CMA 1-3 Statement of Cash Flows and Financial Statement Articulation
Name the supplemental disclosures that are required for the statement of cash flows.
* Cash paid for interest (when the indirect method is used) * Cash paid for taxes (when the indirect method is used) * Significant non-cash investing and financing transactions. One example of this would be the issuance of bonds for the purchase of a building.
Ace prepares its statement of cash flows using the direct method. In which section of the statement should Ace report the dividends received from an investment? Financing activities. Operating activities. Investing activities. Supplemental disclosures.
Financing activities. -- This answer is incorrect. Dividends received are not related to financing activities on the statement of cash flows. Operating activities. -- This answer is correct because dividends received are reported in the operating section of the statement of cash flows. Investing activities. -- This answer is incorrect. Dividends received are not reported in the investing activities on the statement of cash flows. Supplemental disclosures. -- This answer is incorrect. Dividends received will appear within one of the other sections on the statement of cash flows.
cash flow investing
The cash flows associated with longer term investing activities of the organization. Generally, this would include cash outflows for purchases of property and equipment and other investments, and cash inflows from the sale of these same items. The non-operating assets, usually long-term assets, of the organization should be analyzed to support the preparation of the investing section.
when indirect method is used for cash flow
supplemental information must be used to show cash paid for interest and cash paid for taxes
Reed Co.'s year 2 statement of cash flows reported cash provided from operating activities of $400,000. For year 2, depreciation of equipment was $190,000, amortization of patent was $5,000, and dividends paid on common stock were $100,000. If this is the only information relevant to cash flows, what amount was reported as net income in Reed's year 2 statement of cash flows? $105,000 $305,000 $595,000 $205,000
what amount was reported as net income in Reed's year 2 statement of cash flows? $105,000 -- This answer is incorrect. This calculation inaccurately includes the dividends paid on common stock in the calculation of net income. It was incorrectly calculated as operating cash flow of $400,000 less equipment depreciation of $190,000 less dividends paid on common stock of $100,000 less the amortization of the patent of $5,000. This totals to $105,000 ($400,000 − $190,000 − $100,000 − $5,000). $305,000 -- This answer is incorrect. This calculation inaccurately includes the dividends paid on common stock in the calculation of net income, and adds it back in. It was incorrectly calculated as operating cash flow of $400,000 less equipment depreciation of $190,000 plus dividends paid on common stock of $100,000 less the amortization of the patent of $5,000. This totals to $305,000 ($400,000 − $190,000 + $100,000 − $5,000). $595,000 -- This answer is incorrect. This calculation inaccurately adds the depreciation and amortization in, rather than subtracting them. It was incorrectly calculated as operating cash flow of $400,000 plus equipment depreciation of $190,000 plus the amortization of the patent of $5,000. This totals to $595,000 ($400,000 + $190,000 + $5,000). $205,000 -- This answer is correct and is calculated by taking cash flows from operations of $400,000 and deducting the depreciation of equipment and amortization of the patent, which are non-cash expenses that would reduce income, but not affect cash flow: ($400,000 − $190,000 − $5,000 = $205,000).
What are some ways that the financial statements articulate if they are properly prepared?
* Net income and other comprehensive income from the income statement appear in the statement of changes in equity. * Equity balances from the statement of changes in equity appear in the equity section of the balance sheet. * Net income, non-cash gains and losses, beginning and ending cash, and changes in the the balances of the operating assets and liabilities flow to the statement of cash flows when using the indirect method.
statement of changes in equity
Common stock + APIC + Treasury Stock (contra equity) + R/E + AOCI (add'l other comprehensive income)
Why is it important for a financial analyst to scrutinize the statement of cash flows' footnotes? Footnotes provide significant information about noncash investing and financing activities, such as the issuing of stock for fixed assets. Footnotes provide vital information about a company's liquidity position, trend in revenue from different demographic regions, and changes in capital structure. Footnotes detail the executive compensation details and shareholders' voting procedures and information. Footnotes provide significant information about mergers and acquisitions a company is targeting in the current year.
