- cash paid in advance for future period purchases
- Cash paid for interest
- Sale of inventory
INVESTMENT Categories: Cash Flow Statement.
- Payment for P, P, & E (Property & Equipment
- Cash paid for longer term investment
- Principal received from loans made to others
- Sales proceeds from equity investments
- Acquisition of equity investment
- Cash received in sale of equipment
- Sale Proceeds from debt investments
FINANCE Categories: Cash Flow Statement.
- Dividends Paid to shareholders (OR Operating section for IFRS)
- Cash raised from a bank loan
- Cash dispursed to pay off a loan
- Cash paid to shareholders
- Receipt of Capital
- Shares Buyback
- Payment of long-term bond
- Proceeds/Cash received from issuing stock
- Proceeds from issuing bonds
- Payments to reacquire stock
- Principal paid on notes payable
- Cash received from raising debt
- Repurchases of common stock
Changes to look for in an income statement/balance sheet to then CHANGE to the net income amount for the cash flow statement
- Depreciation and amortization (Operating Section) DO: add the $$ to it!
-
Gain/loss of equipment (Operating / Investment Sections) DO: these are included in the INVESTMENT section- but on the income statement, this $ is in the net income amount.
So if we MAKE $ - we SUBTRACT it from the net income and if we LOSE $ we ADD it to the net income. - Accounts Receivables (Operating Section) DO: if this # is positive, SUBTRACT THIS # from Net income (We haven’t actually received this $$ yet)
- Increase in inventory/asset account (Operating/Investment Sections) DO: SUBTRACT THIS # from Net income for the cash flow statement cause we USED cash to pay for the inventory
- Decrease in inventory/asset account DO: ADD this to the Net income
- Increase in operating current liabilitiesDO: ADD THIS to the Net income
- Decrease in an operating current liabilities account DO: SUBTRACT THIS from the Net income
SOURCE OF FUNDS: Statement of Sources & Uses of Funds- What’s on it?
- An Increase in liability/owner’s equity represents a source of funds
- Decrease in Assets is a source of funds.
*Changes in cash are ignored
*Accounts with no change are ignored
*HINT: The “Net Changes in Cash” as well as “Cash Balance Beginning of Year” and “Cash Balance End of Year” on the Statement of Sources and Uses should match the Cash line on the Balance Sheet.
USE OF FUNDS: Statement of Sources & Uses of Funds- What’s on it?
- A decrease in liability or owner’s equity account represents a use of funds.
- An increase in assets is a use of funds
Changes in cash are ignored.
Accounts with no change during the year are also ignored.
Categorize each change as a source of funds or a use of funds.
- A decrease in liability or owner’s equity account
- An increase in liability or owner’s equity
- A decrease in assets
- An increase in assets
- Changes in cash
- Accounts with no change
- A decrease in liability or owner’s equity account represents a use of funds.
- An increase in liability or owner’s equity a source of funds.
- A decrease in assets is a source of funds.
- An increase in assets is a use of funds.
- Changes in cash are ignored.
- Accounts with no change during the year are also ignored.
What are the 3 primary financial statements?
Three primary financial statements:
- Balance Sheet
- Income Statement
- Cash Flow
Purpose of Cash Flow Statement? And what are the sources used to create it?
Cash flow’s purpose is to provide a more detailed picture of what happened to a business’s cash during an accounting period. It shows the different areas in which the business used or received cash & reconciles the beginning and ending cash balances.
Sources Used to Create it:
- Balance sheet for the beginning & end of the period
- The income statement for the period
- Some transactional data
In accrual accounting, expenses & revenues are not necessarily recognized when cash is received. A business that reports $10,000 of net income may not have increased its cash by $10,000. Some of that income could be in the form of a receivable or could’ve been spent on purchases of assets or loan repayments.
*A business cash has a positive net income for a period of time while incurring negative cash flows. Cash flows are important for valuing the business and managing liquidity.
What are the 3 sections of the US cash flow statement?
How does the following transaction impact cash flow?
Purchasing inventory on credit
No Impact- No cash is exchanged at the time of this transaction.
How does the following transaction impact cash flow?
Dividends declared by the Board of Directors
The correct answer is no impact.
Dividends declared do not mean they have been paid. Typically, when dividends are declared, they are recorded as a dividend payable and then paid at a later date.
How does the following transaction impact cash flow?
Receiving cash for goods or services yet to be provided
Positive. Although revenue is not recognized until goods or services are provided, cash is received at the time of this transaction.
