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Flashcards in Chapter 5 Deck (31)
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1
Q

pro forma cash flow state

A

a prediction of what the future statement of cash flow statement will look like in future years if the OIF plans are implemented

2
Q

statement of cash flow

A

explains the change during the period in cash and cash equivalents

3
Q

cash equivalent

A

short term, HIGHLY liquid investments that can easily be converted to cash

4
Q

Operating Activities

A

include those transactions that are associated with the revenues and expenses that enter into the determination of net income

  • Cash receipts from selling goods or from providing services.
  • Receipts from Interest, dividends, and similar items.
  • Payments to purchase inventory and to pay wages, taxes, and similar expenses.
5
Q

categories of cash flows

A

operating activities
investing activities
finance activities

6
Q

“bottom line” of cash flow statement

A

net cash from operating activites

7
Q

guiding principal of the Operating Activities section

A

It contains cash flow effects of revenues and expenses included on the income statement

8
Q

Investing Activities

A

the purchase and sale of land, buildings, equipment and other assets not generally held for sale. It also includes the purchase and sale if financial instruments not intended for trading purposes as well as the making and collections of loans

They are Indirectly related to the central ongoing operation of a business

9
Q

Financing Activities

A

include transactions and events whereby cash is obtained from or repaid to owners (equity financing) and creditors (debt financing)

  • Cash proceeds from issuing stocks or bonds.
  • Payments to reacquire stock (treasury stock) or to retire bonds.
  • Payment of dividends.
10
Q

Non Investing and Financing Activities

A

Equipment purchased with a note payable
Land acquired by issuing stock

Significant transactions should be disclosed separately.
These transactions do not appear in the statement of cash flows.

11
Q

Direct Method

A

The direct method is a reexamination of each income statement item with the objective of reporting how much cash was received or disbursed in association with the item.
To prepare the operating section, each income statement item must be adjusted for the effects of accruals.

12
Q

Indirect Method

A

begins with net income as reported on the income statement and adjusts the accrual amount for any items that do NOT affect cash flow.

13
Q

Adjustments for the Indirect Method

A
  • Adjustments for changes in current operating assets and liabilities that indicate noncash sources of revenues and expenses.
  • Gains and losses associated with investing or financing activities.

-Revenues and expenses that do not involve cash inflow or outflow.

14
Q

Cash paid for interest and income taxes

A

Direct Method: part of the Operating Activities section

Indirect Method: separate disclosure

15
Q

cash flow to net income ratio

A

cash from operations/ net income

16
Q

cash flow adequacy ratio

A

cash from operations/ expenditures for fixed asset additions and new business aquisitions

17
Q

cash times interest earned ratio

A

cash before taxes and interest/ cash paid for interes

18
Q

Under what circumstances does cash flow from operations offer a clearer picture of a companys performance than does the net income?

A
  • When a company reports large noncash expenses: write-offs, depreciation and provisions of future obligations
  • A company is growing rapidly
  • A company needs to report favorable earnings. The cash flow from operations provides a reality check of actualreported earning
19
Q

What criteria must be met for an item to be considered a cash equivalent in preparing a statement of cash flows?

A
  1. Readily converted ti cash

2. Near its maturity that there is insignificant risk of changes in value due to changes in interest rate

20
Q

What are the three categories in a statement of cash flows? What types of items are included in each?

A
  1. Operating Activities: Includes current liabilities and current assets;
  2. Investing Activities: Includes purchase or sale of land, buildings, equipment etc.
  3. Financing Activites: equity and debt financing; cash is optained and repaid to owners; retire bonds; payment of dividends; treasury stock
21
Q

What is the normal pattern of cash flows for operating, investing and financing activities?

A

Operating +
Investing -
Financing +/-

22
Q

Either the direct method or the indirect method may be used to report cash flows from operating activities. What is the difference in approach for the two methods?

A

The direct method reports ALL operating receipts and cash payments. The difference is then the net cash flow from operations. And the indirect method begins with the NI and includes the adjustments for any non-cash items and converts the accrual amounts to a cash basis.

23
Q

Why do many users prefer the direct method? Why do majority of preparers prefer the indirect?

A

Users prefer the direct method because it is straightforward and easy to understand. Accountants prefer the indirect method because it is easier to prepare.

24
Q

How is depreciation expense handled when the direct method is used? The indirect method?

A

It is added back to net income with the indirect method. With the direct method it is ommitted

25
Q

Why does the FASB treat interest payments as an operating activities rather than a financing activity?

A

Because interest expense enters into the calculation of net income.

26
Q

What is the target number?

A

it is the net change in the cash balance from the balance sheet. It is derived from the sum of OIF cash flows.

27
Q

When using the direct method what items must be considered in the calculation of cash paid for inventory purchases?

A
  • Cost of goods sold (-)
  • Account Payable
  • Inventory
28
Q

How is a loss on the sale of a long term asset treated when using the direct method? The indirect method?

A

It is added back to Net income when using the indirect method. And it is omitted when using the direct method. In both the effects is reported in the investing activities section

29
Q

Is the purchase of securities an operating activity or investing? Explain.

A

All transactions involving available for sale and held to maturity securities as investing. Transactions including trading securities are included in the operating activities section

30
Q

What does it mean when the value of a companys cash flow adequacy is less than 1.0?

A

This means that the company is not generating enough cash from operations to pay for all new plant equipment and purchases or cash to repay loan or to distribute to investors.

31
Q

what information is contained in the forecasted statement that can be used for planning purposes?

A

Allows management to see the relationship between forecasted operating cash flow and cash needed for investing activities. A company can use this to obtain additional financing or the company can scale back its expansion plans in order to reduce the drain on cash.