Stmt of Cash Flows

Question 1

Requirements & Purpose：

• 1. SCF (Stmt of Cash Flow) is required for all companies that report both ___ and ___ for a period.
• 2. SCF is not required for certain ___ -type entities (e.g. employee benefit plan entities).
• 3. The basic purpose of SCF is to provide information about the ___ and ___ for an entity to help investors, creditors, and others assess:
     * 1. past ability to g___ and c___ cash inflows and outflows.
     * 2. probable future ability to generate cash inflows sufficient to meet future o___ and pay d___.
     * 3. the likely need for external b___.
• 4. NOTE - SCF also provides information about non-cash investing and financing activities. For example, acquiring a long-term asset by incurring a liability.
• 5. SCF must exactly explain the c___ in cash and cash equivalents between the beginning and ending balance on the Balance Sheet.
• 6. cash equivalents are:
     * 1. short-term, highly ___ investments; and
     * 2. readily ___ to fix (or known) amounts of ___; and
     * 3. have an ___ value of 3 months or less to the purchaser so that the risk of changes in value due to changes in interest rate is insignificant.
     * 4. investments are usually considered cash equivalents only when their original maturity is 3 months or less (e.g., treasury bills, money market funds).
     * 5. companies should disclose their policy for designating cash equivalents. A change in policy for designating cash equivalents is a change in a___ p___. Recall that cumulative effect of change in accounting principle is recorded as ___. RE is an OE account. Recall that OE includes 5 accounts: contributed capital, additional PIC, RE, AOCI, treasury stock (contra OE).
     * 6. Are the following items cash equivalents?
     
     • A Treasury Bill purchased when there are 3 months left in its term?
     • A Treasury Bill purchased when there are 4 months left in its term after holding it one month?
     • Investments in equity securities (stocks)?

Answer 1

• 1. Balance Sheet; Income Stmt
• 2. investment-type
• 3. cash receipts; cash payments
     * 1. generate and control
     * 2. obligations; dividends
     * 3. borrowing
• 4. none
• 5. change
• 6. cash equivalents:
     * 1. liquid
     * 2. convertible; cash
     * 3. original; maturity
     * 4. none
     * 5. accounting principle; an adjustment to the beginning balance of retained earnings.
     * 6.
     
     • YES.
     • NO. Original maturity must be 3 months or less.
     • NO. Investments in equity securities do not have maturity value, and they are not convertible to a fixed amount of cash.

Question 2

SCF must report information about OIFF:

• 1. Net Cash inflow or outflow from ___ activities.
• 2. Net Cash inflow or outflow from ___ activities.
• 3. Net Cash inflow or outflow from ___ activities.
• 4. Effect on Cash of ___. This reports change in cash due to change in currency exchange rates.
• 5. R___ of net cash inflows/outflows (sum of the items listed above) with the reported change in cash and cash equivalents on the ___. The new cash flow derived from the OIFF elements (working down) equals the derived change in cash and equivalents (working up). See the attached image.
• 6. ___ investing and financing activities. The disclosure of noncash investing and financing activities must be on a separate schedule or other presentation, not on the face of the SCF.

Answer 2

• 1. operating
• 2. investing
• 3. financing
• 4. foreign currency translation
• 5. Reconciliation; Balance Sheet
• 6. Non-cash

Question 3

Two formats of SCF allowed By GAAP:

• 1. SCF can be presented using either the ___ or the ___ format.
• 2. The only difference between the two is in the ____ section of the statement.
     * 1. The direct method reports the ___ operating cash flows in the operating section.
     * 2. The indirect method reports the ___ of net income and net operating cash flow in the operating section.
     * 3. Both lead to the same subtotal: ___. The attached image shows the differences and similarities between the direct and indirect methods.
• 3. The direct method must still report the reconciliation of net income and net operating cash flow in a ___.
• 4. Only the ___ section is different between the two formats. While most firms use the ___method, FASB prefers the ___.

