Unit 16 - Statement of Cash Flows - Classifications Flashcards
Statement of cash flows
What is the purpose of a statement of cash flows?
The primary purpose is to provide information about the cash receipts and cash payments of a business entity during a period. This information helps investors, creditors, and other users to assess the entity’s ability to generate net cash inflows, meet its obligations, pay dividends, and secure external financing.
It also helps assess reasons for the differences between net income and net cash flow and the effects of cash and noncash financing and investing activities.
Statement of cash flows
How should interest payments to lenders & other creditors should be classified as cash outflows?
Operating activities
Cash receipts from sales of goods and services, interest on loans, and dividends on equity securities are from operating activities. Cash payments to (1) suppliers for inventory; (2) employees for services; (3) other suppliers for other goods and services; (4) governments for taxes, duties, fines, and fees; and (5) lenders for interest are also from operating activities.
Statement of cash flows
In a statement of CF, payments to acquire debt instruments of other entities (other than cash equivalents & debt instruments acquired specifically for resale) should be classified as cash outflows for…?
Investing activities include the lending of money; the collection of those loans; and the acquisition, sale, or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specifically for resale and (2) property, plant, equipment, and other productive assets.
Statement of cash flows
Dividend payment is considered
Receipt of dividend payment is considered
Issuance of stock is considered
Dividend payments are financing activities
Receipt of dividend payments are operating activities.
Issuance of stock is financing activity.
Direct & Indirect Methods of Presenting Operating Cash flows
How are the changes in unamortized bond discount reported in CF stmt.?
As an addition to net income in the operating activities section.
The amortization of bond discount (debit interest expense, credit discount) is a noncash item that reduces net income.
In a statement of cash flows prepared using the indirect method, net operating cash flow is determined by adjusting net income.
The indirect method begins with net income and then removes the effects of (1) deferrals of past operating cash receipts and payments, (2) accruals of estimated future operating cash receipts and payments, and (3) net income items not affecting operating cash flows.
Thus, bond discount amortization should be added to net income in the reconciliation to net operating cash flow.
Cash flow
How should interest paid to bondholders be reported in CF stmt.?
Operating section, as a use or outflow of cash.
Payment of interest on debt is considered an operating activity, although repayment of debt principal is a financing activity.
How should the amortization of bond discount on long-term debt be reported in a statement of cash flows prepared using the indirect method?
In operating activities as an addition to income.
Amortization of bond discount on long-term debt is presented in the operating activities section as an addition to net income. It is a noncash expense.
Cash flow - Indirect method
What should be reported as supplemental disclosures in Statement of CF’s using the indirect method?
If an entity uses the indirect method to present its statement of cash flows, the interest paid (excluding amounts capitalized) and income taxes paid must be disclosed.
