Statement of Cash Flows (F8:M2)

Question 1

what are the 3 sections of the CF statement and what does each involve?

Answer 1

operating: operating assets/liabilities
investing: non-current assets
financing: company’s own debt and equity

Question 2

what is a cash equivalent?

Answer 2

short-term, liquid investments (max 3 months between purchase and maturity)

Question 3

Under GAAP, where are bank overdrafts recorded in CF statement?

Answer 3

financing section because its essentially a loan from the bank

Question 4

for the following, recall in which section of the CF statement it would appear under GAAP and IFRS (hint: GAAP and IFRS treat them differently)

Interest rec
Interest paid
Div rec
Div paid
Tax paid

Answer 4

Interest rec: CFO (GAAP) / CFO or CFI (IFRS)

Interest paid: CFO (GAAP) / CFO or CFF (IFRS)

Div rec: CFO (GAAP) / CFO or CFI (IFRS)

Div paid: CFF (GAAP) / CFO or CFF (IFRS)

Tax paid: CFO (GAAP) / CFO, CFI, CFF (IFRS)

Question 5

why do most companies use the indirect method rather than the direct method to prepare the statement of CF?

Answer 5

because if the direct method is used, the indirect method (which is essentially a reconciliation) must be prepared and included as a supplemental disclosure

Question 6

what is the first supplemental disclosure that is listed under the indirect method? How about the direct method?

Answer 6

indirect: cash paid for taxes and interest
direct: reconciliation (i.e., indirect method)

both are then followed by schedule of non cash investing and financing activities

then disclosure of accounting policy

Question 7

T or F, IFRS does not require a reconciliation of net income to operating cash flow (i.e., indirect method) when using the direct method.

Answer 7

T

GAAP does!!

Question 8

should conversion of debt to equity be disclosed as supplemental information in the statement of CF?

Answer 8

yes

Question 9

which section of the CF statement would “purchase of a bond payable” be reported?

Answer 9

investing because the company is investing in the debt of others

Question 10

does the purchase or sale of treasury bills impact the statement of CF?

Answer 10

no because the company is basically trading cash for a cash equivalent, so it’s an even exchange. No inflow or outflow

Question 11

if you see goodwill impairment, what impact does that have on the income statement?

Answer 11

its a loss on the IS, so it must be added to net income when doing the indirect method.

Question 12

when doing the indirect method, what must you do with a “decrease in income taxes payable” when trying to find net cash provided (used) by operating activities?

Answer 12

subtract it from net income

Question 13

the sale/purchase of available-for-sale and held to maturity securities is recorded in which section of CF?

Answer 13

investing

Question 14

when an asset is sold and a gain is recorded, where should that gain be included in the state of CF (direct method)?

Answer 14

it isn’t included in any section because the gain itself is a non-cash event