Operating Cash Flows - Indirect Method Flashcards
What are the differences between Indirect and direct method of the SCF?
Direct - has additional disclosure for Reconciliation of cash flows from operating activity with net income (Indirect has this in Body). Indirect has disclosures for Payments of Interest and Payment of Income Tax (Direct has both of these in the body of the SCF).
What type of accounting does the SCF use?
The cash basis. Income statement is prepared on accrual basis and, therefore, the effects of accrual accounting must be reversed to get cash flows.
Under the Direct Method of “Cash Flows from Operating Activities” what should be separately stated within the section? (No disclosures)
a. ) Collections from customers
b. ) Collections for interest and dividends
c. ) Collections from other operating sources
d. ) Payments to employees
e. ) Payments to suppliers
f. ) Payments for operating expenses
g. ) Payments for interest (on debt)
h. ) Payments for income taxes
i. ) Payments for other operating uses
Would an increase in accounts payable result in an increase or decrease when converting to cash basis?
Decrease. Since receivables increase that amount was recognized as revenue, but was not collected yet.
Would an increase in Deferred Revenues result in an increase or decrease when converting to cash basis?
Increase. The amount was collected, but not reported in revenue yet.
Would an increase in Inventory result in an increase or decrease when converting COGS to cash basis?
Increase. Since inventory increased, more goods were purchased than were in COGS.
Would a decrease in Prepaid Expense result in an increase or decrease when converting the payment to cash basis?
Decrease. Since prepaid expenses decreased, Operating expenses include the portion of prepaid expenses that were paid (prepaid) in a prior period.
Would an increase in operating expenses payable result in an increase or decrease when converting the payment to cash basis?
Decrease. With the amount of increase, that means the amount of expenses was not paid for yet.
What are some common add-back items using the Indirect Method of the SCF?
These items were deducted in getting NI, but did not cause cash to be used
a. ) Depreciation expense
b. ) Amortization expense
c. ) Depletion Expense
d. ) Losses (From sale of assets)
e. ) Loss under equity method of accounting for investments
f. ) Amortization of premium on bond investment
g. ) Amortization of discount on bond payable
h. ) Decrease in current assets (A/R, Inventory, PP)
i. ) Increase in current liabilities (A/P, Deferred Taxes)
j. ) Increase in Deferred Revenue
What are some common subtract out items using the Indirect method of the SCF?
Items were added in getting net income, but did not cause cash to be received
a. ) Gains (From sale of assets)
b. ) Amortization of Discount on Bond Investment
c. ) Amortization of premium on Bond Payable
d. ) Undistributed income under equity method of accounting for investments
e. ) Increases in Current Assets (A/R, Inventory, PPs)
f. ) Decrease in Current Liabilities (A/P, Deferred Taxes)
g. ) Decrease in Unearned Revenue
What is the only time an investor would have cash flow from an investment under the equity method?
When dividends are paid. Dr. Cash
Cr. Investment in Investee
What adjustments must be made to arrive at cash flow on the SCF for an equity method investment?
If a loss, add back the amount of loss. If an income (revenue, subtract out the amount recognized as revenue that was not received as cash dividends
When does a premium result for Bonds purchased?
When the bond is purchased for more than maturity value
Dr. Investment in Bonds (at Face Value)
Dr. Premium on Bond Investment
Cr. Cash
When would cash outflow for purchase of a bond show up on the SCF?
When the bond is purchased. Subsequent amortization of the premium or discount would be a non-cash transaction
When does a discount result for Bonds purchased?
When the bond is purchased for less than maturity value
DR. Cash
DR. Discount on Bond Payable
CR. Bonds Payable
