Statement of Cash Flows Flashcards
What info does a statement of cash flows provide?
- ability to generate cash flow
- ability to pay debts and dividends
- differences between net income and cash receipts/payments
- effects of investing and financing transactions
Besides cash, what else does a SCF provide info of changes on?
Cash equivalents
Enterprise should have (and disclose) a policy for which short-term and liquid investments to treat as cash equivalents
For investments which are classified as cash equivalents, what about their transactions needs to be reported?
Nothing
What is the difference between the direct and indirect method for the SCF?
Only change is in operating activities
Direct – just like other activities
Indirect – starts with net income and adjusts it to arrive at cash from operating activities
Under direct method, it is still necessary to reconcile net income and cash from operating activities, so indirect method is most popular
Under the direct method, at minimum, what must be separately reported in operating activities?
- Cash from customers
- Interest and dividends received
- Other operating cash receipts
- Cash paid to employees
- Cash paid to suppliers (e.g. insurance, advertising)
- Interest paid
- Taxes paid
- Other operating cash payments
Further breakdowns are permitted
Under the indirect method, what must be removed from net income to arrive at operating activities?
- deferrals of past operating cash receipts/payments
- accruals of expected cash receipts/payments
- investing cash flow items
- financing cash flow items
Under the indirect method, where should the income reconciliation be reported?
Either within the SCF or in a separate schedule (in which case the SCF only shows the net cash flow from operating activities)
What needs to be disclosed if the indirect method is used?
Interest paid (net of capitalized amount)
Income taxes
If there is info about investing or financing activities that doesn’t result in cash flow changes, how should they be reported?
They should be disclosed
E.g. converting bonds to stock, exchanging property for other property
Can the SCF report cash flow as a per-share amount?
No
What is the format of a SCF?
Net cash flow from operating activities
Net cash flow from investing activities
Net cash flow from financial activities
Net increase (decrease) in cash and cash equivalents
Cash and CEs at beginning of year
Cash and CEs at end of year
Are the sales and maturities of trading securities considered operating or investing activities?
Operating
What are some unusual operating activities?
Cash received to settle lawsuits, charity donations
Basically, anything not classified as investing or financing
If a company takes out a note to purchase goods for ordinary resale, how is the cash flow classified?
Both principal and interest payments are operating
What assets are relevant to investing activities?
Held-to-maturity securities
Available-for-sale securities
PP&E
Equity investments
What loan activity is covered in operating activities?
Inflow:
-all interest income
Outflow:
- principal repayments on loans to acquire direct materials or goods for resale
- all interest payments
What loan activity is covered in investing activities?
Inflow:
- principal collections
- proceeds from sales of debt to third party
Outflows:
- principal lent out
- purchases of debt instruments
What loan activity is covered in financing activities?
Inflows:
-proceeds from borrowing money (principal)
Outflows:
-repayment of principal
What are the main things relevant to financing activities?
Debt Principal
Paying Dividends
Issuing Stock
Treasury Stock
How are hedges classified on the SCF?
Classified in the same category as the item being hedged
Starting with sales, how do you calculate cash collected from customers?
Sales \+ Beg. A/R - Write-offs - Ending A/R = Cash collected
Starting with the cost of sales, how do you calculate cash paid for inventory?
Cost of sales \+ Increase in Inventory = Inventory purchases - Increase in A/P = Cash paid for inventory
What modifies general and administrative expenses to arrive at cash paid for G&A exp.?
Bad debt expense
G&A Exp.
- Bad debt expense
= Cash paid for G&A exp.
What modifies interest expense to arrive at interest paid?
Bond discount/premium amortization
Interest exp.
+ bond premium (- discount) amortization
= Interest paid
Note, this means that bond premium amort. is SUBTRACTED from the income itself, because it is added to an expense
Starting with income tax expense, how do you calculate income taxes paid?
Income tax expense
- increase in income taxes payable
- increase in deferred tax liability
= income taxes paid
What are some adjustments to net income for the indirect method of calculating operating cash flows?
Adding back non-cash expenses (e.g. depreciation, amortization, deferred taxes)
Subtracting gains on the sale of investments
Subtracting equity in other companies’ earnings (think equity method)
Subtracting gains on the extinguishment of debt
Subtracting increases in receivables
Adding increases in payables
If dividends are declared in one year but paid in another year, what needs to be reported?
Nothing in the SCF – doesn’t even need to be disclosed
Same thing for stock dividends and for appropriated RE
What about the sale of AFS securities is relevant to the operating and investing sections of the SCF?
Any cash proceeds from selling AFS securities are investing cash flows
Yet, since gain on these sales is recognized in income, that amount has to be SUBTRACTED when determining operating cash flows with the indirect method
Same goes for any other gain on sale
If a company uses cash to purchase a cash equivalent, how is it reported on the SCF?
Not reported at all – there is effectively no net change
How do you calculate cash outflows for insurance during the year?
Insurance expense
+ Increase in prepaid insurance
= Cash outflows for insurance
How does income tax affect cash inflows?
Cash inflows are always presented as pre-tax, NOT net of tax
Total tax payment is included as a separate line item in operating activities
How are capital lease payments accounted for in the SCF?
Capital lease payments are part reduction of principal and part interest, and they are treated normally – principal payment is financing activity, interest payment is operating
