Lecture 7 - Statement of Cash Flows

Question 1

SoCF

Answer 1

reports how entire firm’s ops, investing, & financing activities have affected cash balances during period

Question 2

“Cash”

Answer 2

= actual cash + marketable securities with maturities of 3 months or less

Question 3

Why does NI sometimes not equal Cash?

Answer 3

bc NI is calculated w/accrual acct

Question 4

CF from financing: categories

Answer 4

obtaining debt (acting as a borrower)
paying of principal related to debt
issuing or repurchasing stock
paying dividends

Question 5

CF from investing: categories

Answer 5

purchasing/selling longer-term productive assets (equip)
purchasing/selling investment securities (stocks & bonds)
lending (providing loans)

Question 6

Direct method

Answer 6

analyze all transactions affecting cash account; group transactions into common activities and report how these activities affected cash

Question 7

Indirect method

Answer 7

reconcile NI to CF from ops by accounting for non-cash and/or non-operating items embedded in accounting NI

Question 8

___ expenses that were taken to NI but didn’t reduce cash balance

Answer 8

ADD (ex. depreciation)

Question 9

___ decreases in non-cash assets

Answer 9

ADD (ex. inventories, receivables)

Question 10

___ increases in payables and other related liabilities

Answer 10

ADD

Question 11

___ losses on sales of assets

Answer 11

ADD

Question 12

___ increases in non-cash assets

Answer 12

SUBTRACT (ex. inventories, receivables)

Question 13

___ decreases in payables and other related liabilities

Answer 13

SUBTRACT

Question 14

___ gains on sales of assets

Answer 14

SUBTRACT

Question 15

Δ cash =

Answer 15

= NI + Depr - Gain (loss) on Sale of PPE - Δother CA + ΔCL
- Purchase of PPE + Cash from Sale of PPE
+ Δ PIC + Δ LT Debt - DIV

Question 16

Why add Depr. exp?

Answer 16

NI was reduced, but cash was not

this is a non-cash expense

Question 17

Why add increases in payables?

Answer 17

+ΔCL
an increase in payables means we hoard cash
this decreases NI, but does not change cash
ex. Salary Exp 1000
Salaries Payable 1000
add $1000

Question 18

Why subtract decreases in payables?

Answer 18

+ΔCL
a decrease in payables means we expend cash
this does not alter NI, but decreases cash
ex. A/P 1000
Cash 1000
add -$1000

Question 19

Why subtract increases in non-cash assets?

Answer 19

-Δother CA
ex. A/R 1000
Sales 1000
subtract $1000 (increases NI, but does not change cash)

ex. Inventory 2500
Cash 2500
subtract $2500 (does not alter NI, but decreases cash)

Question 20

Why add decreases in non-cash assets?

Answer 20

-Δother CA
ex. Cash 1000
A/R 1000
subtract -$1000 (= +$1000) (didn’t change NI, but incr. cash)

ex. Cash  2500
              Sales  2500
      COGS  2000
              Inventory 2000
subtract -$2000 (= +$2000) (NI increases by 500, Cash increases by 2500)

Question 21

Calculating Gain/Loss

Answer 21

Amount Received - Book Value

Amount Received - (Amount paid - Accumulated Depr.)

Question 22

Why subtract gain on asset sales?

Answer 22

Subtract gains on asset sales to avoid double counting the transaction in both ops and investing section) and to make sure all CF related to asset sales are in INVESTING section

ex. purchased for 10,000; accum depr of 9200, sold for 1K
Cash 1000
Accum Depr 9200
Gain on Equip sales 200
Equipment 10,000
record 1000 in CF from investing; since NI reports 200 gain, subtract 200 to avoid double counting in ops

Question 23

Why add losses on asset sales?

Answer 23

Add losses on asset sales to avoid double counting the transaction (in both ops and investing) and to make sure all CF related to asset sales are in INVESTING section

ex. purchased for 10,000; accum depr of 8800, sold for 1K
Cash 1000
Accum Depr 8800
Loss on Equip 200
Equip 10,000
record 1000 in CF from investing; since NI reports 200 loss, add back 200 to avoid double counting in ops

Question 24

Cash receipts of interest and dividends are reported as ____ activities

Answer 24

Operating

even though lending money & buying securities is investing…

Question 25

Cash payments of interest are reported as ___ activities

Answer 25

Operating

even though borrowing money is financing…

Question 26

Cash payments of dividends are reported as ___ activities

Answer 26

Financing

Question 27

What if you purchase inventory on account?

Answer 27

this would cause incr in non-cash asset, but also increase a payable –> zero net effect