Accounting Statements of Cash Flow Test 4

What are contingencies? Examples?

*Material* events that have an *uncertain* outcome. Defined as -- an existing situation involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more *future* events occur or fail to occur. Loss contingency examples include litigation, environmental issues, possible tax assessments, or governmental investigation.

What are four steps in the preparation of the SCF?

1. Determine the cash provided by (or used in) operating activities. 2. Determine the cash provided by (or used in) investing and financing activities. 3. Determine the change (increase or decrease) in cash during the period. 4. Reconcile the change in cash with the beginning and the ending cash balances.

What are the three activities in the SCF?

1. Operating activities involve the cash effects of transactions that enter into determination of net income (e.g., Sales revenues, Operating expenses). Note: The Income Statement is sometimes referred to as the "Statement of Operations." 2. Investing activities include making and collecting loans, purchasing and selling investments (both debt and equity) and property, plant, and equipment. Generally it involves the purchases and sales of Non-current assets. 3. Financing activities generally involve long-term liability and stockholders' equity items and include (a) obtaining resources from owners (selling stock) and providing them with a return on their investment (paying cash dividends) and (b) borrowing money from creditors and repaying the amounts borrowed (e.g., notes payable, bonds payable, etc,).

What is the basic format of the SCF?

Operating Activities, Investing Activities, Financing Activities are the first 3. Followed by Net Increase in Cash, Cash at the beginning of the year then Cash at the end of the Year.

Which method (Direct or Indirect) is most commonly used/heavily favored? Why?

The *Indirect Method* is heavily favored, because it is easier and less costly to prepare and it focuses on the differences between net income and net cash flows from operating activities.

Which method does the FASB prefer - Direct or Indirect?

The FASB prefers the *Direct Method* method but allows the use of either method.

Why is the SCF useful?

The Statement of Cash Flows is useful (Chapter 2) because it provides answers to the following important questions: -Where did cash *come from* during the period? -What was cash *used for* during the period? -What was the *change* in the cash balance during the period?

What information is needed in order to prepare the SCF?

The information needed to prepare the Statement of Cash Flows comes from: a) comparative balance sheets b) the current income statement c) selected transaction data

What are the differences in the Indirect and Direct Methods of presenting Operating Activities?

a. *Indirect Method* - starts with *net income* and makes adjustments from the *accrual* basis of accounting to the *cash* basis. Most *commonly used* format. b. The *Direct* Method - shows the detail of the cash receipts and cash payments. For example, this method will show "Cash Receipts from Customers on Account" and "Cash Payments to Suppliers for Purchases."

What are Significant Accounting Principles/Policies?

- U.S. GAAP recommends disclosure of all *significant accounting principles* and methods that involve selection from among alternatives and/or those that are peculiar to a given industry. E.g., inventory methods, depreciation methods, investments. - This disclosure is usually given in the *first* note or in a separate Summary of Significant Accounting Policies preceding the accompanying notes. - Companies are also required to disclose information about the nature of their operations, the use of estimates in preparing financial statements, certain significant estimates, and risks and uncertainties involved in their operations.

What 3 questions does the SCF provide answers to?

-Where did cash come from during the period? -What was cash used for during the period? -What was the change in the cash balance during the period?

What are the four Techniques of Disclosure?

1. *Parenthetical Explanations* - provides additional information about an item following the item. Adds clarity and completeness, brings additional information into the body of the statement - less likely to be overlooked than a Note. 2. *Notes* - used if additional explanations cannot be shown conveniently as parenthetical explanations. 3. *Cross-Reference* (example: "See Current Liabilities") and contra items 4. *Supporting Schedules* are used to present more detailed information about certain assets or liabilities instead of just a single summary (line) item.

What are Significant Noncash Activities? Where are they typically shown? Examples?

All significant non-cash investing and financing activities must be reported in either a separate schedule at the *bottom of the statement* or in separate *notes*, in order to satisfy the full disclosure principle. Examples include: Issuance of common stock to purchase assets, Conversion of bonds into common stock, Issuance of debt to purchase assets, and Exchanges of long-lived assets

What is an adjunct account? Examples?

In *adjunct accounts,* the amount is *added* to the account it relates to (example: Premium on Bonds Payable).

What is a contra item/account? Examples?

In *contra items*, the amount is *deducted* from the account it relates to (examples: Discount on Bonds Payable, Allowance for Doubtful Accounts, Accumulated Depreciation).

What is the purpose of the SCF?

The primary purpose of a statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise *during* a period.