Statement Of Cash Flows

Question 1

Is the SOCF Required?

Answer 1

Yes

Question 2

What is the purpose of the SOCF?

Answer 2

– to provide info about cash receipt & cash payments

Question 3

What does the SOCF help investors assess?

Answer 3

1. Past ability to generate and control cash inflows/outflows
2. Probable future ability to generate sufficient inflows to pay obligations
3. Likelihood of future external borrowing

Question 4

What are cash equivalents?

Answer 4

(i) Short-term highly liquid investments
(ii) Readily convertible to known amounts of cash (T-Bills, Money Market Funds)
(iii) Sufficiently close to maturity so that risk of value change due to interest is insignificant
(iv) Investments with maturity in ≤ 3 months (has no effect on CF’s)

Question 5

How are noncash activities disclosed?

Answer 5

1) Should be on a separate schedule or other presentation

2) Not on face of the SOCF

Question 6

What is the Direct Method?

Answer 6

Operating Activity by sources and uses

1) Reports actual operating CF in operating section

Question 7

What is the Indirect Method?

Answer 7

Operating activity by adjusting accrual NI to operating CF

1) Reports recon of NIE & Net Operating CF in operating section

Question 8

What are the Inflows for Operating Activities?

Answer 8

1) From customers
2) Dividends (From Investments)
3) Interest Received (on loans made & investments)

Question 9

What are the outflows for Operating Activities?

Answer 9

1) To suppliers (goods/services)
2) To Employees (payroll)
3) Interest Paid (On Debt)
4) Income Taxes & other operating uses

Question 10

What are the inflows for Investing Activities?

Answer 10

*Sale of LT Assets
*Collection of Loan Principal
*Disposal of debt & equity securities (AFS & HTM)
(If firm plans to hold these securities for short period, they are Operating Acty)
*Sale of other productive assets (not inventory)

Question 11

What are the outflows for Investing Activities?

Answer 11

• Purchase of LT Assets
• Lending (to others)
• Investment in Debt & Equity Securities (HTM & AFS). (If firm plans to hold these securities for short period, they are Operating Acty)
• Purchase of other productive Assets

Question 12

What are the inflows for Financing Activities?

Answer 12

Sale of Own Stock
Proceeds from borrowing (Bonds,Notes, etc.)
Proceeds from sale of T/S

Question 13

What are the outflows for Financing Activities?

Answer 13

Repurchase T/S
Paying back lenders (principal only)
Payment of Div