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Flashcards in Cash Flow Statements Deck (21)
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1
Q

What is a cash flow statement?

A

Cash flow statements shows where cash is generated from and how it is used.

2
Q

What is the indirect method?

A

The indirect method begins with net income and adjusted for the following:

  i) non-cash and/or non-operating activities include included in net income 
      * depreciation and amortization
      * gains and losses on sale of assets
 ii) adjust for the impact of accruals and deferrals on net income
      * changes in current assets
      * changes in current liabilities

*The investing (non-current assets) and financing (non-current liabilities and equity) cash flow is calculated the same way for both indirect and direct method.

3
Q

What is the direct method?

A
The direct method of presenting the CFS presents the specific cash flows associated with items that affect cash flow. Items include:
     Cash collected from customers
     Interest and dividend received
     Cash paid to suppliers
     Cash paid to employees
     Interest paid 
     Income taxes paid 

*The investing (non-current assets) and financing (non-current liabilities and equity) cash flow is calculated the same way for both indirect and direct method.

4
Q

What is the rule of thumb for adding or decreasing CA and CL differences to operating cash flow?

A
Current Assets   Current liabilities
Increased	        Use(-)	         Source(+)
Decreased 	      Source(+)	             Use(-)
5
Q

Addition to or Deduction from cash:

i) Increased in A/R
ii) Decreased in A/R

A

i) Deduction from cash = Sales revenue was recognized but no cash was received.
ii) Addition to cash = customers on credit made cash payments.

6
Q

Addition to or Deduction from cash:

i) Increased in Inventory
ii) Decreased in Inventory

A

i) Deduction from cash = cash were used to purchase inventory.
ii) Addition to cash = Cash was generated from sales of inventory.

7
Q

Addition to or Deduction from cash:

i) Increased in A/P
ii) Decreased in A/P

A

i) Addition to cash = cash was received and entity owes an obligation.
ii) Deduction from cash = cash were paid out to satisfy an obligation.

8
Q

What items are included in cash collections from customers?

A

Sales
+/- Accounts Receivables
- Bad Debt Expense
+/- Changes in deferred revenue

9
Q

What items are included in cash paid to suppliers?

A
Cash paid to suppliers:
Cost of Goods Sold
\+ total operating expenses
\+/- Change in A/P
\+/- Change in accrued liabilities
\+/- Change in inventory
\+/-  Change in prepaid expenses 
  • when deciding whether to +/- the changes, think of whether cash was paid out (add to expense account) to decrease the I/S account or increase in change (deduct from expense account) because cash was not involved.
10
Q

What balance sheet items goes into:

i) Operating activities
ii) Investing activities
iii) Financing activities

A

i) CA and CL
ii) non-current assets
iii) non-current liabilities and equity

11
Q

What items are involved in cash paid to employees?

A

Wages & Salaries Expense
+/- Change in wages payable

  • when deciding whether to +/- the changes, think of whether cash was paid out (add to expense account) to decrease the I/S account or increase in change (deduct from expense account) because cash was not involved.
12
Q

What items are involved in cash paid for interest and bank charges?

A

Interest Expense
+/- Change in interest payable

  • when deciding whether to +/- the changes, think of whether cash was paid out (add to expense account) to decrease the I/S account or increase in change (deduct from expense account) because cash was not involved.
13
Q

What items are involved in cash paid for income taxes?

A

Income tax expense
+/- change in income tax payable

  • when deciding whether to +/- the changes, think of whether cash was paid out (add to expense account) to decrease the I/S account or increase in change (deduct from expense account) because cash was not involved.
14
Q

What are the advantages and disadvantage of the indirect method?

A

Advantages:

 * focuses on the difference between NI and net CF from operating activities
 * provide a useful link between CFS and I/S and B/S
 * simpler, therefore more cost effective to prepare

Indirect method is more common in practice.

15
Q

What are the advantages and disadvantage of the direct method?

A

Advantages:

  • shows operating cash receipts and payment, which is more consistent with the objective of the CFS - to provide more info about cash receipts and cash payments
  • sources of operating cash receipts and purpose of cash payments are useful in estimating future operating cash flows

Disadvantages:
*more costly

Direct method is theoretically superior and is recommended in the standards

16
Q

What are investing activities and what does it include?

A

Investing cash flows are monies expended and received from the purchase and sale of infrastructure necessary to run the business. Include the purchase and disposal of:

 * PPE
 * intangibles
 * Investments (gain or loss reported on the I/S does not represent cash received. The NBV + gains (- losses) is cash received)
17
Q

What are financing activities and what does it include?

A

Financing cash flows are monies expended and received with creditors and owners other than those of an operating nature. It include the following:

 * Dividend paid
 * Changes in demand loans
 * Changes in term loans
 * issue or redemption of share capital (common shares)
18
Q

Under investing activities, how is gains and losses on disposal of investments calculated?

A

Investments

Gain or loss reported on the I/S does not represent cash received. The NBV + gains (- losses) is cash received.

19
Q

Under the indirect method, what is net income adjusted for?

A

Non-cash expenses and revenue from non-operating activities such as gains on sale of investments/PPE if it was included in net income.

Notes: always consider if the amount was included in net income in the first place. If it was not included, then don’t need to adjust for it.

20
Q

What are operating activities?

A

Operating cash flows are those that arise from the normal, day-to-day operations of a business.

21
Q

Does direct method begin the CFS with net income?

A

No. Starts with Cash collections from customers.