Part 2 - Statement of cash flow

Question 1

What are the three classifying transactions?

Answer 1

Operating, investing and financing

Question 2

What is included in operating activities?

Answer 2

Principal revenue producing and service provision activities of the entity (can be under direct or indirect method)

Question 3

What are direct methods?

Answer 3

Basically recasts IS to cash flow basis (cash received from customers, paid to suppliers and employees, income tax paid)

Question 4

What are indirect method?

Answer 4

Starts with NI and reconciles to cash flow basis (add back non-cash items)

Question 5

What is investing activities?

Answer 5

Acquisition and disposal of long-term asset. use proceeds of disposition (rather than booked gain/loss)

Question 6

What is financing activities?

Answer 6

Changes re long-term debt (new borrowing, repayment) and equity (issuance or retirement of shares, dividends)

Question 7

What is the usual Indirect Method format for cash flow from operations

Answer 7

Net income

Adjust for non-cash items
Depr/amortiz (add back)
loss on disposal of asset (add back)
gain on disposal of asset (deduct)
Adjust for changes in non-cash capital items
Increase in current asset (deduct)
decrease in current asset (add back)
Increase in current liabilities (add back)
decrease in current liabilities (deduct)

Question 8

What is the usual template for cash flow from investing?

Answer 8

Purchase of long term asset

proceeds on sale of long term asset

Question 9

What is the usual template for cash flow from financing?

Answer 9

New long-term debt proceeds
repayment of long-term debt (principal portion only)
issue of capital stock
repurchase of capital stock (cash flow amount)
Payment of dividend

Question 10

What is the usual direct method format for cash flow from operations?

Answer 10

Cash collected from customer

Sales
bad debt expense
changes in AR
change in unearned revenue

Cash collected from suppliers

COGS
operating expense
prepaid expense
change in AP
change in inventory 

Cash paid from interest
interest expense
changes in interest payable

Cash paid from tax
income tax expense
change in income tax payable

Question 11

Capital asset transaction for cash flow statement

Answer 11

Cash
Accumulated depreciation
capital asset
gain on asset (or DR in loss on asset)

Question 12

payment of dividend for cash flow statement

Answer 12

Retained earnings
Beg balance + net income - stock dividend (non cash transaction) - cash dividend declared = ending balance

Cash dividend declared
decrease (increase) in dividend payable
cash dividend paid

Question 13

Should cash flow statement include non-cash investing and financing activities?

Answer 13

No e.g. acquisition of asset by related liabilities or finance lease. disclose in F/S

Question 14

What is the purpose of Management discussion and analysis (MD&A)?

Answer 14

provide a narrative explanation on how the company performed in the past, financial condition and its future prospects.

Question 15

MD&A - corporate goverance aspects:

Answer 15

• review by audit committee
• approval by Board of directors
• certified by CEO and CFO

Question 16

For MD&A to be useful…

Answer 16

should be understandable, relevant, comparable, verifiable, timely