LM 4: Analyzing Statements of Cash Flows

Question 1

What are the 3 types of cash flow activities? OFI

Answer 1

1. Operating
2. Financing
3. Investing

Question 2

What is operating activities?

Answer 2

Day to day activities that create revenue, such as selling inventory, providing services, and other activities not classified as investing or financing

Question 3

What is investing activities?

Answer 3

Purchasing and selling long-term assets and other investments. Long term assets, property, plant, equipment, as well short-term investments in equity, debt, bonds, etc.

Question 4

What is financing activities?

Answer 4

Cash flow from financing activities measures the movement of cash between a firm and its owners, investors, and creditors. This report shows the net flow of funds used to run the company including debt, equity, and dividends.

Question 5

What is non-cash investing and financing transactions and how are they recorded?

Answer 5

Investing and financing activities that affect assets and liabilities but not cash since acquisition or funding can be bought with common shares. do not affect cash. example; acquisition of building by issuing common stock

recorded in a separate note; like the footnotes and in the cash flow statement

Question 6

What are the 2 methods for reporting cash flow from operating activities?

Answer 6

1. Direct Method
2. Indirect Method

Question 7

What is direct method?

Answer 7

reports all cash receipts and cash payments from operating activities
(has collection from customers & deductions)

Question 8

What is the indirect method?

Answer 8

adjusts net income for items that do not affect cash to determine net cash provided by operating activities

Question 9

How is the cash flow statement linked to the balance sheet?

Answer 9

balance sheet shows the assets and liabilities that result, in part, from the activities on the cash flow statement.

Question 10

How is cash flow statement linked to the income statement?

Answer 10

the net profit or net loss is linked to the cash flow statement because it shows all the cash flow activities of each section of the income statement

Question 11

What is accrual accounting?

Answer 11

accounting method where revenue or expenses are recorded when a transaction occurs vs. when payment is received or made.

Question 12

What are the steps in preparing a cash flow statement from operating activities under the direct method? DDD

Answer 12

1. Determination of the amount of cash received from customers. (revenue)
2. Determination of amount that was paid to suppliers and employees. (expenses) (subtract)
3. Determination of amount that was paid for other operating expenses, interest, and income taxes (subtract)

Question 13

What are the steps in preparing a cash flow statement from operating activities under the indirect method?

Answer 13

take net income and then make the following 3 adjustments to net income

1. non-operating activities (add)
2. non-cash expenses (add because of non-cash deduction)
3. changes in operating working capital items(subtract) (make changes for accrual accounting and not cash accounting)

working capital includes accounts receivable/ payable, salaries payable, interest payable, and income tax payable

Question 14

What is cash received from sale of equipment formula?

Answer 14

cash received from sale of equipment = historical cost of equipment sold - accumulated depreciation on equipment sold + gain of sale of equipment

Question 15

What is dividends paid formula?

Answer 15

dividends paid = beginning retained earnings + net income - ending retained earnings

Question 16

What cash flow activity would interest received fall in under IFRS and under US GAAP?

Answer 16

IFRS: Operating or Investing
US GAAP: Operating

Question 17

What cash flow activity would interest paid fall in under IFRS and under US GAAP?

Answer 17

IFRS: Operating or Financing
US GAAP: Operating

Question 18

What cash flow activity would dividends received fall in under IFRS and under US GAAP?

Answer 18

IFRS: Operating or Investing
US GAAP: Operating

Question 19

What cash flow activity would dividends paid fall in under IFRS and US GAAP?

Answer 19

IFRS: Operating or Financing
US GAAP: Financing

Question 20

What cash flow activity would bank overdrafts fall in under IFRS and US GAAP?

Answer 20

IFRS: Part of cash equivalents
US GAAP: Financing

Question 21

Tax payments are treated as operating cash flows under IFRS and US GAAP, what is the one exception?

Answer 21

IFRS allows tax to be treated as investing or financing cash flows if they are attributable to investing or financing activities.

ex. taxes paid on gains due to the sale of a discontinued operation may be recorded as an investing activity.

Question 22

Are acquisitions and disposals of long-term assets treated as financing, operating, or investing activities?

Answer 22

treated as investing activities.

Question 23

What are 4 techniques to analyze the cash flow statement? ECFC

Answer 23

1. evaluation of the sources and uses of cash
2. common size analysis
3. free cash flow to the firm (fcff) & free cash flow to equity (fcfe)
4. cash flow ratios

Question 24

What are the 4 steps in the evaluation of sources and uses of cash to analyze the cash flow statement? MPPP

Answer 24

1. major sources and uses of cash between operating, investing ,and financing
2. primary determinants of operating cash flow
3. primary determinants of investing cash flow
4. primary determinants of financing cash flow

Question 25

What are 2 ways line items in common size analysis can be expressed?

