Understanding Cash Flow Statements Flashcards
________ include cash receipts and payments related to dealing securities or
trading securities
Operating activities
US GAAP classify interest and dividends received from investments as operating
activities, whereas IFRS ____________
allow companies to classify those items as either operating
or investing cash flows.
US GAAP classify interest expense as an operating
activity, even though the principal amount of the debt issued is classified as a financing activity. IFRS _____________.
allow companies to classify interest expense as either an operating
activity or a financing activity.
US GAAP classify dividends paid to stockholders as a
financing activity, whereas IFRS _________.
allow companies to classify dividends paid as either
an operating activity or a financing activity
The _______ shows the specific cash inflows and outflows that result in
reported cash flow from operating activities.
direct method
The __________ shows how cash flow from operations can be obtained from
reported net income as the result of a series of adjustments.
indirect method
IFRS and US GAAP both encourage the use of the _________ but permit either
method. ________ require companies
to present a reconciliation between net income and cash flow (which is equivalent to the indirect method).
direct method, US GAAP
Adjustments to Net Income Using the Indirect Method (4)
1) Non-cash items (e.g. D&A)
2) Non-operating gains or losses
3) Deferred tax liability
4) Changes in working capital
What is FCFF?
Free cash flow to the firm
What is FCFE?
Free cash flow to equity
FCFF =
NI + NCC + Int(1 – Tax rate) – FCInv – WCInv
CFO + Int(1 – Tax rate) – FCInv
FCFE =
CFO – FCInv + Net borrowing
Cash to income
CFO ÷ Operating income
Cash flow per share =
(CFO – Preferred dividends) ÷ Number of
common shares outstanding
Debt coverage =
CFO ÷ Total debt
Interest coverage =
(CFO + Interest paid + Taxes paid) ÷
Interest paid
Reinvestment cash flow ratio =
CFO ÷ Cash paid for long- term assets
Debt payment =
CFO ÷ Cash paid for long- term debt
repayment
Dividend payment =
CFO ÷ Dividends paid
Investing and financing cash flow ratio =
CFO ÷ Cash outflows for investing and
financing activities
The sale of a building for cash would be classified as what type of activity on the cash flow statement? A Operating. B Investing. C Financing
B is correct. Purchases and sales of long- term assets are considered investing
activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock of
another company, or a long- term note receivable), it would have been considered a significant non- cash activity
Under which section of a manufacturing company’s cash flow statement are the
following activities reported?
Item 1: Purchases of securities held for trading
Item 2: Sales of securities considered cash equivalents
A Both items are investing activities.
B Both items are operating activities.
C Only Item 1 is an investing activity
B is correct. The purchase and sale of securities considered cash equivalents
and securities held for trading are considered operating activities even for companies in which this activity is not a primary business activity.
Payment of dividends is a _________ under US GAAP.
Payment of interest and receipt of dividends are included in ________
under US GAAP. Note that IFRS allow companies to include receipt of
interest and dividends as _________ cash flows and to include payment of interest and dividends as _________cash flows.
financing activity
operating cash flows
either operating or investing
either operating or financing
Interest paid is classified as an operating cash flow under:
A US GAAP but may be classified as either operating or investing cash flows
under IFRS.
B IFRS but may be classified as either operating or investing cash flows under
US GAAP.
C US GAAP but may be classified as either operating or financing cash flows
under IFRS.
C
Taxes on income are ________
disclosed under
IFRS and US GAAP.
required to be separately
The disclosure may be in the cash flow statement or
elsewhere.
The ________may be prepared under the indirect method. The other sections are always prepared under the direct method.
operating section
An ______ to net income is made when there is a loss on the retirement of debt, which is a non- operating loss.
addition
