L5 - Cash Flow Statement Flashcards
Difference in FS
BS = ownership overview
Income = power of company to operate
–> reflects revenue when earned rather than when cash is collected
Cash Flow = combination of both - when “how company is able to generate cash
–> reflects cash receipts when collected as opposed to when the revenue was earned
= provides information about a company´s cash receipts &cash payments
Cash Flow Statement vs Income statement
Reconciliation between reported income &cashflows from operating activities provides useful information about WHEN, WHETHER, HOW company is able to generate cash - from its operating activities
- does the company generate enough CASH from its operations to pay for its new investments,
or is he company relying on new debt issuance to finance them? - does the company pay its dividends to common stockholders using cash generated from operations, from selling assets
of from issuing debt?
Example:
a company making all sales on account, without regard o whether it will ever collect its account receivable
a) would report healthy sales on its income statement
& might well repot significant income
b) however it will report ZERO Cash flow
Classification on CF Activities
1. Operating Activities
company´s day to day activities that create revenue
- such as selling inventory
- or providing services and other activities not classified as financing or investing
cash inflows comes from –> cash sales or collection of accounts receivables
for revenue generation firms undertake such activities:
- manufacturing inventory
- purchasing inventory from suppliers
- paying employees
Cash outflow results from
- cash payments for inventory
- salaries
- taxes ?
- other operating related expenses
- paying accounts payables
Classification on CF Activities
2. Investing Activities
= purchasing &selling LT assets or other investments
(include PPE, intangible assets, equities, bonds, loans)
for this purpose investments in equity and debt securities exclude
- securities considered cash equivalents - ST&highly liquid investment
- securities held for dealing or trading purposes
- purchase/sale of which are considered operating activities even for companies where this is not primary business activity
Classification on CF Activities
3. Financing Activities
= obtaining or repaying capital (equity or LT debt)
Cash inflow
= cash receipts from issuing stock (common or preferred) or bonds
= cash receipts from borrowing
Cash Outflow
= cash payments to repurchase stock (treasury stock)
= cash payments to repay bonds or other borrowings
Note: indirect borrowing using accounts payables is NOT considered a FA ( such borrowing is classified as operating)
Differences IFRS vs US GAAP
Interest received/ Dividends received
IFRS = O/I vs US = O
Interest paid
IFRS = O/I vs US = O
Dividends paid
IFRS = O/I vs US = F
Bank overdrafts
IFRS = part of C.E. vs US = Financing
Taxes paid
IFRS = generally operating, but portion can be allocated to I/F if it can be specifically identified with these categories
vs US = O
Direct Method
shows the specific cash IN/OUTFLOWS that result of which
includes the cash being received from the customers and the cash paid to the suppliers, employees, and others. The cash can also be paid for income tax, interest, and other variables.
starts with cash transactions such as cash received and cash paid while ignoring the non-cash transactions.
eliminates impact of accruals and shows only cash receipt and cash payments
it provides info. on specific sources of operating cash receipts and payments
Indirect Method
uses net income as the base. It makes the adjustments needed, i.e., adding and subtracting the variables to convert the total net income to cash amount from operations.
calculation starts from the net income, and then we go along adjusting the rest.
only shows the net result of these receipts and payments
how to obtain net income + series of adjustments
(noncash items, fo non-operating income, nt changes in operating accruals)
main arguments:
- shows reasons for the difference between net income and operating income
- it begins by forecasting future income and then derives CF by adjusting for accounts that occur because of the timing differences between accrual and cash accounting
Direct vs Indirect
Direct and indirect are the two different methods used for the preparation of the cash flow statement of the companies with the main difference relates to the cash flows from the operating activities
a) direct cash flow method changes in the cash receipts and the cash payments are reported in cash flows from the operating activities section
b) indirect cash flow method changes in assets and liabilities accounts is adjusted in the net income to arrive cash flows from the operating activities.
Direct vs Indirect
Key Differences
Definition
Direct
- uses only cash transactions (cash spent o received) to produce the CF statement
Indirect
- uses net income as a BASE and adds non-cash expenses (depreciation)
deducts non-cash income (profit of sales, net adjustment)
Direct vs Indirect
Key Differences
working
Direct:
reconciliation is done to separate the CF from others
Indirect:
- Net Income is automatically converted in the form of Cash Flow
Direct vs Indirect
Key Differences
Factors are taken
Direct:
all NONCASH transactions like depreciation ignored
Indirect:
ALL factors are taken into account
Direct vs Indirect
Key Differences
Preparation
Direct:
no such preparation required
Indirect:
- preparations are mainly needed during the conversion of net income –> cash statement
Direct vs Indirect
Key Differences
Accuracy
Direct:
very accurate as no adjustment needed
Indirect:
- not very accurate due to adjustment being made
Direct vs Indirect
Key Differences
Time taken
Less amount on indirect method
