Statement of Cash Flows Flashcards
When must a statement of cash flows included in a set of F/S?
a statement of cash flows must be presented for every year in which an income statement is shown
In a statement of cash flows what cash equivalents are reported in the same manner as cash?
investments with 3 or less months to maturity are generally considered to be a cash equivalent and given the same treatment as cash on the CF stmt
What are the 3 main classifications on the stmt of CF?
investing activities
financing activities
operating activities
On a stmt of CF what are the transactions disclosed in the investing activities section?
investing activities reflect transaction involving assets that do not normally change in the regular course of business from daily operations. examples purchase of land, selling a building, selling a patent, buying equipment
On a stmt of CF what are the transactions disclosed in the financing activities section?
financing activities are all transactions that involve either stockholders’ equity or liabilities that do not occur as a normal part of daily operations examples paying a note payable with cash, paying cash dividends, issuance of common stock for cash, issuing bonds for cash
On a stmt of CF what are the transactions disclosed in the operating activities section?
operating activities include all transactions happening in the regular course of daily operations. examples paying A/P, buying inventory, receiving interest revenue, paying interest exp, collecting from the sale of inventory or services provided
Indicate how each of the following transactions will be shown on the CF stmt
- Bought truck for $9,000 cash and note of $30,000
- Sold inventory for $3,000 cash
- Paid $15,000 on a note, $12,000 principal and $3,000 int
- Declared a $6,000 cash dividend
- Paid the above dividend
- sold treasury stock for $32,000
- $9,000 outflow in investing activities
- $3,000 cash inflow in operating activities
- $12,000 principal outflow in financing, $3,000 interest is cash outflow in operating
- no change, no reporting required
- $6,000 cash outflow in financing
- $32,000 cash inflow in financing
What are some transactions that would not be reported on a stmt of CF?
examples, a non-monetary exchange, stock dividend or stock split, issuance of stock for an asset
An entity spends $10,000 in cash to buy an investment that comes due in 60 days. How is this transaction reported on the stmt of CF?
not reported on stmt of CF. the investment is a cash equivalent because it was bought within 3 mos. of maturity. thus the entity exchanged cash for a cash equivalent so no overall change in the cash balance took place.
What are the 2 different methods that can be used to report cash flows from operating activities?
Which of these methods is preferred by the FASB?
1) direct method 2) indirect method
FASB has indicated a preference for the direct method
An entity is going to report its CF from operating by means of the direct method. How does this approach work?
in the direct method, each separate figure reported on the entities income statement is converted to the amount of cash collected or paid in connection with daily operations.
What 3 changes are made to convert the I/S to a CF from operating activities stmt?
1) gains and losses are eliminated because they do not pertain to daily operations
2) non-cash revenues and expenses are eliminated because they do not affect cash
3) changes in any operational assets and liabilities are also removed to convert from accrual to cash
What are the operational assets and liabilities?
A/R inventory PP expenses A/P Accrued liabilities income tax payable
What operational assets and liabilities are associated with the following I/S accounts?
1) Sales
2) COGS
3) Insurance exp
4) Salary exp
5) Income tax exp
1) A/R
2) Inventory, A/P
3) PP exp, Insurance payable
4) Salaries payable
5) income tax payable and deferred income taxes
An entity reports sales of $200,000 for the year, while A/R went up by $15,000. Using the direct approach, how much cash was actually collected from customers?
Credit Sales - Change in A/R = Cash collected from customers
$200,000 - $15,000 = $185,000
An entity reports COGS of $100,000 for the year, while inventory went down by $9,000 and A/P went down by $2,000. using the direct approach, how much cash was actually paid for the inventory?
COGS + Change in inventory + change in A/P = cash paid for inventory
$100,000 + ($9,000) + $2,000 = $93,000
An entity reports insurance expense of $21,000 for the year while PP insurance went down by $3,000. Using the direct approach, how much cash was actually paid for the insurance?
Insurance expense + change in PP insurance = cash paid for insurance
$21,000 + ($3,000) = $18,000
An entity reports its total operational expenses an $90,000 for they year, while accrued liabilities went up by $8,000. Within the total expense figure was $13,000 depreciation. Using the direct approach, how much cash was actually paid for expenses?
Total expenses + change in accrued liabilities - non cash expenses = Total cash paid for expenses
$90,000 + ($8,000) - $13,000 = $69,000
An entity is determining its cash flows from operating activities by means of the direct method. On its I/S for the year, the entity reports an $8,000 loss on the sale of equipment. How does the impact of CF from operating activities computation become impacted?
sale of equipment is an investing activity therefore it is eliminated in the operating activities section of the CF stmt
How does the indirect method work when determining CF from operating activities?
start with NI
1) non cash revenues and expenses eliminated
2) all gains and losses eliminated
3) changes occurring in operational assets and liabilities must be eliminated
An entity reports net income of $200,000. Within NI the entity reports a depreciation expense of $30,000 and a gain on sale of equipment of $11,000.
What are the cash flows from operating activities if the indirect method is applied?
NI + non cash expense - gain on sale of equipment = CF from operating activities
$200,000 + $30,000 - $11,000 = $219,000
An entity reports NI of $300,000. Within NI the entity reports amortization exp of $14,000 and a loss on the sale of land $17,000.
What are the CF from operating activities if the indirect method is applied?
NI + non cash exp + loss on sale of land = CF from operating activities
$300,000 + $14,000 + $17,000 = $331,000
An entity reports NI of $400,000. The entities inventory went up by $9,000 and A/R went down by $22,000.
What are the CF from operating activities if the indirect method is applied?
NI + change in A/R + change in inventory = CF from operating activities
$400,000 + $22,000 + ($9,000) = $413,000
An entity reports NI of $400,000. The entities A/P went up by $13,000 and salaries payable went down by $4,000.
What are the CF from operating activities if the indirect method is applied?
NI + Change in A/P + Change in salaries payable = CF from operating activities
$400,000 + $13,000 + ($4,000) = $409,000
An entity sells equipment with a cost of $200,000 and accumulated depreciation of $80,000 for a gain of $16,000.
If the indirect method is applied, how does this transaction impact a stmt of CF?
The gain is eliminated to CF from operations
the cash received is added to CF from investing
An entity has a building with a cost of $300,000 and accumulated depreciation of $110,000. The building is sold for $172,000. The indirect method is applied.
How is this transaction reported on a stmt of CF?
The loss of $18,000 is eliminated from the CF from operations.
The cash of $172,000 is added to CF from investing.
What is the cash basis of accounting?
the cash basis reports revenues when cash is received and expenses when cash is paid.
therefore there is no need for accrual accounts such as A/R, A/P and accrued assets or liabilities
An entity is using the cash basis of accounting but wants to convert to the accrual basis. What 2 steps are carried out to make this conversion?
1) accounts as of the first day of the year that have been left off are placed on the books through a J/E with RE as the plug
2) the beginning balances are adjusted to the ending balances for the period with the plug either increasing or decreasing NI
An entity uses the cash basis of accounting and reports NI of $200,000 for year 1. The entity has gathered the following comparative B/S info.
A/R $16,000 1/1 $27,000 12/31
AP $13,000 1/1 $11,000 12/31
Salaries Payable $2,000 1/1 $8,000 12/31
under accrual accounting what net income figure would be reported?
to record the 1/1 balances
A/R 16,000
A/P 13,000
Salary Payable 2,000
RE 1,000
To adjust these accounts to 12/31
A/R 11,000
A/P 2,000
Salaries payable 6,000
NI 7,000
the NI has been increased from $200,000 to $207,000 in accrual accounting
