Vol. 3 LM3 Direct and Indirect Methods For Reporting Flashcards
Describe
The direct method
Cash Flow Statements
Shows the specific cash inflows and outflows that result in reported cash flow from operating activities
Cash Flow Statements
Acceptable formats
Reporting cash flow from operating activities
Cash Flow Statements
- Direct method
- Indirect method
Cash Flow Statements
Describe
The indirect method
Cash Flow Statements
Shows how cash flow from operations can be obtained from reported net income as the result of a series of adjustments.
Cash Flow Statements
Primary argument for
The direct method
Cash Flow Statements
- It provides information on the specific sources of operating cash receipts and payments.
- This is in contrast to the indirect method, which shows only the net result of these receipts and payments.
Cash Flow Statements
Consequences of using
The direct method
Cash Flow Statements
Eliminates any impact of accruals and shows only cash receipts and cash payments.
Cash Flow Statements
Primary argument for
The indirect method
Cash Flow Statements
The reason it’s simpler, and faster, is that it relies on net income and movements in the balance sheet rather than looking at direct cash inflows and outflows to calculate payments and expenses
Cash Flow Statements
Fill in the blank
Whenever the ___ is used, US GAAP mandate disclosure of how much cash was paid for interest and income taxes
Cash Flow Statements
indirect method
Cash Flow Statements
Fill in the blank
Whenever the indirect method is used, ____ mandate disclosure of how much cash was paid for interest and income taxes
Cash Flow Statements
US GAAP
Cash Flow Statements
Fill in the blank
Whenever the indirect method is used, US GAAP mandate disclosure of how much cash was paid for _____ and _____ on the cash flow statement.
Cash Flow Statements
interest [and] income taxes
Cash Flow Statements
Concept
These line items are mandated to be disclosed in the cash flow statements using the indirect method, but are normally included using the direct method; therefore, a mandate is not required with direct method
Cash Flow Statements
- interest paid
- income taxes paid
Cash Flow Statements
Fill in the blank
The ___ format of the cash flow statement demonstrates that changes in balance sheet accounts are an important factor in determining cash flows.
Cash Flow Statements
indirect
Cash Flow Statements
Fill in the blank
The indirect format of the cash flow statement demonstrates that changes in ____ accounts are an important factor in determining cash flows
Cash Flow Statements
balance sheet
Cash Flow Statements
purpose
The indirect format of the cash flow statement
Cash Flow Statements
demonstrates that changes in balance sheet accounts are an important factor in determining cash flows.
Cash Flow Statements
purpose
The statement of cash flows
Cash Flow Statements
- shows the change in cash during an accounting period.
- The beginning and ending balances of cash are shown on the company’s balance sheets for the previous and current years.
Cash Flow Statements
complete the statement
Cash Flow Statements show
- the change in cash during an accounting period.
- the beginning and ending balances of cash are shown on the company’s balance sheets for the previous and current years.
Cash Flow Statements
complete the statement
The bottom of the cash flow statement reconciles …
Cash Flow Statements
the beginning cash with ending cash
Cash Flow Statements
complete the statement
The bottom of the cash flow statement reconciles …
Cash Flow Statements
the beginning cash with ending cash
Cash Flow Statements
multiple choice
The current assets and current liabilities section of the balance sheet typically reflect a company’s
a. financing decisions and activities
b. investing decisions and activities
c. operating decisions and activities
Cash Flow Statements
c. operating decisions and activities
Cash Flow Statements
complete the statement
Because a company’s operating activities are reported on an accrual basis in the income statement, any differences between the accrual basis and the cash basis of accounting for operating transaction results in …
Cash Flow Statements
an increase or decrease in some short-term asset or liability on the balance sheet.
Cash Flow Statements
what is the result
If revenue reported using the accrual basis is higher than the cash actually collected
Cash Flow Statements
- an increase in accounts receivables, or;
- it is possible that there is a decrease in an unearned revenue liability account
Cash Flow Statements
complete the statement
If expenses reported using the accrual basis is lower than cash paid, the result will typically be …
Cash Flow Statements
- a decrease in accounts payable or another accrued liability account.
- it is possible that there is an increase in prepaid expenses, inventory, or another asset account.
Cash Flow Statements
Equation
interrelation between balance sheet, income statement, and cash flow statement
accounts receivable [balance sheet] @ t, + ? + ? = accounts receivable [balance sheet] @ t+1
Cash Flow Statements
+ plus: revenues [income statement] @ t+1
- less: cash collected from customers [cash flow statement] @ t+1
Cash Flow Statements
fill in the blank
A company’s investing activities typically relate to the ____ section of the _(financial statement)_.
Cash Flow Statements
long-term assets;
balance sheet
Cash Flow Statements
Concept
cash flows from these activities are identical regardless of whether the direct or indirect method is used
Cash Flow Statements
financing activities
investing activities
Cash Flow Statements
List line items from
cash flow from operating activities
Cash Flow Statements
- cash received from customers
- cash paid to suppliers
- cash paid to employees
- cash paid for other operating expenses
- cash paid for interest
- cash paid for income tax
net cash provided by operating activities
Cash Flow Statements
List line items from
cash flow from investing activities
Cash Flow Statements
- cash received from sale of equipment
- cash paid for purchase of equipment
net cash used for investing activities
Cash Flow Statements
List line items from
cash flow from financing activities
Cash Flow Statements
- cash paid to retire long-term debt
- cash paid to retire common stock
- cash paid for dividends
Cash Flow Statements
Reconciliation of
- Acme’s net income of $2,210
- Acme’s operating cash flow of $2,606
Cash Flow Statements
to perform this reconciliation:
* any non-operating activities
* any non-cash expenses
* changes in operating working capital items
Cash Flow Statements
adjustments to net income using the indirect method
non-cash items
Cash Flow Statements
- depreciation expense of tangible assets
- amortization expense of intangible assets
- depletion expense of natural resources
- amortization of bond discount
Cash Flow Statements
adjustments to net income using the indirect method
non-operating losses
Cash Flow Statements
- loss on sale or write-down of assets
- loss on retirement of debt
- loss on investments accounted for under the equity method
Cash Flow Statements
