Lecture 05 - Cash flow statement Flashcards

1
Q

Cash Flow Statement,
a general explaination:

  • what information,
  • for whom (3 how),
  • why (use case)
A
  • Provides information about how a company
    generates and uses cash
  • Enables
    investors and creditors
    to assess:
    • Ability to settle liabilities
    • Capacity to pay dividends
    • Need for outside financing
  • Allows
    observation and assessment
    of management’s investing and financing policies.
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2
Q

Describe CFS

  • Less connected to (3)
  • Information how (2)
  • Used by (2)
A
  1. Less connected to
  • Balance Sheet,
  • Income Statement
  • Statement of Stockholder’s Equity
  1. Provides information how a company
  • generates
  • uses cash
  1. Used by:
  • Creditors,
    to see if a firm can settle its liabilities and pay dividends
  • Investors,
    to see if a company needs outside financing
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3
Q

Framework
for the „Statement of Cash Flows“ (3)

A

Cash receipts and payments are classified into 1 of 3 categories
(=> Change in cash and cash equivalents)

  1. Operating activities
  2. Investing activities
  3. Financing activities
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4
Q

Comparison:
Income Statement
vs.
Cash Flow Statement (4)

A

Income Statement:

  • economic earnings of a company
  • profitability
    (revenues & expenses)

Cash Flow Statement:

  • how much cash being generated or used
  • performance
    (cash in/out flow)
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5
Q

What categories,
as cash receipts and payments,
classified into?

A
  1. Operating Activites
  2. Investing Activities
  3. Financing Activities
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6
Q

⭐️

  • Where is the focus in operating activities?
  • Where are operating activities reported? (2)
A

The focus is on selling goods or rendering services.

Reported:

  • Income Statement
    Accrual Basis
    (Verbuchung von angefallenen, aber noch nicht bezahlten Einnahmen oder Ausgaben.)
  • Statement of Cash Flows
    Cash Basis
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7
Q

Investing Activities
(Cash outflow / inflow)

A

Investments in, own longer-term, assets:

Cash outflow, from

  • buying other company’s stocks,
  • lending etc.

Cash inflow, from divesting of
(sale or disposal)

  • assets,
  • business segments
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8
Q

Financing Activities (2)

A
  • Shareholders Cash
    Receiving / Returning
  • Creditors Cash
    Borrowing / Repaying
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9
Q

How can you prepare
a statement of cash flows? (2)

A

Option 1: Direct Method
- often not practical

  1. Examine all cash transactions that occur during the period.
  2. Group them according to the type of activity.

Option 2: Indirect Method
- commonly used approach

  1. Reconcile the income statement and balance sheet information
  • Changes in balance sheet accounts are explained on the income statement and statement of cash flows
  1. Group them according to the type of activity.
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10
Q

What are the main steps
to prepare the cash flow statement
using the indirect method? (4)

A
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11
Q

Make adjustments for operating activities .. (4)

A

1. Add back non-cash expenses:

  • Depreciation and amortization
  • Provision for bad debts

2. Adjust for changes in working capital:

  • Accounts Receivable:
    Subtract increases, add decreases
  • Inventory:
    Subtract increases, add decreases
  • Accounts Payable:
    Add increases, subtract decreases
  • Accrued Expenses and Other Liabilities:
    Add increases, subtract decreases

3. Adjust for deferred revenues and prepaid expenses:

  • Unearned Revenue:
    Subtract increases, add decreases
  • Prepaid Expenses:
    Subtract increases, add decreases

4. Adjust for gains and losses on asset sales:

  • Subtract gains, add back losses
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12
Q

Operating Assets (3)

A
  • Receivables,
  • Inventories,
  • Prepaid expenses
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13
Q

Operating Liabilities (6)

A
  1. Wage payable
  2. Taxes payable
  3. Interest payable
  4. Accounts payable
  • Accrued expenses
    (earned but not yet paid)
  • Unearned revenue
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14
Q

What is the information provided via CFS? (2)

A

Provides a summary of a

  • company’s cash inflows and outflows
  • over a specific period,

Typically broken down into

  • operating,
  • investing,
  • financing activities.
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15
Q

What is the purpose of a cash flow statement? (2)

A

show how changes in a company’s balance sheet and income statement

  • affect its cash position.
  • Assess a company’s:
    liquidity, solvency,
    and financial health.
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16
Q

What are the three main sections of a CFS?

A

1. Operating Activitie
Shows cash flows from the core operational activities of the business.

2. Investing Activities
Reports cash flows from buying and selling assets (e.g., property, equipment, investments).

3. Financing Activities
Highlights cash flows related to raising or repaying capital, such as issuing or repurchasing stock, and taking on or repaying debt.

17
Q

How are operating cash flows calculated? (2)

A

Adjusting net income for

  • non-cash items
    (depreciation, amortization)
  • changes in working capital
    (e.g., changes in accounts receivable, accounts payable).
18
Q

What does a positive cash flow mean on a CFS? (2)

A
  • generating more cash than using
  • financial stability and liquidity
19
Q

What does a negative cash flow mean on a cash flow statement?

A

Indicates that the company is using more cash than it’s generating.

It could signify financial challenges and may require additional financing or cost-cutting measures.

20
Q

Explain the Idea of CFS (Cash Flow Statement)

  • Main sections
  • Definitions
A

CFS consists of three main sections:

  • Operating activities,
  • Investing activities,
  • Financing activities.

Operating activities
cover cash flows from day-to-day business operations.

Investing activities
involve cash flows related to asset investments.

Financing activities
include cash flows from raising capital or repaying debts.

20
Q

⭐️
What is the general Sturcture for CFS? (9)

A