Reading 25- Understanding Cash Flow Statements

Question 1

Compare cash flows from operating, investing, and financing activities and classify cash flow items are relating to one of those three categories given a description of the items.

Answer 1

CFO- CFO is the adjusted and true NI value for the company after accrual accounting and depreciation expense accounts have been settled.

CFI- CFI is activities that involve liquidation of assets to compensate for inability to pay for any expenses; it also accounts for investments in other stocks; buying of other businesses, etc.

CFF- CFF are activities that are used to obtain more capital like activities like selling and issuing common stocks, gaining bank loans from creditors, etc.

Question 2

Describe how non-cash investing and financing activities are reported.

Answer 2

Non-cash investing and financing activities are NOT REPORTED on the statement of cash flows because they do NOT HAVE to DO with exchange of CASH.

You will find them in the footnotes of the financial reports

Question 3

Contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles.

Answer 3

IFRS Standards-
**A.) US GAAP- interest expense is reported in operating activities; dividends received and interest received are reported on operations as incomes

Dividends paid= financing activity

B.) IFRS- more flexible classifications of cash flows; interest received or dividends received can be reported on the operating or investing cash flow section.

Question 4

Distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method.

Answer 4

*So when talking about Direct or Indirect CF, we are talking about the difference between the CFO section of the CF Statement:

A.) Direct Method of Cash Flow- change the accrual income statement into a “cash-based income statement.”

B.) Indirect Method of Cash Flow-

• Net Income or Bottom-Line which is going to be the top portion of the operations section of CF Statement.
• Then, there will be subtractions for depreciation expenses and changes for accrual accounting

Question 5

Describe how the cash flow statement is linked to the income statement and the balance sheet.

Answer 5

Income Statement creates the CFO section of the CF statement. Bottom-line of the CF statement shows the changes in the CASH BALANCE on the Balance Sheet between two periods (right? because the Balance sheet is a “snap shot” of the business RN).

RE = sum of all NI for a company 
SHE= RE old + NI + stock + capital investment

Question 6

Describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data.

Answer 6

Already explained above! WE NEED SOME PRACTICE QUESTIONS FOR THIS ONE!

Question 7

Convert cash flows from he indirect to direct method.

Answer 7

thIS WAS KIND OF COMPLICATED SO I IGNORED.

Question 8

Analyze and interpret both reported and common-size cash flow statements.**

Answer 8

Reported Cash flow statements are the normal ones we see.

**Common-size cash flow statements, we are talking about a PERCENTAGE (%) of REVENUE FROM THE INCOME STATEMENT.

Question 9

Calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios.

Answer 9

FCF (firm)= (FCF)+ [(1-Effective tax rate)*(interest expense)]
* FCF(firm) is money that is recognized by the firm BEFORE any loan payments to the bank are made.
———————————————————————————–
FCF (equity)=FCFO- FCFI
- takes into account any payments made on repairing assets or increasing ownership of land