Answer 3

• 1. direct; indirect
• 2. operating
     * 1. actual
     * 2. reconciliation
     * 3. net operating cash flow
• 3. separate schedule
• 4. operating; indirect; direct.

Question 4

Sources & Uses of Cash - CPAexcel flashcards:

• 1. What is the reporting basis of the SCF?
• 2. What is the direct method on the SCF?
• 3. What is the indirect method on the SCF?
• 4. What is the primary purpose of the SCF?
• 5. Is the SCF required for all companies?

Answer 4

• 1. The reporting basis is cash and cash equivalents.
• 2. This method presents actual inflows and outflows from cash operations. Must also disclose the reconciliation of net income to cash flows from operations as a supporting schedule.
• 3. Reconciles net income to cash flows from operating activities.
• 4. The primary purpose is to provide information about the cash receipts and cash payments of an entity to help investors, creditors, and others make economic decisions.
• 5. NO. The SCF is required for companies that report both Balance Sheet and Income Statement for a period.

Question 5

Net Cash Flow from Operating Activities:

• 1. This category reports cash inflows and cash outflows that relate to items used in the determination of _____.
• 2. The major +cash inflow/-outflow items in operating section are:
     * 1. + collection from c_____ (sale of goods/services).
     * 2. - pmt to s____ (purchase of goods/services).
     * 3. + d____ receipt from Investment (-dividend payment is financing).
     * 4. - pmt to e____.
     * 5. ± i____ receipt/payment.
     * 6. - payment for i___ t___.
     * 7. ± sale of / investment in ___ securities.
     * 8. any cash inflow or cash outflow not properly classified as from investing or financing would be included as from operating activities (e.g., collection of a lawsuit settlement).
• 3. The net of the above items constitutes “___,” and can be positive or negative.
• 4. The items that make up the “Cash Flow from Operating Activities” may be presented in the SCF using one of two possible methods:
     * 1. ___ method - presents actual operating cash flows.
     * 2. ___ method - reconciles NI to net operating cash flow (called the reconciliation of net income and net operating cash flow).
     * 3. Recall that the direct method shows both the ___ and the ___ of net income and net operating cash flow. Under direct method, is the reconciliation of net income and net operating cash flow reported on the face of SCF?
     * 4. Recall that the indirect method shows only the _____ of net income and net operating cash flow. Under indirect method, the reconciliation of net income and net operating cash flow is reported on the face of SCF. The indirect method does not report the actual operating cash flow.
• 5. NOTE - interest paid/received and dividends received are all ___ cash flows, but dividends paid is a ____ cash flow. Interest paid/received and dividends received are associated with income stmt items (interest exp, interest rev, dividend rev), but dividends paid is not an income stmt item; rather, it is a direct reduction in RE. Dividends paid are a distribution of RE.

Answer 5

• 1. net income
• 2.
  
  • 1. customers.
  • 2. suppliers.
  • 3. dividend.
  • 4. employees.
  • 5. interest.
  • 6. income taxes.
  • 7. trading.
  • 8. none.
• 3. Net Cash Flow from Operating Activities
• 4.
  
  • 1. direct.
  • 2. indirect.
  • 3. actual operating cash flows; reconciliation; NO, under direct method the reconciliation of net income and net operating cash flow is reported in a separate schedule, not on the face of SCF.
  • 4. reconciliation
• 5. NOTE - operating; financing

Question 6

Net Cash Flow from Investing Activities:

• 1. This category reports cash inflows and cash outflows that relate to p___ and ___of non-current assets.
• 2. The major +cash inflow/-outflow items in investing section are:
     * 1. ± sale of / investment in long-term debt & equity securities (HTM & AFS) of ___ entities.
     * 2. ± sale/purchase of ___ (e.g., patent).
     * 3. + collections of loan ___ (NOTE: + collections of loan interests are operating).
     * 4. - ___ to others.
• 3. The net of the above items constitutes “___,” and can be positive or negative.
• 4. The items that make up the “Cash Flow from Investing Activities” are presented in the same manner, regardless of whether the direct or indirect method is used to present “Cash Flow from Operating Activities.

