Statement of Cash Flows

Question 1

Classification of Cash Flows

Answer 1

Operating, Investing, Financing, Foreign Currency (O IFF)

Question 2

Cash

Answer 2

coins, currency, foreign currency, cash equivalents

Question 3

Restricted Cash

Answer 3

cash held aside for special purposes and not freely available for entity use

Question 4

Cash Equivalents

Answer 4

short term (maturity 3 months or less), highly liquid, bear no interest (T-Bills, money market funds)

Question 5

Other info reported on SCF

Answer 5

1. effects of foreign currency translation
2. reconciliation of cash at beginning of yr to cash at end of yr
3. if indirect method used, must report a reconciliation of accrual NI to cash flow from operations
4. significant non-cash transactions (ex: purch of equip with Note Payable, settle a liability by paying with common stock)

Question 6

SCF purposes

Answer 6

to provide information about the cash receipts and cash payments for an entity to help investors, creditors, and others assess:

1. Past ability to generate and control cash inflows and cash outflows related to operating, investing, and financing activities;
2. Probable future ability to generate cash inflows sufficient to meet future obligations and pay dividends;
3. The likely need for external borrowing.

Question 7

Direct and Indirect Method

Answer 7

The direct method reports the actual operating cash inflows and outflows in the operating section. The indirect method reports the reconciliation of net income and net operating cash flow in the operating section.

Question 8

Non Cash transactions

Answer 8

should be disclosed in supplemental noncash disclosure

Question 9

Direct method discloses

Answer 9

a reconciliation of NI to Net Cash flow from Operations.

Question 10

Things that go into the Operating section of SCF

Answer 10

things that have an impact on the income statement

Question 11

Things that go into the Investing section of SCF

Answer 11

business acquisitions, sale and purch of PP&E, sale and purch of debt or equity securities of OTHER ENTITIES, Collection of loan principal

Question 12

Things that go into the Financing section of SCF

Answer 12

1. cash outflows to: stockholders as dividends, redeem long term debt, re-acquire capital stock (treasury stck)
2. cash inflows: issuance of debt (bonds and notes), issuance of stock (equity securities)

Question 13

Working Capital Accounts

Answer 13

AR, Inventory, Prepaid exp, other assets, AP, accrued expenses, accrued taxes, other liabilities

Question 14

Operating Activities in the Indirect Method of SCF

Answer 14

is a reconciliation of net income (accrual basis) to cash generated by operations (cash basis).

Question 15

Using the indirect method, net income is adjusted to derive net cash flow from operating activities by:

Answer 15

1. Adding back noncash charges (reductions) included in deriving net income; and
2. Subtracting out noncash credits (increases) included in deriving net income.

Question 16

Items that are added back to net income are those that were deducted to derive net income

Answer 16

Depreciation expense
Amortization expense
Depletion expense
Losses (from sale of assets, etc.)
Loss under equity method of accounting for Investments
Amortization of premium on bond investment
Amortization of discount on bonds payable
Decreases in current assets (accounts receivable, inventory, prepaid assets, etc.)
Increases in current liabilities (accounts payable, deferred taxes, etc.)
Increase in unearned revenue

Question 17

Items that are subtracted from net income are those that were added to derive net income

Answer 17

Gains (from sale of assets, etc.)
Amortization of discount on bond investment
Amortization of premium on bond payable
Undistributed income under equity method of accounting for investments
Increases in current assets (accounts receivable, inventory, prepaid assets, etc.)
Decreases in current liabilities (accounts payable, deferred taxes, etc.)
Decrease in unearned revenue

Question 18

Investor that uses equity method to account for an investment

Answer 18

must recognize its share of investee’s NI or Net Loss regardless of whether any dividends are paid by the investee