Statement of Cash Flows

Question 1

Direct Method (Direct Cash Approach)

Answer 1

Cash sources and uses related to each account in income from continuing operations are listed individually.

Question 2

Indirect Method (Reconciliation Approach)

Answer 2

Income from continuing operations is reconciled to net cash flows from operating activities.

Question 3

Application of Indirect Method

Answer 3

begin with net income and make three types of adjustments:
• Non-cash items are adjusted.
• Non-operating items are adjusted.
• Changes in balances of accrual related accounts are adjusted.

Question 4

What to do if Direct Method used?

Answer 4

the indirect method must be presented as a supplementary schedule to present a reconciliation of net income to net cash flows from operating activities.

Question 5

Proceeds from Sale of Equipment

Answer 5

investing activity

Question 6

Income Tax Effect of Gain on Disposal

Answer 6

does not affect the amount reported in the investing section because all income taxes are to be classified as an operating activity on a statement of cash flows.

Question 7

Net Cash Flow from Operating Activities - Direct vs. Indirect Method

Answer 7

Under the direct method, enterprises are encouraged to report major classes of gross cash receipts and gross cash payments and their arithmetic sum – the net cash flow from operating activities. The indirect method calculates the net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities.

Question 8

Advances from Related Parties

Answer 8

financing activities

Question 9

Equity Method: Dividends in Excess of Earnings

Answer 9

no earnings to be adjusted for the cash distribution in the preparation of the statement of cash flows. The return of investments would need to be reflected in the investing section of the statements.

Question 10

Purpose of Statement of Cash Flows

Answer 10

helps investors, creditors, and others to assess the reasons for differences between net income and associated cash receipts and payments

Question 11

Cash Inflows from Financing Activities

Answer 11

(1) proceeds from issuing equity instruments and (2) pro¬ceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing.