Statement of Cash Flows Flashcards
Instead of the accrual accounting on the income statement, the statement of cash flows is based on cash accounting. It only changes when cash changes hands!
How do investing and financing cash flows behave under the direct and indirect method of classifying operating cash flows?
The stay the same under each method
Describe the indirect method of describing operating cash flows.
Adjust net income for any non-operating activities, any non-cash expenses (like depreciation), and for changes in operating working capital (receivables etc.)
What are the three steps to convert an indirect method to a direct method?
- Convert net income into total revenue and total liabilities.
- Remove any non-operating and non-cash items and state relevant cash flow items.
- Adjust accrual amounts to cash amounts by correcting for changes in operating working capital.
What are the three important categories of a cash flow statement?
Operating, investing, financing
Describe how to calculate the value of a sale of equipment.
- Calculate the historical costs by looking at the value of equipment on the balance sheet.
- Calculate the reduction in depreciation on the balance sheet and reduce the historical value with depreciation to arrive at book value.
- Adjust book value with gain or loss on sale.
How to calculate the amount of dividends paid?
Beginning retained earnings + net income - dividends paid = Ending retained earnings
What is the “additional paid-in capital” post?
APIC is the amount between the par value of a stock and the amount that investors actually pay for it.
What are the differences for cash flow statements between US GAAP and IFRS?
IFRS is more flexible so it allows certain things to be stated at multiple posts. They both encourage the direct method but in US GAAP you also have to show how you arrive from net income to cash flow.
Where should interest received be in cash flow statement according to US GAAP and IFRS?
IFRS - Operating or investing
US GAAP - Operating
Where should interest paid be in cash flow statement according to US GAAP and IFRS?
IFRS - Operating or financing
US GAAP - Operating
Where should dividends received be in cash flow statement according to US GAAP and IFRS?
IFRS - Operating or investing
US GAAP - Operating
Where should dividends paid be in cash flow statement according to US GAAP and IFRS?
IFRS - Operating or financing
US GAAP - Financing
Where should bank overdrafts be in cash flow statement according to US GAAP and IFRS?
IFRS - Part of cash equivalents
US GAAP - Financing
Where should taxes paid be in cash flow statement according to US GAAP and IFRS?
IFRS - Potentially all three but generally operating
US GAAP - Operating
It is desirable that operating cash flow exceeds net income, this is also a sign of good earnings quality!
What are the two approaches for the common-size cash flow statement?
Inflow (outflow) s a percentage of total cash inflow (outflow)
As a percentage of net revenue
What is free cash flow?
The excess of operating cash flow over capital expenditures
What is Free Cash Flow to the Firm (FCFF) and how to calculate it?
The cash flow available to both debt and equity investors after all operating expenses have been paid and necessary investments in working capital and fixed capital have been made. FCFF = CFO + Interest (1 - Tax) - FixedCapitalExpenditures.
Interest has to be corrected if it is included in operating activities, because it is cash flow that is paid to debtholders, so it has to be included in FCFF.
What is cash flow to revenue and how to calculate it?
CFO / Revenue
Operating cash generated per dollar
What is cash return on assets and how to calculate it?
CFO / Average total assets
Operating cash generated per dollar of asset investment
What is cash return on equity and how to calculate it?
CFO / Average shareholders’ equity
Operating cash generated per dollar of owner investment
What is cash to income and how to calculate it?
CFO / Operating income
Cash generating ability of operations