How does the following transaction impact cash flow?
Paying cash for property insurance covering next 2 years
The correct answer is: Negative (Decrease)
Although expense is not recognized until prepaid insurance is amortized, cash is paid out at the time of this transaction.
Operating Section (for Cash flow Statement) Defined. And what are the two methods for preparing this section?
The Operating section includes information on cash used or received in the process of preparing and providing good or services to customers. Most current asset & current liability accounts are associated with cash flows that belong in the operating section. This section provides insight into the operating decisions that management is masking and is often the most used section of the statement of cash flows. This section is closely tied to net income. It essentially shows what net income would have been under the cash accounting method. It does this by taking away the components of the income statement that don’t have an impact on the cash account and those that do not pertain to the operations of the company.
Two methods for preparing this section:
- Direct Method
- Indirect Method
- Both result in the same number- net cash flow from operating activities.*
- Under IFRS, a company can choose its own policy as to the section in which it includes interest paid. In some cases, you may find it in the operating section, otherwise it could be in the financing section.
- Under US GAAP dividends paid are not included in the operating section, but in the finance section.
What are some of the key differences between the Statement of Cash Flows prepared under US GAAP as compared to IFRS.
US GAAP | IFRS
- Interest Paid - Operating Section | Operating OR Financing Section
- Dividends Paid - Financing Section | Operating OR Financing Section
- Interest Received - Operating Section | Operating OR Investing Section
- Dividends Received - Operating Section | Operating OR Investing Section
International standards allow a lot more flexibility in the classification of interest and dividends, but they require that the business be consistent from period to period.
Which of the following is considered an Operating Activity under US GAAP?
- Cash raised from a bank loan
- Cash paid to a vendor for inventory
- Cash disbursed to pay off a loan
Cash paid to a vendor for inventory
This is the correct answer! Inventory is an integral part of a company’s operations and cash disbursed to pay for inventory impacts Operating cash flow.
Which of the following is considered an Operating Activity under US GAAP?
- Payment for PP&E the company bought one month ago
- Cash received in advance for services
- Cash collected from stock issuance
Cash received in advance for services
Cash received from customers, even if it is received in advance, is an Operating Activity.
DIRECT METHOD (Operating Section of Cash Flows Statement) EXPLAINED
- Take all cash collections from operating activities and subtract all of the cash disbursements from operating activities.
- This method uses transactional information that impacted cash during the period. Once we have identified all of the cash flows from operating activities, creating this section just requires that we list those activities and their respective amounts.
- “Cash collected from customers” - represents cash collections from customers not necessarily actual sales during this period. ((The Cash Collections # number could be lower because they collected $ from customers in other ways. It could also be higher because it could’ve collected cash from sales that were made in a previous period))
- Positive #’s create a cash inflow during the period
- Negative #’s - shown in parenthesis - represent cash outflows.
- The cash paid is not the expense recognized for the period, but rather the amount of cash paid out to another party.
- Not required, but companies typically list inflows before outflows.
What Category is “Cash Paid for Equipment Purchase”
Investing
What cash flow categories are:
- Proceeds from a sale of fixed assets
- Interest & Dividends received
- Cash Paid for Interest
- Cash Dividends paid to shareholders
- Interest Received in Cash
- Proceeds from a sale of fixed assets- Investment
- Interest & Dividends received- Operating
- Cash Paid for Interest- Operating
- Cash Dividends paid to shareholders- Financing
- Interest Received in Cash- Operating
INDIRECT METHOD (Operating Section of Cash Flows Statement) EXPLAINED
When using the indirect method, we starting using Net Income from the income statement and make adjustments to undo the impact of the accruals that were made during the period.
Essentially converting net income to actual cash flows by de-accruing it.
A simple way to start is to identify any non-cash expenses for the period on the income statement. The most common/consistent ones are _depreciation and amortization. (_Amortization is like depreciation for intangible assets ) We recognize depreciation and amortization to match the cost of a long lived asset with the revenues that it helped generate over time. But companies don’t pay any additional cash as the expense is being recognized. The cash outflow occured when the asset was originally purchased.
Additional things you need to do under the indirect method…. (Use the balance sheet!)
- Accounts Receivables. We technically haven’t received this income yet (even tho it is recorded on the balance sheet) So we subtract it from the statement of Cash flows- we don’t have that $$ yet! When accounts receivable decreases- that means we’ve received the cash! We can add this to the operating section in cash flows! Think of it as revenue recognized during last period, but the $ collected was from THIS period.