Footnotes provide significant information about noncash investing and financing activities, such as the issuing of stock for fixed assets. --This answer is correct. The statement of cash flows requires footnote disclosure of any significant noncash investing and financing activities, such as the issuing of stock for fixed assets or the conversion of debt to equity. Footnotes provide vital information about a company's liquidity position, trend in revenue from different demographic regions, and changes in capital structure. --This answer is incorrect. These items would most likely not be included in the notes to the statement of cash flows. Footnotes detail the executive compensation details and shareholders' voting procedures and information. -- This answer is incorrect. This information would not be provided in the notes to the statement of cash flows. Footnotes provide significant information about mergers and acquisitions a company is targeting in the current year. -- This answer is incorrect. This information would typically not be included in the notes to the statement of cash flows.
Music Makers, a record label company, paid dividends of $560,000 to its shareholders, reducing its dividends payable to $350,000. The balance in dividends payable at the beginning of the year was $230,000. The balance in retained earnings at the beginning of the year was $1,990,000 and is now $2,430,000. If only cash dividends were declared during the year, what was Music Makers' net income for the year? There is not enough information. $1,000,000 $440,000 $1,120,000
If only cash dividends were declared during the year, what was Music Makers' net income for the year? There is not enough information. -- There is enough information given in the problem to determine dividends declared by using the dividend payable information together with the dividends paid. Once the dividends declared is known, the amount of net income can be found by combining dividends declared with the change in retained earnings. $1,000,000 -- This answer represents dividends paid plus the change in retained earnings; however, the amount of dividends paid does not equal the amount of dividends issued. The amount of dividends issued must be calculated by accounting for the change in the dividends payable account. $440,000 -- This answer represents the change in retained earnings for the year; however, it does not consider how dividends declared affects retained earnings. $1,120,000 -- This is correct. First, calculate the balance in retained earnings before the dividends were paid of $910,000 ($350,000 + $560,000). Then, calculate the amount of dividends issued this year of $680,000 ($910,000 − $230,000). Next, calculate net income of $1,120,000 ($2,430,000 + $680,000 − $1,990,000).
In its cash flow statement for the current year, Ness Co. reported cash paid for interest of $70,000. Ness did not capitalize any interest during the current year. Changes occurred in several balance sheet accounts as follows: Accrued interest payable 17,000 decrease Prepaid interest 23,000 decrease In its income statement for the current year, what amount would Ness have reported as interest expense? $ 76,000 $ 30,000 $ 64,000 $110,000
In its income statement for the current year, what amount would Ness have reported as interest expense? $ 76,000 -- This answer is correct. The amount is calculated as cash paid for interest minus the decrease in accrued interest payable and plus the amount of decrease in prepaid interest, or $76,000 = $70,000 − $17,000 + $23,000. $ 30,000 -- This answer is incorrect. This answer incorrectly takes the cash paid for interest ($70,000) and subtracts the decrease in the accrued interest payable ($17,000) and the decrease in the prepaid interest ($23,000) for a total of $30,000. $ 64,000 -- This answer is incorrect. This answer incorrectly takes the cash paid for interest, then subtracts the decrease in prepaid interest and adds in the accrued interest payable ($70,000 − $23,000 + $17,000 = $64,000). $110,000 -- This answer is incorrect. This answer incorrectly takes the cash paid for interest ($70,000) and adds the decrease in the accrued interest payable ($17,000) and the decrease in the prepaid interest ($23,000) for a total of $110,000.
cash flow methods
Indirect Method: The most common method used. It begins with net income then reconciles to operating cash flow by adjusting non-cash expenses and changes in operating assets and liabilities from accrual accounting to cash basis accounting. Direct Method: Shows actual gross cash inflows from their sources derived and cash outflows for each purpose. The FASB prefers this method, but it is rarely used because the organization is still required to reconcile net income to cash flows from operations.
cash flow financing
The cash flows associated with the financing strategy of the company. Generally, this would include cash inflows from borrowings (bank or bond), cash inflows from the sale of stock (common or preferred), cash outflows from the principal repayments on debt, cash outflows from purchasing treasury stock, and cash payment of dividends to owners. The non-operating liabilities, usually long-term liabilities, and equity accounts of the organization should be analyzed to support the preparation of the financing section. The statement of changes in equity is particularly helpful in preparing part of this section as it relates to the equity accounts.
what is cash flow useful for
The statement of cash flows is useful for understanding cash resources and needs of the organization because it reconciles the overall changes to the organization's cash position over the course of the period presented. Cash flows are broken down into three categories: operating, investing, and financing. Operating cash flows are from the central operations of the organization and can be presented using the indirect method or the direct method. Investing cash flows are related to longer term investing activities. Financing cash flows are associated with the financing strategy of the organization. You should also be familiar with the accounts that connect the financial statements together.
