Statement of Cash Flows exam with 100% correct answers already graded A+

What is the purpose of the statement of cash flows? It is a required part of a full set of F/S that provides info about the sources of cash/cash equivalents and the uses of cash/cash equivalents. It reconciles cash/cash equivalents from the beginning Balance sheet, to the ending Balance sheet. It also presents info about material noncash events. Cash flow per share is not presented under GAAP. It is not prohibited under IFRS however. What are the three sections of a statement of cash flows, and what cash flows are included for each section? Operating Activities - cash flows from income statement transactions and operating assets and liabilities (most but not necessarily all "current" assets and liabilities. Investing Activities - cash flows from non-current assets (e.g., PP&E) Financing Activities - cash flows from a company's own debt and equity. How are bank overdrafts handled under GAAP? They are excluded from cash and are instead a financing cash flow. Name the two methods of presentation of cash flows from operating activities. Which method is preferred? 1. Direct method 2. Indirect method Direct method is preferred (encouraged) under both GAAP and IFRS. How is net cash flows from operating activities (CFO) calculated using indirect method? Net Income + Noncash expenses/losses - Noncash income/gains + Increases in oper. liabilities (or decreases in oper. assets) - Increases in oper. assets (or decreases in oper. liabilities) ____________________________________________________________________________________ = CFO Define operating assets and operating liabilities: Operating Asset (OA) = All current assets except cash/cash equivalents. Operating Liability (OL) = All accruals except interest bearing liabilities (e.g., non OL = note, debt, bond, debenture, LOC, negotiated, financing). Examples of OL = accounts payable, salaries payable, taxes payable, etc. Decribe the Direct Method: Ignore any mention of Net Income, depreciation, gains/losses (those are indirect relevant items). A reconciliation of net income to net cash provided by operations must be provided as a supplemental schedule per GAAP (Not required under IFRS). Major classes of cash receipts / disbursements are presented in their gross amounts and totaled to arrive at "net cash flow provided by (used in) operating activities". Name the most common, major classes of cash receipts and disbursements included in cash flows from operating activities using the "direct" method: 1. Cash received from customers 2. Cash paid to suppliers / employees 3. Interest received / paid (GAAP) 4. Dividends received (GAAP) 5. Purchases / sales of trading securities (if appropriate based on the nature and reason the securities were acquired) 6. Income taxes paid How to calculate "Cash received from customers" (direct method)? Revenues - Increase in receivables (no cash outflow) + Decrease in receivables (cash received) + Increase in unearned revenue (cash received) - Decrease in unearned revenue (no cash outflow) _______________________________________________ Cash received from customers (net inflow) What is formula for cash paid to suppliers? Cost of Goods Sold + Increase in inventory (buying, outflow) - Decrease in inventory (selling, inflow) - Increase in accounts payable (borrowing, inflow) + Decrease in accounts payable (repayment, outflow) _________________________________________________________________________ = Cash paid to suppliers (Net outflow) What is formula for cash paid to employees? Salaries and wages expense - Increase in wages payable + Decrease in wages payable _____________________________________________ = Cash paid to employees (Net Outflow) How is interest paid on debt and principal paid on debt treated in the statement of cash flows? Interest paid is an operating outflow Principal paid is a financing outflow Describe the "Indirect Method": Ignore cash received from customers, cash paid to vendors, etc. (only relevant to direct method). Net income is adjusted to arrive at net cash flows from operating activities. Supplemental disclosure of cash paid for interest and income taxes is required. Peter's formula for determination of cash flow from operations (CFO) using the Indirect Method: Net Income + Depreciation / Amortization + Losses - Gains/Amort. Bond Premium - Equity earnings - (+/-) change in OA + (+/-) change in OL _____________________________________________ =CFO Describe Investing Activities: Cash flows from the purchase or sale of non-current assets: 1. Making loans to other entities (cash outflow) 2. Purchase or disposing of non-current trading securities, available-for-sale securities, and HTM investment securities of other entities (debt or equity) 3. Acquiring or disposing of property, plant, and equipment. 4. Acquiring another entity under the acquisition method using cash (cash outflow). Describe Financing Activities: Cash flows from non-current liabilities (creditor-oriented) and equity (owner-oriented) activities. 1. Obtaining resources from owners such as issuing stock 2. Paying owners a cash dividend (not just declaring, and not stock/property) or repurchasing stock. 3. Issuing bonds, notes, and other borrowings. 4. Payments of principal (not interest) on amounts borrowed. Describe Noncash Investing and Financing Activities relevant to statement of CF Material noncash financing and investing activities must be described separately in a supplement disclosure. Examples: 1. Purchase of fixed assets by issuance of stock. 2. Conversion of bonds to equity, which generally doesn't involve cash. 3. Acquiring assets through incurrence of a capital lease obligation. 4. Exchange of one noncash asset for another noncash asset. IFRS allows more flexibility than GAAP in classifiying certain cash flows. Describe the differences between IFRS and GAAP. Cash dividends received on equity securities would be presented in which section on the statement of CF? Cash flows from Operating Activities - GAAP IFRS is more flexible and allows reporting of dividends received as either investing activities OR operating activities.