Topic 14: The cash flow statement

Question 1

What informations provides the cash flow statement?

Answer 1

• Shows where cash came from (receipts) and how cash was spent (payments)
• Reports why cash increased or decreased during the period
• Explains why net income as reported on the income statement does not equal the change in the cash balance: communicating link between income statement and balance sheet.

Question 2

What is more important? male profit or have cash flows positive?

Answer 2

• Company’s profitability and its ability to generate positive cash flows are both important
• The expected magnitude of future cash flows is important in valuing corporate securities and in determining the company’s ability to meet its obligatinos (short-term = liquidity, long-term = solvency)
• Cash flow in any given period is not however a complete measure of performance for that perid because a company may be obligated to make future cash payments as a result of a transaction that generates positive cash flow in the current period.

Question 3

Use of cash flow information?

Answer 3

Predict future cash flows

Evaluate management decisions

Predict ability to pay debts and dividends

Question 4

the three basic types of cash-flow activities

Answer 4

• Operating: Cash inflows and outflows form operations
• Investing: Cash inflows and outflows from non-current assets.
• Financing: Cash inflows and outflows from non-current liabilities and equity.

Question 5

Characteristic and effect of Operating, Investing and Financing activites

Answer 5

-Operating activities: reflect the day-to-day operations
=>Affects net income and the income statement
=>Affects currents assets and current liablilities on the balance sheet

-Investing activities: Increase and decrease long-term assets: Computers, software, land building and equipment

Includes: purchase/sale of short-term and long-term investments in the equity and debts issued by other companies

Excludes: investments in the equity and debt securities.

-Financing activities: increase/decrease long-term liabilities and equity

Includes: issuing stock, paying dividends, buying/selling treasury stock.

Excludes: Account/Trade payable (operating activity)

Question 6

Describe the 2 format of the cash-flow statement

Answer 6

• Indirect Method: starts with Net income; adjusts it to net cash provided by operating activities
• Direct Method: Restates income statement in terms of cash. Shows cash receipts and cash payments from operating activities.

Question 7

What to determine when preparing the cash-flow statement?

Answer 7

i) Cash provided by or used in operating activities
ii) Cash provided by or used in investing and financing activities
iii) Determine the change (increase or decrease) in cash during the period.
iv) Reconcile the change in cash with the beginning and the ending cash balances.

Question 8

Step for the indirect method

Answer 8

① Lay out the statement format
② Compute the change in cash from the balance sheet. The change in cash is the “key reconciling figure” for the statement of cash flows.
③ Take from the income statement Net Income, depreciation, and any gains or losses.
④ Complete the statement of cash flows using data from the income statement and the balance sheet.

Question 9

State and explain the 7 rows of the indirect method (row 0= net income)

Answer 9

0. NET INCOME
   + 1. Depreciation , depletion and amortization expenses
   => depreciation is noncash expense. Therefore, to go from net income to cash flows, we must remove depreciation by adding it back to net income.
   + 2. Losses on the Sales of long-term assets
   - 3. Gains on the Sales of long-term assets.
   => the gain or loss must be removed from net income on the statement of cash flows so the total csh from the sale of the asset can be shown in the investing section.
   - 4. Increases in current assets other than cash
   + 5. Decreases in current assets other than cash
   + 6. Increases in current liability
   - 7. Decreases in current liability

Question 10

What do we find in Investing activities and what does it affect?

Answer 10

Affects long-term assets

Involves Sales and Acquisitions of long-term assets

Question 11

What do we find in Financing activities and what does it affect

Answer 11

Affects the liability and ownes’ equity accounts, such as:

• Issuances of and payments on long-term notes payable
• Issusances of stock and purchases of treasury stock
• Payments of dividends

Question 12

Main drivers for analysing sources and uses of cash

Answer 12

① Evaluate where the major sources and uses of cash flow are between operating, investing and financing activities
② Evaluate the primary determinants of operating cash flow.
③ Evaluate the primary determinants of investing cash flow
④ Evaluate the primary determinants of financing cash flow