Answer 25

1. percentage of inflows as percentage of total inflows / outflows as percentage of total outflows 2. percentage of net revenue

Question 26

What is free cash flow?

Answer 26

excess of operating cash flow over capital expenditures.

Question 27

What is Free Cash Flow to the Firm?

Answer 27

extra cash from operations after all expenses like operating expenses and maintaining its capital expenditures.

Question 28

What is the formula for Free Cash Flow to the Firm from net income?

Answer 28

1. FCFF = NI + NCC+ (Int(1- Tax Rate)) - FCInv - WCInv -NCC = Non-Cash Charges (depreciation and amortization) -FCInv = Capital Expenditures (fixed capital, such as equipment) -Int= interest expense -WCInv = Working Capital Expenditures

Question 29

What is the formula for Free Cash Flow to the Firm from operating cash flow?

Answer 29

2. FCFF = CFO + Int(1 - Tax Rate) - FCInv -CFO= cash flow from operating -Int= interest expense -FCInv = Capital Expenditures (fixed capital, such as equipment)

Question 30

What is Free Cash Flow to equity?

Answer 30

how much cash is available to the equity shareholders of a company after all expenses, reinvestment, and debts are paid for.

Question 31

What is Free Cash Flow to Equity formula?

Answer 31

FCFE = CFO - FCInv + Net Borrowing FCInv= Capital expenditure

Question 32

What formula for FCFE do you use when net borrowing is negative?

Answer 32

FCFE = CFO - FCInv - Net Debt Repayment FCInv = capital expenditure

Question 33

What is the cash flow to revenue formula and use?

Answer 33

CFO/ Net Revenue measures operating cash generated per dollar of revenue, a high ratio usually means company is able to turn a higher percentage of its revenue into profits and net cash flow

Question 34

What is the cash return on assets formula and use?

Answer 34

CFO/ Average Total Assets operating cash generated per dollar of asset investment, used to benchmark a business's performance with other businesses in the same industry

Question 35

What is cash return on equity formula and use?

Answer 35

CFO/ Average Shareholders Equity Operating cash generated per dollar of owner investment

Question 36

What is cash to income formula and use?

Answer 36

CFO/ Operating Income how much dollars of cash flows per dollar of operating income of the company from its operating activities

Question 37

What is the cash flow per share formula and use?

Answer 37

(CFO - Preferred Dividends) / Number of Common Shares Outstanding Operating cash flow on a per-share basis

Question 38

What is the debt coverage formula and use?

Answer 38

Company's ability to make debt payments CFO/ Total Debt

Question 39

What is the interest coverage ratio formula and use?

Answer 39

(CFO + Interest Paid + Taxes Paid) / Interest paid how well a firm can pay the interest due on outstanding debt

Question 40

What is the reinvestment ratio and use?

Answer 40

CFO/ Cash Paid for Long-Term Assets Ability to acquire assets with operating cash flow

Question 41

What is the debt payment ratio and use?

Answer 41

CFO/ Cash Paid for Long-Term Debt Repayment Ability to pay debts with operating cash flows

Question 42

What is the dividend payment ratio formula and use?

Answer 42

CFO/ Dividends Paid ability to pay dividends with operating cash flows

Question 43

What is the investing and financing ratio formula and use?

Answer 43

CFO/ Cash Outflows for Investing and Financing Activities ability to acquire assets, pay debts, and make distributions to owners

Question 44

What are non-cash charges?

Answer 44

A write down or accounting expense that does not involve a cash payment (line items for things like depreciation, amortization, unrealized gains & losses, bad debt, and etc.

Question 45

What is capital expenditure?

Answer 45

Funds used by company to acquire, upgrade, maintain physical assets such as property, plants, buildings, technology, equipment

Question 46

What is the difference between the cash flow statement and the income statement in terms of revenue recognition?

Answer 46

cash flow statement: reflects the receipt of cash, regardless of when the revenue was earned income statement: recognizes revenue when it is earned, regardless of when it is received

Question 47

What all does operating cash flow include?

Answer 47

Operating cash flows = Cash received from customers – (Cash paid to suppliers + Cash paid to employees + Cash paid for other operating expenses + Cash paid for interest + Cash paid for income taxes)