- The same adjustment needs to be made for all other operating current asset accounts.
Ex: the adjustment for changes in inventory would impact the statement of cash flows for Apple. At the end of Sept 2012, Apple had inventory on the balance sheet of 791mil on Sept 2013 Apple had 1,764 mil.
This means that Apple’s inventory increased by 973 million during the period. The increase represents an outflow- cash paid for inventory that doesn’t appear as an expense on the income statement.
In the operating section of the statement of cash flows for Apple, inventoriesis listed as a $973 mil dollar decrease.
Essentially, building the operating activities section of the statement of cash flows using the indirect method is an exercise in de-accrual.
To summarize the general rules as to how to account for asset accruals when using the indirect method:
- If an asset account increases, it must be that the company acquired an additional asset. Acquisitions of assets generally require a cash payment, so the general inference is that if an asset account increased (for example, inventory was purchased, or more sales were on account), then the cash account decreased.
- If an asset account decreases, it must be that the company sold or disposed of an asset. The sale of assets is generally accompanied by a receipt of cash. So the general inference is that if an asset account decreased (for example, inventory was sold, or accounts receivable was collected), then the cash account increased.
Increase by $10,000
This is the correct answer! The adjustment to Net Income is an increase of $10,000, because $10,000 of Depreciation expense was recognized during the year. By adding this amount back to Net Income, we eliminate the impact of this non-cash transaction.
Increase by $22,000
This is the correct answer! The adjustment to Net Income is an increase of $22,000, because $22,000 of Depreciation and Amortization expense was recognized during the year. By adding this amount back to Net Income, we eliminate the impact of this non-cash transaction.
Money made from the sale of a truck would we included in which cash flow statement section?
Investing.
Decrease by $1,000
The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The gain itself is a non-cash item. To eliminate this gain, the $1,000 amount should be subtracted from Net Income in the Operating Section of the Statement of Cash Flows. Since the gain would have increased Net Income, this subtraction ensures that the net effect on cash flow from operations is zero.
Increase by $12,000
The total cash flows received from sale of fixed assets is an Investing Activity and not an Operating Activity. The loss itself is a non-cash item. To eliminate this loss, the $12,000 amount should be added to Net Income in the Operating Section of the Statement of Cash Flows. Since the loss would have decreased Net Income, this addition ensures that the net effect on cash flow from operations is zero.
What does it look like on a cash flow statement when Apple’s inventory increases by 973 million?
The correct answer is: Decrease of $104,205 for Accounts Receivable and increase of $92,348 for Inventory
Since Accounts Receivable increased during the year, it means that the cash collected was less than the revenue recognized, so the adjustment is to record a decrease related to Accounts Receivable. Since Inventory decreased it means that the COGS expense recognized was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventory.
The correct answer is: Decrease of $973 for Inventory and decrease of $1,071 for Other Current Assets
Since Inventory increased, it means the cash paid for purchasing inventory was more than the COGS expense recognized, so the adjustment is to record a decrease related to Inventory. Since Other Current Assets increased, it means the cash paid to acquire these assets was more than the expenses incurred in the period, so the adjustment is to record a decrease related to Other Current Assets.
Increase of $87 for Accounts Receivable and increase of $172 for Inventory
Since Accounts Receivable decreased, it means that the cash collected was more than the revenue recognized, so the adjustment is to record an increase related to Accounts Receivable. Since Inventory decreased it means that COGS expense was more than cash spent for purchasing inventory, so the adjustment is to record an increase related to Inventory.
Increase of $32,593 for Accounts Payable and increase of $70,977 for Accrued Expenses
Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.
Increase of $1,192 for Accounts Payable and increase of $2,442 for Accrued Expenses
Since Accounts Payable and Accrued Expenses increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Accrued Expenses.
Increase of $259 for Accounts Payable and increase of $491 for Other Current Liabilities
Since Accounts Payable and Other Current Liabilities increased, it means that the cash paid was less than the expense recognized, so the adjustment is to record an increase related to both Accounts Payable and Other Current Liabilities.
Decrease of $491 for Accounts Payable and decrease of $852 for Accrued Expenses
Since Accounts Payable and Accrued Expenses decreased, it means that the cash paid was more than the expense recognized, so the adjustment is to record a decrease related to both Accounts Payable and Accrued Expenses.