Answer 6

• 1. purchase; disposal
• 2.
  
  • 1. other.
  • 2. non-current assets.
  • 3. principal.
  • 4. lending.
• 3. Net Cash Flow from Investing Activities.
• 4. none.

Question 7

Net Cash Flow from Financing Activities

• 1. This category reports cash inflows and cash outflows that relate to how the entity is f___.
• 2. The major +cash inflow/-outflow items in financing section are:
     * 1. + sale of ___ stock.
     * 2. - repurchase of ___ stock (treasury stock, it is a contra OE account).
     * 3. + proceeds from ___ (bonds, notes, etc.).
     * 4. - paying back loan ___ to lenders. (NOTE: paying back interest for loan is operating outflow).
     * 5. - pmt of c___ d____.
• 3. The net of the above items constitutes “___,” and can be positive or negative.
• 4. The items that make up the “Cash Flow from Financing Activities” are presented in the same manner, regardless of whether the direct or indirect approach is used to present “Cash Flow from Operating Activities.”

Answer 7

• 1. financed
• 2.
  
  • 1. own.
  • 2. own.
  • 3. borrowing.
  • 4. principal.
  • 5. cash dividends.
• 3. Net Cash Flow from Financing Activities.
• 4. none.

Question 8

Net Effect on Cash of Foreign Currency Translation:

• 1. This category reports the changes in cash caused by changes in ___.
• 2. Companies that have transactions in foreign currencies or convert financial stmts expressed in a foreign currency to stmts expressed in dollars may incur a change in the dollar value of cash simply as a result of exchange rate changes. Example:
     * A foreign subsidiary has a (nondollar) cash balance that does not change during 20X2 of 100,000 Euros. The (spot) exchange rates were:

12/31/X1: 1 Euro = $ .10

12/31/X2: 1 Euro = $ .11

The dollar value of cash for US reporting would be:

12/31/X1 (100,000 Euros X .10) $10,000

12/31/X2 (100,000 Euros X .11) $11,000

Net Increase in Cash $ 1,000

• 3. Changes in cash caused by changes in c___ e___ r___ must be shown in SCF.
     * 1. Foreign currency transactions should be converted to their dollar equivalent using:
     
     • 1. the exchange rate in effect at the date of each transaction; or
     • 2. an average exchange rate for the period, if not materially different from the specific rate in effect on the date of the transaction.
          
          • 2. Cash balances held in foreign currency at period end should be converted to dollars using the spot (current) exchange rate at the date of the Balance Sheet.
          • 3. NOTE - study the subsequent lesson on Foreign Currency Accounting for a complete description of foreign currency transactions and translation.
• 4. The net of the above items constitutes “___.”
• 5. The items that make up the “Net Effect on Cash of Foreign Currency Translation” are presented in the same manner, regardless of whether the direct or indirect approach is used to present “Cash Flow from Operating Activities.”

Answer 8

• 1. currency exchange rates.
• 2. none.
• 3. currency exchange rates.
• 4. Net Effect on Cash of Foreign Currency Translation.
• 5. none.

Question 9

Reconciliation of Change in Cash:

• 1. This category r___ the net change (increase or decrease) in Cash and Equivalents with the difference between beginning & ending Cash and Equivalents balances.
• 2. Formula: net change (increase or decrease) in Cash and Equivalents during X2 + beginning Cash and Equivalents (1/1/X2) = ending Cash and Equivalents (12/31/X2).
     * 1. the beginning and ending Cash and Equivalents balances are given on the (1/1/X2 and 12/31/X2) balance sheet.
     * 2. the net change (increase or decrease) in Cash and Equivalents is the amount resulting from OIFF.

Answer 9

• 1. reconciles
• 2. none.

