Section 25 - Statement of Cash Flows Flashcards
What are the three categories of activities in the Statement of Cash Flows?
1) Operating Activities
2) Investing Activities
3) Financing Activities
What are considered Operating Activities in the Statement of Cash Flows?
Inflows and outflows of cash related to income from continuing operations such as:
- collections on sales from customers
- cash payments on COGS and SGA
- INTEREST RECEIVED and PAID
- Dividends received
- acquisition and disposal of trading securities
- payments for income taxes
- all other receipts/disbursements that do not stem from transactions defined as Investing or Financing activities
What are considered Investing Activities in the Statement of Cash Flows?
Investing in yourself or others such as Loans, Investments, PPE (LIP):
- principal collections or Loans made by the entity
- acquisition or disposal of AFS or HTM Investments (Not Trading)
- Acquisition or disposal of PPE and intangibles
What are considered Financing Activities in the Statement of Cash Flows?
Issuing Debt or Equity such as:
- proceeds from issuing or payments for retiring Bonds
- issuance or reacquisition of stock or Treasury stock
- borrowing or repaying a loan
- dividends PAID to shareholders (distribution to owners)
JE accounts - common stock, preferred stock, APIC, N/P, Bonds payable
What are the two methods to preparing the Operating Activities section of the Statement of Cash Flows?
1) Direct Method - preferred method
2) Indirect Method (reconciliation approach)
Under the Direct Method, how do you prepare the Statement of Cash Flows?
- Take every income statement item and convert from the accrual method of accounting back
- Starts with Income from Continuing Operations on the I/S
- Adjusts for changes in accounts like A/R, A/P, Inventory, and non-cash revenues, expenses, gains, losses, interest expense, income tax expense
NOTE: Gains/losses from sale of investments and expenses not requiring the use of cash (depreciation, amortization) are not reported
NOTE2: If selling expense includes depreciation or bad debt expense, they should be deducted since they do not involve the payment of cash
Under the Indirect Method, how do you prepare the Statement of Cash Flows?
Begin with Net Income (bottom of I/S) and make 3 types of adjustments:
1) Non-cash items are adjusted (depreciation and amortization expense is added back, equity in earnings is deducted)
2) Non-operating items are adjusted (deduct gain from sale of AFS security since this is an investing activity)
3) Changes in the balances of accrual related accounts are adjusted (A/R, Inventory, A/P, Allowance fr uncollectible accounts receivable, amortization of discount, and taxes
What are the disclosures required for the Direct Method?
-Indirect Method must be shown (Schedule to reconcile net income)
- Schedule of non-cash investing and financing activities
- transactions having no effect on cash (ie. conversion of bonds to stock and purchase financed entirely by stock)
What are the disclosures required for the Indirect Method?
-Cash payments for Interest and Income taxes
- Schedule of non-cash investing and financing activities
- transactions having no effect on cash (ie. conversion of bonds to stock and purchase financed entirely by stock)
What are the 5 steps to prepare a Statement of Cash Flows?
1) Set up the Statement of Cash Flows in a 3-column format (increases, decreases, and changes)
- At bottom of statement, fill in amounts for net increase or decrease in cash and the beginning and ending balances of cash
2) Set up T-accounts for each B/S account other than cash
3) Analyze additional entries provided, preparing JE for the transactions. Post debits and credits in the appropriate schedules
4) Any unreconciled differences in the balance sheet T-accounts should be eliminated with the offsetting debit or credit going into the appropriate section of the Statement of Cash Flows
5) If direct method is used, complete the operating activities section of the statement by using the income statement and the related B/S accounts. Finally complete the statement with subtotals for each section
Under IFRS, what methods are allowed for the Statement of Cash Flows?
Direct, Indirect, or Modified Direct Method (showing revenue and expense and changes in working capital accounts in operating activities
Under IFRS, what section is interest PAID reported on the Statement of Cash Flows?
Operating activity if it’s a financial institution
Operating or Financing activities by all other entity
Under IFRS, what section is interest and dividends RECEIVED reported on the Statement of Cash Flows?
Operating activity if it’s a financial institution
Operating or Investing activities by all other entity
