unit 10 Flashcards
what are the 3 categories of company activity
- operating activities
- investing activities
- financing activities
what are operating activities
- Activities related to opening the core business
- Think “cash relating to everything above EBIT”
what are investing activities
- Business activities related to purchasing/disposing of long-term assets and investments that aren’t cash equivalents or held for trading, AND include activities related to making cash advances loans to other parties
- Think “cash relating to long-term assets and cash transactions that create a liability for another party”
what are examples of investing activities
- Cash used to buy new equipment or software
- Cash used to expand a manufacturing facility
- Cash received from disposing used equipment
- Cash used to lend money to another party
what are examples of operating activities
- Cash received from selling goods/services during a period
- Cash used to pay suppliers and employees
what are financing activities
- Business activities related to raising capital
- Think “cash relating to debt generated by the company and equity transactions”
what are examples of financing activities
- Borrowed cash from the bank
- Cash used to repay a bank loan
- Cash from investor in exchange for company shares
- Cash used to pay dividends
- Cash used to buy back shares
what kind of activity are cash flows from interest paid and received (included in net income under EBIT as non-operating income) considered
operating activity
what kind of activity are cash flows from income taxes considered
operating activities
- Interest paid & received, and income taxes are already a part of net income (so included in the first line of operating activities)
- If EBIT is displayed as the first line of operating activities, these are added/subtracted to EBIT
what kind of activity are cash flows from dividends paid (from retained earnings) considered
financing activities (even though dividends are also displayed on the net income)
what is the cash flow statement formula
Cash Flow From/Used in Operating Activities + Net Cash Flow From/Used in Investing Activities + Net Cash Flow From/Used in Financing Activities = Net Increase (or Decrease) in Cash for the Period + Cash Balance at Beginning of Period = Cash Balance at End of Period
cash balance at end of period = cash balance on balance sheet
what information is needed to prepare an indirect cash flow statement
- Income statement for the period (to get information about the net income, depreciation, etc.) - First line of operating activities can be net income or EBIT & add the other stuff into EBIT
- Statement of retained earnings (to obtain what dividends were actually paid)
- Balance sheet for the most recent and prior period (to adjust net income for non-cash working capital transactions and understand investing and financing activities) - Looking at changes in current assets and liabilities
- Other financial information, as required
what are the 3 main categories of adjustments made to net income
- non cash items
- changes in current assets (besides cash)
- changes in current liabilities
how to make an cash flow statement using the indirect method
- Start with net income
- Remove transactions that are non-cash
- Add transactions that are cash but not included in net income
what are common non-cash items
depreciation, gain/loss on sale of asset
- look at latest income statement for this information
what is the adjustment gains/losses on long-term asset disposal is made to net income
- Add losses on long-term asset disposals to net income
- Remove gains on long-term asset disposals from net income
what is the adjustment depreciation is made to net income
add depreciation/amortization to net income
what are the adjustments changes in current assets are made to net income
first use the balance sheet and calculate the changes in current assets
take the balance sheet from the prior period and the balance sheet from the most recent period
if the changes are increases, they need to be removed from net income
if the changes are decreases, they are added to net income
what are the adjustments changes in current liabilities are made to net income
first use the balance sheet and calculate the changes in current liabilities
take the balance sheet from the prior period and the balance sheet from the most recent period
if the changes are increases, they need to be added to net income
if the changes are decreases, they are removed net income
what adjustments are made for investing activities
cash inflows are added
cash outflows are removed
use the balance sheet to look at changes of net book value of long term assets
what additional information is needed for calculating cash flows of financing activities
- amounts of new loans
- repayments of loans or bonds
- amount of shares purchased
what adjustments are made for investing activities
cash inflows are added
cash outflows are removed
use the balance sheet to look at changes:
- of current portion of long-term debt
- in long-term liabilities
- of owner’s equity
also need to look at statement of retained earnings to determine if and how much dividends were actually paid
what adjustments are made to the bank side for bank reconciliation
when transactions have been recorded in a company’s books but arent in the bank statement yet
- deposits in transit
- outstanding cheques
what are deposits in transit and what is done to adjust the bank side
- Cash deposits have been record in the general ledger but aren’t processed by the bank yet
- The company has deposited cash at the bank & recorded it in their accounting system, but the bank hasn’t processed the transaction yet so it hasn’t shown in the bank statement
money was collected, but wasn’t in the bank statement = add to bank side
- The deposit amounts are added to the bank side
what are outstanding cheques and what is done to adjust the bank side
- Cheques issued by the company & have been recorded in the books, but have not yet been cleared by the bank
- The company made the payment & recorded the transaction, but the bank didn’t process it yet
cheques is paying someone money, taking money out, so deducted from bank side
- The amount for cheques outstanding is deducted from the bank side
what adjustments are made to the book side for bank reconciliation
- When transactions have been processed by the bank & is included in the bank statement, but hasn’t been recorded in the books
- To reconcile the book side, start with the ending cash balance on the cash flow statement (book balance)
what needs to be done after doing bank reconciliation for the book side
- Journal entries are needed for these reconciliations
adding cash = debit cash
removing cash = credit cash
- If amounts are added to the book side, cash is debited
- If amounts are deducted from the book side, cash is credited
what are examples of adjustments that need to be done on the book side
- bank collections
- electronic funds transfers
- service charges
- interest income
what are bank collections and what is done to adjust the book side
- When customers paid for goods/services & the bank recorded the transactions, but the company hasn’t yet
money was given to the company = added
- Bank collections amounts are added to the book side
what are ETFs and what is done to adjust the book side
- Bank has processed payments to/from the company, but the company hasn’t recorded them yet
if someone e-transfered you money, you got money = added
if you gave money, you lost money = deducted
- EFT receipts are added to the book side
- EFT payments are deducted from the book side
what are service charges and what is done to adjust the book side
- Bank fees that are charged to the company and haven’t been recorded by the company yet
bank charged you for services = lose money = deducted
- Service charges are deducted from the book side
what are interest income and what is done to adjust the book side
- Interest earned when money is placed in saving accounts
- Hasn’t been recorded in the company’s books yet
got money from your savings account = added
- Interest income amounts are added to the book side
NOT the same as interest earned from notes receivable or loans given out to others