Question 10

Noncash Investing and Financing Activities:

• 1. This category reports significant investing and financing activities that occur without affecting (going thru) ___.
• 2. Noncash Inv & Fin Activities can be presented:
     * in a s___; or
     * in a f___; or
     * on the ___, usually at the bottom of SCF.
     * NOTE - noncash activities would NOT be in the ___. (I asked Dr. Bain about the difference between the face and body of SCF. Body is everything above noncash activities. Anything below reconciliation of change in cash is additional disclosure, not in the face nor as part of the stmt).
• 3. If an Inv or Fin Activity involves part cash and part noncash, cash portion should be a part of (on the face of) SCF; noncash portion should be disclosed in Noncash Investing and Financing Activities. Example:
     * A $100,000 note payable is settled by a cash payment of $60,000 and issuing stock with a fair market value of $40,000. How to record it in SCF?

Answer 10

• 1. cash
• 2.
  
  • schedule.
  • footnote.
  • face of SCF.
  • NOTE - body of SCF.
• 3. A $100,000 note payable is settled by a cash payment of $60,000 and issuing stock with a fair market value of $40,000. How to record it in SCF?
     * The cash portion ($60,000) would be a Financing Cash Outflow.
     * The noncash portion ($40,000) would be disclosed as a noncash financing activity in the Schedule of Noncash Investing and Financing Activities.

Question 11

Oper, Inv, Fin Activities - CPAexcel flashcards:

• 1. What are financing cash inflow items?
• 2. What is the cash flow category for principal payments on short-term and long-term loans (from financial institutions or dealers) made to acquire plant assets?
• 3. What are investing cash inflow items?
• 4. What is the cash flow category for cash dividends paid?
• 5. Where is the net effect on cash of foreign currency translation reported?
• 6. What are investing cash outflow items?
• 7. What is the cash flow category for principal payments on short-term and long-term loans (from financial institutions) made to acquire inventory for resale?
• 8. What is the cash flow category for loans made to other entities?
• 9. What is the cash flow category for purchases of AFS and HTM securities?
• 10. Where are non-cash investing and financing activities reported?
• 11. What is the cash flow category for principal payments on short-term and long-term loans (from suppliers) made to acquire inventory for resale?
• 12. What are financing cash outflow items?
• 13. What is the cash flow category for purchases of trading securities?
• 14. What is the cash flow category for receipt and payment of property dividend?
• 15. What is the cash flow category for monthly mortgage payment?
• 16. What is the cash flow category for annual capital lease payment?
• 17. What is the cash flow category for collection of loan to customers?

Answer 11

• 1. financing inflows:
     * + sale of own stock.
     * + proceeds from borrowing.
• 2. financing outflow. Principal payment for loans borrowed from financial institutions or dealers are financing outflows, regardless of ST/LT and the use of proceeds.
• 3. investing inflows:
     * + sale of debt & equity securities of other entities.
     * + sale of non-current assets.
     * + collection of loan principal.
• 4. financing outflow.
• 5. It is reported as a separate part in SCF.
• 6. investing outflows:
     * - investment in long-term debt & equity securities of other entities (recall that investment in trading security is operating outflow).
     * - purchase of non-current assets.
     * - lending to others.
• 7. financing outflows. Payment for loans borrowed from financial institutions are financing outflows, regardless of ST/LT and the use of proceeds.
• 8. investing outflow.
• 9. investing outflow. Recall that purchase and sale of trading securities are operating items.
• 10. non-cash inv and fin activities can be presented:
      * in a separate schedule; or
      * in a footnote; or
      * on the face of SCF (at the bottom of the stmt).
      * non-cash activities cannot be presented in the body of SCF.
• 11. operating outflow. Payment for loans borrowed from suppliers are operating inflows, regardless of ST/LT and the use of proceeds.
• 12. financing outflows:
      * repurchase of own stock (treasury stock).
      * retirement of debt (principal only; recall that interest payment of debt is operating outflow).
      * cash divident payment.
• 13. operating outflow.
• 14. non-cash investing and financing activity in SCF. Recall that cash dividend receipt is other revenue in income stmt, and is operating cash inflow; cash dividend payment is a RE account not an income stmt account, and is financing cash outflow.
• 15. operating (interest) and financing (principal).
• 16. operating (interest) and financing (principal).
• 17. investing (principal) and operating (interest).

