Vol. 3 LM3 Direct and Indirect Methods For Reporting Flashcards

1
Q

Describe

The direct method

Cash Flow Statements

A

Shows the specific cash inflows and outflows that result in reported cash flow from operating activities

Cash Flow Statements

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2
Q

Acceptable formats

Reporting cash flow from operating activities

Cash Flow Statements

A
  • Direct method
  • Indirect method

Cash Flow Statements

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3
Q

Describe

The indirect method

Cash Flow Statements

A

Shows how cash flow from operations can be obtained from reported net income as the result of a series of adjustments.

Cash Flow Statements

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4
Q

Primary argument for

The direct method

Cash Flow Statements

A
  • 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

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5
Q

Consequences of using

The direct method

Cash Flow Statements

A

Eliminates any impact of accruals and shows only cash receipts and cash payments.

Cash Flow Statements

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6
Q

Primary argument for

The indirect method

Cash Flow Statements

A

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

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7
Q

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

A

indirect method

Cash Flow Statements

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8
Q

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

A

US GAAP

Cash Flow Statements

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9
Q

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

A

interest [and] income taxes

Cash Flow Statements

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10
Q

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

A
  • interest paid
  • income taxes paid

Cash Flow Statements

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11
Q

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

A

indirect

Cash Flow Statements

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12
Q

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

A

balance sheet

Cash Flow Statements

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13
Q

purpose

The indirect format of the cash flow statement

Cash Flow Statements

A

demonstrates that changes in balance sheet accounts are an important factor in determining cash flows.

Cash Flow Statements

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14
Q

purpose

The statement of cash flows

Cash Flow Statements

A
  • 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

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15
Q

complete the statement

Cash Flow Statements show

A
  • 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

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16
Q

complete the statement

The bottom of the cash flow statement reconciles …

Cash Flow Statements

A

the beginning cash with ending cash

Cash Flow Statements

17
Q

complete the statement

The bottom of the cash flow statement reconciles …

Cash Flow Statements

A

the beginning cash with ending cash

Cash Flow Statements

18
Q

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

A

c. operating decisions and activities

Cash Flow Statements

19
Q

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

A

an increase or decrease in some short-term asset or liability on the balance sheet.

Cash Flow Statements

20
Q

what is the result

If revenue reported using the accrual basis is higher than the cash actually collected

Cash Flow Statements

A
  • an increase in accounts receivables, or;
  • it is possible that there is a decrease in an unearned revenue liability account

Cash Flow Statements

21
Q

complete the statement

If expenses reported using the accrual basis is lower than cash paid, the result will typically be …

Cash Flow Statements

A
  • 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

22
Q

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

A

+ plus: revenues [income statement] @ t+1
- less: cash collected from customers [cash flow statement] @ t+1

Cash Flow Statements

23
Q

fill in the blank

A company’s investing activities typically relate to the ____ section of the _(financial statement)_.

Cash Flow Statements

A

long-term assets;
balance sheet

Cash Flow Statements

24
Q

Concept

cash flows from these activities are identical regardless of whether the direct or indirect method is used

Cash Flow Statements

A

financing activities
investing activities

Cash Flow Statements

25
# 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
26
# 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
27
# 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
28
# 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
29
# 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
30
# 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