Describe the purpose of the statement of cash flows.
The statement of cash flows reconciles the overall change to the organization's cash position over the course of the period presented, making it useful for understanding cash resources and needs of the organization. On the cash flow statement, the change in cash is broken down into three categories of cash flows, the combination of which equal the total change in cash for the period presented.
Baker Co. began its operations during the current year. The following is Baker's balance sheet at December 31: The diagram shows the assets and liabilities and stockholders' equity. Assets Cash $192,000 A/R 82,000 Total Assets $274,000 L & SE $24,000 A/P $24,000 C/S $200,000 R/E $50,000 Total L & SE $274,000 Baker's net income for the current year was $78,000 and dividends of $28,000 were declared and paid. Common stock was issued for $200,000. What amount should Baker report as cash provided by operating activities in its statement of cash flows for the current year? $ 50,000 $192,000 $ 20,000 $250,000
What amount should Baker report as cash provided by operating activities in its statement of cash flows for the current year? $ 50,000 -- This answer is incorrect. This is the ending amount of retained earnings. However, not all of the increase in retained earnings is due to operating activities, nor is it all cash related. $192,000 -- This answer is incorrect. This is ending cash balance. However, the entire cash balance is not the operating cash flow for this year. The total change in cash must be separated into operating, investing, and financing cash flows. $ 20,000 -- This answer is correct. Because Baker is in its first year of operations, the beginning balances of all accounts are zero. Cash flow from operating activities is calculated as net income minus the increase in accounts receivable, plus the increase in accounts payable ($78,000 − $82,000 + $24,000) = increase in cash from operating activities of $20,000. Cash flows from common stock and dividends are included in financing activities. $250,000 -- This answer is incorrect. This is the sum of the retained earnings and the common stock ($50,000 + $200,000). This is not the cash flow from operating activities.
Classify each of the following items as either operating cash flow, investing cash flow, financing cash flow, or non-cash flow. If the item is non-cash, explain whether and how it would appear on the cash flow statement. a. Payments received from customers b. Loss on the sale of available-for-sale securities c. Interest payments received d. Cash received from the issuance of bonds e. Dividends paid to preferred shareholders f. Depreciation expense g. Cash received from the sale of property and equipment h. Cash payment on a mortgage loan (part interest and part principal) i. Issuance of stock to acquire another organization
a. Payments received from customers - ops b. Loss on the sale of available-for-sale securities - Non-cash: would be a reconciling item in the operating section of the statement of cash flows if the indirect method is used c. Interest payments received - ops d. Cash received from the issuance of bonds - financing e. Dividends paid to preferred shareholders - financing f. Depreciation expense - Non-cash: would be a reconciling item in the operating section of the statement of cash flows if the indirect method is used g. Cash received from the sale of property and equipment - investing h. Cash payment on a mortgage loan (part interest and part principal) - Part operating (interest), part financing (principal) i. Issuance of stock to acquire another organization - Non-cash: would be disclosed as a significant non-cash financing (new stock) and investing (acquisition) activity
cash flow from operating activities
the cash flows from the central operations of the organization. Generally, this would include cash inflows from customers, cash outflows to employees and suppliers, and cash flows for interest and taxes. Two methods are used to present the operating section of the cash flow statement, the indirect method and the direct method. indirect: common adjustments to net income to arrive at operating cash flow are: Add back non-cash expenses such as depreciation, amortization, and stock compensation. Remove non-operating gains (subtract) and losses (add) such as gains and losses on investments or property and equipment. Adjust for the changes in operating assets and liabilities such as accounts receivable, inventory, prepaid assets, accounts payable, accrued liabilities, interest payable, and taxes payable. Increases in operating assets AND decreases in operating liabilities are subtracted. Decreases in operating assets AND increases in operating liabilities are added.