Question 12

Direct vs. Indirect Methods: similarities and differencies

Direct

In the body of SCF:

• 1. Operating: components are different, subtotal is same. Directly lists cash actually collected & paid.
     * 1. cash collections:
     
     • from customers.
     • for interest.
     • for cash dividends.
     • for operating sources.
       * 2. cash payments:
     • to suppiers (inventory).
     • to employees.
     • for interest.
     • for income taxes.
     • for operating expenses.
       * 3. net of collections & pmts = net operating CF.
• 2. Investing: same.
• 3. Financing: same.
• 4. Effect on Cash of Foreign currency translation: same.
• 5. Reconciliation of change in cash: same.
• NOTE - as between the 2 methods in the body of SCF, only the presentation of CF from operating activities is different.

In the additonal disclosures of SCF (this part is not in the body of SCF. Additional disclosure refers to everything below reconciliation of change in cash):

• 1. non-cash Investing and Financing activities: same.
• 2. reconcile NI to net operating CF: identical to operating section in the Indirect Method.
• 3. pmts for interest is in the body.
• 4. pmts for income tax is in the body.

Answer 12

Direct vs. Indirect Methods: similarities and differencies

Indirect

In the body of SCF:

• 1. Operating: components are different, subtotal is same. Reconciles NI to net operating CF.
     * 1. subtract non-cash revenues out of NI:
     
     • amortization of premium on BP.
     • gain on sale of asset
     • increase in AR
     • increase in inventory
     • increase in prepaid asset
     • decrease in AP
     • decrease in unearned rev.
       * 2. add back non-cash expenses to NI:
     • depreciation exp.
     • amortization of discount on BP.
     • loss on sale of asset
     • decrease in AR
     • decrease in inventory
     • decrease in prepaid asset
     • increase in AP
     • increase in unearned rev.
       * 3. net of additions & deductions = net operating CF.
• 2. Investing: same.
• 3. Financing: same.
• 4. Effect on Cash of Foreign currency translation: same.
• 5. Reconciliation of change in cash: same.
• NOTE - as between the 2 methods in the body of SCF, only the presentation of CF from oper activities is different.

In the additonal disclosures of SCF (this part is not in the body of SCF. Additional disclosure refers to everything below reconciliation of change in cash):

• 1. non-cash Investing and Financing activities: same.
• 2. reconcile NI to net operating CF is in the body, this is identical to the reconciliation in the Direct Method.
• 3. pmts for interest.
• 4. pmts for income tax.

Question 13

Which method of preparing the SCF is preferred by the FASB?

Answer 13

While most companies report cash flow using the Indirect Method, the FASB prefers the Direct Method.

Question 14

Oper CF - CPAexcel flashcards:

• 1. Using the indirect method for reporting CF from operations, should a decrease in inventory be added to or subtracted from accrual based net income?
• 2. Using the indirect method for reporting CF from operations, should a decrease in unearned revenue be added to or subtracted from accrual based net income?
• 3. Using the indirect method for reporting CF from operations, should an increase in AR be added to or subtracted from accrual based net income?
• 4. What is the purpose of the operating section of the SCF under the direct method?
• 5. Using the indirect method for reporting CF from operations, should an increase in AP be added to or subtracted from accrual based net income?
• 6. What is the purpose of the operating section of the statement of cash flows under the indirect method?

Answer 14

• 1. A decrease in inventory should be added to NI to get NCF.
• 2. A decrease in unearned revenue should be subtracted out of NI to get NCF.
• 3. An increase in AR should be subtracted out of NI to get NCF.
• 4. The purpose is to show all cash inflows and outflows for operating activities.
• 5. An increase in AP should be added to NI to get NCF.
• 6. The purpose is to adjust accrual NI to NCF from operating activities.