Accounting Statement of Cash Flows Modules

Which income statement item does not have a cash effect

depreciation (non-cash expense)

To convert net income from an accrual number to a cash number, you must add back ___. same logic used for ___ and ___

depreciation, gains and losses

The FASB prefers the ___ method but allows either

direct

The choice of indirect method does or does not affect financing and investing activities sections

does not

The indirect method starts with ___ basis net income and then makes a series of adjustments to convert it to ___ basis net income

accrual, cash

Liquidity ratios using cash flows are ___-based instead of ____-based

cash, accrual

The major purpose of the operating activities section is to

convert net income from an accrual basis to a cash basis

a ratio that partially corrects current ratio problem

current cash debt coverage ratio

The ____ activities section of the statement of cash flows represents cash that is either paid to or received from owners and creditors

financing

A negative cash flow from investing activities indicates the company is

re-investing in itself in order to expand and grow

The net cash provided should always be the ____ under indirect and direct method

same

A postive cash flow from investing activities indicates that a company is

selling off its long-term assets

Disadvantage to all cash-based ratios is that there is no

readily available published industry averages for comparison

Investments represent both __ and ____ of other companies that we own as well as ___ we have made

stocks, bonds, loans

Direct method requires us to use ___-___ to analyze each individual cash flow

t-accounts

How to calculate the cash paid for dividends

use a retained earnings t-account

Disadvantage of the current ratio

uses year-end balances of current assets and current liabilities (may not be representative of company's position during most of the year)

Interest Paid IFRS and GAAP

IFRS: Operating or financing GAAP: operating

Dividends paid IFRS and GAAP

IFRS: operating or financing GAAP: financing

Interest received IFRS and GAAP

IFRS: operating or financing GAAP: operating

Dividends received IFRS and GAAP

IFRS: operating or investing GAAP: operating

Long-term assets include

PPE and intangibles

salaries expense----> t-account for

salaries payable

DIRECT METHOD: what cash payments would you subtract from cash collected from customers

1. to suppliers for inventory purchases 2. to employees as salaries 3. to creditors as interest 4. to government as taxes

The cash flow statement helps users assess (4)

1. ability to generate future cash flows 2. ability to pay dividends and debts 3. why net income is different than operating cash flows 4. cash investing and financing transactions

The statement of cash flows provides information about what two things

1. cash receipts (inflows) 2. cash payments (outflows)

Items to ignore when using direct method (non-cash revenues and expenses)

1. depreciation expense 2. losses 3. gains

Conversion of net income from an accrual to cash basis can be done with either of these two methods

1. direct method 2. indirect method

Why do most companies prefer the indirect method (3)

1. easier to prepare 2. focuses on differences between net income and net cash flow from operating activities 3. tends to reveal less company info to competitors

Cash inflow examples for investing activities (3)

1. from sale of PPE 2. from sale of investments in other entities 3. from collection of principal on loans to other entities

Cash inflow examples for financing section (2)

1. from sale of company's own stock to its stockholders 2. from borrowing money

Cash inflow examples for operating (2)

1. from sale of goods or services 2. from return on loans and equity securities (interest and dividends)

4 examples of non-cash activities

1. issuance of common stock to purchase assets 2. conversion of bonds into common stock 3. issuance of debt to purchase assets 4. exchanges on long-lived assets

Cash inflows and outflows are categorized into these three categories

1. operating activities 2. investing activities 3. financing activities

Cash outflow examples for investing activities (3)

1. to purchase PPE 2. to purchase investments in other entities 3. making loans to other entities

Cash outflow examples for financing section (2)

1. to stockholders as dividends 2. to creditors as the repayment of principle of funds borrowed

Cash outflow examples for operating (5)

1. to suppliers for inventory 2. to employees for services 3. to government for taxes 4. to lenders for interest 5. to others for expenses

See slides for indirect method statement of cash flow calculations

:)

see slides for example of indirect method

:)

Which of the following would be an example of a cash flow from investing activities

Receipt of cash from the sale of equipment

Significant financing and investing activities that do not affect cash are reported in either

a separate schedule at bottom of statement of cash flows or in the notes to the financial statements

Sales revenue ---> T-account for ___ ___

accounts receivable

Under IFRS, interest paid to creditors is classified

either an operating or a financing activity, but treated consistently from period to period

IFRS requires that non-cash investing and financing activities be ----

excluded from statement of cash flows (instead they are disclosed in the notes to the financial statements)

The direct method lists each individual cash inflow and outflow for all items appearing on __ __

income statement

The statement of cash flows shows the changes in cash for the same period of time as the ___ _____

income statement

One area where there can be a substantial difference between IFRS and GAAP relates to the classification of

interest and dividends

COGS---> T-account(s) for

inventory, account payable

The ____ activities section of the statement of cash flows includes the cash inflows and outflows related to the purchase and sale of long-term assets and ____

investments

the ability of a business to pay its debts as they come due

liquidity

When the direct method is used, the net cash flow from operating activities as computed using the indirect method ...

must also be reported using a separate schedule

The company should have a __ cash flow from investing activities

negative

current cash debt coverage ratio

net cash flow provided by operating activities / average current liabilities

The ___ ___ ____ __ ___ ___ represents what the net income of the company would have been had the company used cash accounting rather than accrual

net cash provided by operating activities

A net negative cash flow from operations would indicate the company had a __ ____ using the cash basis of accounting

net loss

The ____ activities section of the statement of cash flows includes the cash inflows and outflows related to the normal course of business operations

operating

The ____ section of the statement of cash flows is the cash effect of all items appearing on the income statement - revenues and expenses and thus enter into determination of net income

operating

Under GAAP, which of the following would be an example of a cash flow from operating activities

payment of cash to lenders for interest

The firm should have ____ cash flow provided by operating activities positive

positive

The cash flows from financing activities can be either

positive or negative

Insurance expense ---> T-account for

prepaid insurance

How does the statement of cash flows differ from the other major financial statements?

the other financial statements are based on accrual accounting, whereas the cash flow statement is based on cash accounting