CFA_L1_Assignment_99_Lesson 2: The Cash Flow Statement: Linkages and Preparation

_____ is calculated from changes in the equity and noncurrent debt sections of the balance sheet.

1. CFF

_____ is calculated from changes in asset balances under the noncurrent assets section of the balance sheet.

1. CFI

in your own words how do we do indirect method?

1. adjust the income statement items 2. moves the adjusted income statement items to work them into working capital item accounts - add sources of cash and subtracting uses of cash

Changes in asset balances and cash are __________ related.

1. negatively

Changes in liability balances and cash are ________ related.

1. positively

If inventory levels have decreased over the year, less of the firm's cash is tied up in inventory. This is a _____ of cash for the firm.

1. source

If the total amount due to the firm's creditors has increased over the year, it implies that the firm has borrowed more money. This represents a __________ of cash to the firm.

1. source

Increases in current liabilities are ________ of cash, while decreases in current liabilities are _________ of cash.

1. sources 2. uses

steps to direct method are:

1. start with sales on the income statement. Go through each income statement account and adjust it for changes in related working capital accounts on the balance sheet. This serves to remove the effects of the timing difference between the recognition of revenues and expenses and the actual receipt or payment of cash. 2. Determine whether changes in these working capital accounts indicate a source or use of cash. Make sure you put the right sign in front of the income statement item. Sales are an inflow item so they have a positive effect on cash flow, while COGS, wages, taxes, and interest expense are all outflow items that have negative effects on cash flow. Step 3: Ignore all nonoperating items (e.g., gain/loss on sale of plant and equipment) and noncash charges (e.g., depreciation and amortization).

If the amount payable to creditors has fallen over the year, some creditors have been paid back, which is a ______ of cash for the firm.

1. use

Let's consider an asset account, inventory. If inventory levels have increased from the previous year, more liquidity of the firm is tied up in inventories. This is a ______ of cash for the firm.

1. use

Increases in current assets are ______ of cash and decreases in current assets are _______ of cash.

1. uses 2. sources

Cash flow from operating activities = ...

Cash received from customers - Cash paid to suppliers - Cash paid for other operating expenses - Cash paid for taxes

Purchases =

Cost of goods sold - Decrease in inventory

using GAAP, CFF =...

Issuance of common stock - Dividends paid

CFO =

Net income + Depreciation expense

Cash paid to suppliers =

Purchases - Increase in accounts payable

Cash received from customers =

Revenue + Decrease in accounts receivable

CFI =

Sale of available‐for‐sale securities - Investment in new machinery

what are the 3 steps of the indirect method yo:

Step 1: Start with net income. Go up the income statement and remove the effects of all noncash expenses and gains from net income. For example, the negative effect of depreciation is removed from net income by adding depreciation back to net income. Cash-based net income will be higher than accrual-based net income by the amount of noncash expenses. Step 2: Remove the effects of all nonoperating activities from net income. For example, the positive effect of a gain on sale of fixed assets on net income is removed by subtracting the gain from net income. Step 3: Make adjustments for changes in all working capital accounts. Add all sources of cash (increases in current liabilities and declines in current assets) and subtract all uses of cash (decreases in current liabilities and increases in current assets).

what is the indirect method?

The indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.

what is the direct method?

Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers.

direct method is calculated how in your own words

adjust a bunch of income statement items with their working capital related items adjustments then add them together

total sales adjusted for working capital changes is called...

cash collected from customers

interest expense adjusted for related working capital accounts is called...

cash interest paid

COGS adjusted for changes in related working capital is called

cash paid to suppliers

salaries and wages adjusted for related working capital accounts is called...

cash salaries and wages

income tax expense adjusted for working capital related items is called...

cash taxes paid...

(year end cash balance) - (beginning of year cash balance) =

change in cash

The sum of cash flow from operating, investing, and financing activities equals the ...

change in cash over the year.

whats ur gangster explanation to this shit>

go thru all items on the income statement and remove the ones with no effect on cash, add a plus or minus sign to other things due to how they affect cash accounts. then make adjustments for changes in all working capital accounts. add all sources of cash and subtract all uses of cash such as liabilities and shit

LOS 27e: Describe how the cash flow statement is linked to the income statement and the balance sheet.

how is the cash flow statement linked to the income statement and the balance sheet, yo

LOS 27g: Convert cash flows from the indirect to direct method.

how would we convert cash flows from the indirect to the direct method, yo

depreciation is adjusted how?

its non cash so its ignored all together

other operating expenses adjusted for changes in working capital accounts is called...

other operating expenses (cash)

gain on sale of equipment is adjusted how?

relates to the sale of a long-lived asset. The proceeds from this transaction are classified under investing activities and ignored in the calculation of CFO.

LOS 27f: Describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data.

what are the steps in the preparation of direct and indirect cash flow statements, and how can cash flows be computed using income statement and balance sheet shit