LDP 5.1 Cash Flow Statements and Their Formats Flashcards
SFAS No. 95 Direct
Starts at the top of the income statement and recasts accrual-based expenses to cash outlays to arrive at net cash income
Is said to cash out the income statement
UCA Direct
Developed by the banking industry
Not an allowable format within GAAP
Identifies interest expense and current portion of long-term debt as separate cash flow requirements after it calculates cash from operations
SFAS No. 95 Indirect
Starts at the bottom of the income statement with net profit and adjusts it to reconcile with cash charges
Focuses on differences between net income and net cash flow from operating activities
does not explicitly show whether cash interest and principal payments were made from internally generated cash flow, but it does provide supplementary disclosures that support repayment analysis
Operating Cash Flow Definition
Operating cash flow is a measure of the cash provided through company operations, or the cash equivalent of the income statement’s profit from core business activities.
How is Operating Cash Flow Labeled under SFAS indirect and direct?
Net Cash Provided by Operating Activities
Net Cash provided by Operations.
How is Operating Cash Flow Labeled under UCA direct?
UCA direct format displays operating cash flow in four steps:
- Gross Cash Profit
- Cash after Operations
- Net Cash after Operations
- Net Cash Income
How is Operating Cash Flow interpreted?
Sources and uses of operating cash flow are the same regardless of the format, but presentation differences make the UCA format easier to understand when interpreting ability to repay debt
Investing Cash Flow Definition
Investing cash flow includes cash flows from investment activities, such as buying or selling plants and equipment, intangible assets, rental properties, and stock in affiliates or subsidiaries.
How is Investing Cash Flow Labeled under SFAS indirect and direct?
SFAS direct and indirect:
Net Cash Provided by Investing Activities
Net Cash Used in Investing
UCA direct:Not universal among banks
Possible captions:
Capital Expenditures Cash Paid for Plant and Investments
How is Investing Cash Flow interpreted?
Net cash value in this area can be either positive or negative: Negative as companies grow and report capital expenditures and other investment activities Positive when a company is in a declining stage of their life cycle and reinvests less than they dispose of
Financing Cash Flow Definition
Financing activities include changes in both debt and equity. Trade payables result in operating flows; short term notes or revolving credit agreements with banks result in financing cash flows.
shows the amount of cash needed to meet any investing cash needs not provided by operating cash flow.
How is Financing Cash Flow labeled?
SFAS Direct and Indirect:
Net Cash Provided by Financing Activities
Net Cash Provided by Financing
UCA Direct: Total External Financing + Current Portion of Long term Debt
How is Financing Cash Flow interpreted?
Although financing cash flow includes changes in debt and equity, it does not include any change in the company’s retained earnings that is the result of profit or loss.
Financing cash flows show the amount of cash needed to meet investing cash needs not provided by operating cash flow
Which section of the cash flow statement includes the cash flow effect of changes in a company’s cash cycle?
Operating Cash Flow
Describe the principal difference in how the SFAS direct, the UCA direct, and the SFAS indirect formats present information about cash paid for interest and taxes.
SFAS Direct - Includes cash interest and cash taxes paid with other operating expenses.
UCA Direct - Shows these cash outlays separately, in the interim cash flow steps of ‘net cash after operatons and net cash income’
SFAS Indirect - Does not show these outlays in the body of the statement of cash flows, rather, disclosed at the bottom of the statement as supplemental cash flow info.
Which format generally provides the most information about a bank’s position relative to other claims on a company’s cash flow? Why?
UCA Direct Method - it explicitly demonstrates cash payments for taxes, interest and principal reductions in order of in which we expect to companies to pay them.
- Makes it easier to see when a company runs out of cash and clarifies whether principal and interest payments are made from internally generated cash.
Describe similarities in how the three cash flow formats help interpret a company’s cash flow. You should be able to identify at least three common characteristics of the various formats.
- Each compensates for the cash flow measurement disadvantages of accrual accounting.
- Each format tells us separately about cash flow from the company’s operating, investing, and financing activities.
- Each format separates internal from external sources and uses of cash, although the UCA considers repayment of external debt at two different points on the cash flow
- Each format allows us to reconcile the net effect of operating and investing cash flow to year-to-year change in cash
Benefits of Accrual Accounting
Useful to lenders because they offer two important benefits:
1) they provide a superior presentation of the value of a company’s assets, the extent of its liabilities, and the amount of its earnings.
2) they provide a more accurate allocation of sales and expenses among accounting periods.
Drawback of Accrual Accounting
- mislead a credit analyst about a borrower’s ability to repay debt
- Cash tied up in receivables, inventory, prepaid advertising, buildings, equipment, or officer loans is not available to repay bank debt.
Which of the following cash transactions are found on the UCA direct cash flow statement but are not found on the income statement?
Capital Expenditures, Term Debt Payments, and Dividends are all found on the UCA direct cash flow statement, but not on the income statement.
Cash Coverage Ratio
Net Cash after Operations divided by the Financing Costs plus the Current Portion of Long-term Debt.
Two categories of cash that can be used as sources for loan repayment.
Operating-cycle cash
Long-term cash flow
Operating-cycle cash
moves from inventory to receivables and back to cash during the normal purchase, production, sales, and collection cycle. The cycle of asset conversion releases cash temporarily and does not depend on any net new cash being injected.
Long-term cash flow comes from profits
Long-term cash flow comes from profits, permanent improvements in efficiency, the sale of
noncurrent assets, increases in noncurrent or base-level current liabilities, or additional
investments by owners. Cash-flow cash is available permanently.
Operating cash flow
a measure of the cash provided through company operations or, in very broad terms, the cash equivalent of the income statement’s profit from core business activities.
Investing cash flow
includes cash flows from investment activities, such as buying or selling plant and equipment, intangible assets, rental properties, and stock in affiliates or subsidiaries. Changes in marketable securities are also classified as investing cash flow when the securities are considered an investment instead of a cash equivalent.
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Financing cash flow
includes changes in both debt and equity
Companies generate operating cash flow from two sources
- profit
- the cash cycle
The key to consistent and sustained operating cash flow
- Profits and a company’s ability to generate profit is often referred to as the company’s cash flow fundamentals.
- Cash generated from fundamental profitability is obviously a more reliable source for loan repayment than cash that can be released by shortening the cash cycle.
