Understanding Cash Flow Statements

Question 1

________ include cash receipts and payments related to dealing securities or
trading securities

Answer 1

Operating activities

Question 2

US GAAP classify interest and dividends received from investments as operating
activities, whereas IFRS ____________

Answer 2

allow companies to classify those items as either operating

or investing cash flows.

Question 3

US GAAP classify interest expense as an operating

activity, even though the principal amount of the debt issued is classified as a financing activity. IFRS _____________.

Answer 3

allow companies to classify interest expense as either an operating
activity or a financing activity.

Question 4

US GAAP classify dividends paid to stockholders as a

financing activity, whereas IFRS _________.

Answer 4

allow companies to classify dividends paid as either

an operating activity or a financing activity

Question 5

The _______ shows the specific cash inflows and outflows that result in
reported cash flow from operating activities.

Answer 5

direct method

Question 6

The __________ shows how cash flow from operations can be obtained from
reported net income as the result of a series of adjustments.

Answer 6

indirect method

Question 7

IFRS and US GAAP both encourage the use of the _________ but permit either
method. ________ require companies
to present a reconciliation between net income and cash flow (which is equivalent to the indirect method).

Answer 7

direct method, US GAAP

Question 8

Adjustments to Net Income Using the Indirect Method (4)

Answer 8

1) Non-cash items (e.g. D&A)
2) Non-operating gains or losses
3) Deferred tax liability
4) Changes in working capital

Question 9

What is FCFF?

Answer 9

Free cash flow to the firm

Question 10

What is FCFE?

Answer 10

Free cash flow to equity

Question 11

FCFF =

Answer 11

NI + NCC + Int(1 – Tax rate) – FCInv – WCInv

CFO + Int(1 – Tax rate) – FCInv

Question 12

FCFE =

Answer 12

CFO – FCInv + Net borrowing

Question 13

Cash to income

Answer 13

CFO ÷ Operating income

Question 14

Cash flow per share =

Answer 14

(CFO – Preferred dividends) ÷ Number of

common shares outstanding

Question 15

Debt coverage =

Answer 15

CFO ÷ Total debt

Question 16

Interest coverage =

Answer 16

(CFO + Interest paid + Taxes paid) ÷

Interest paid

Question 17

Reinvestment cash flow ratio =

Answer 17

CFO ÷ Cash paid for long- term assets

Question 18

Debt payment =

Answer 18

CFO ÷ Cash paid for long- term debt

repayment

Question 19

Dividend payment =

Answer 19

CFO ÷ Dividends paid

Question 20

Investing and financing cash flow ratio =

Answer 20

CFO ÷ Cash outflows for investing and

financing activities

Question 21

The sale of a building for cash would be classified as what type of activity on the
cash flow statement?
A Operating.
B Investing.
C Financing

Answer 21

B is correct. Purchases and sales of long- term assets are considered investing
activities. Note that if the transaction had involved the exchange of a building for other than cash (for example, for another building, common stock of
another company, or a long- term note receivable), it would have been considered a significant non- cash activity

Question 22

Under which section of a manufacturing company’s cash flow statement are the
following activities reported?
Item 1: Purchases of securities held for trading
Item 2: Sales of securities considered cash equivalents

A Both items are investing activities.
B Both items are operating activities.
C Only Item 1 is an investing activity

Answer 22

B is correct. The purchase and sale of securities considered cash equivalents
and securities held for trading are considered operating activities even for companies in which this activity is not a primary business activity.

Question 23

Payment of dividends is a _________ under US GAAP.
Payment of interest and receipt of dividends are included in ________
under US GAAP. Note that IFRS allow companies to include receipt of
interest and dividends as _________ cash flows and to include payment of interest and dividends as _________cash flows.

Answer 23

financing activity
operating cash flows

either operating or investing
either operating or financing

Question 24

Interest paid is classified as an operating cash flow under:

A US GAAP but may be classified as either operating or investing cash flows
under IFRS.
B IFRS but may be classified as either operating or investing cash flows under
US GAAP.
C US GAAP but may be classified as either operating or financing cash flows
under IFRS.

Answer 24

C

Question 25

Taxes on income are ________
disclosed under
IFRS and US GAAP.

Answer 25

required to be separately

The disclosure may be in the cash flow statement or
elsewhere.

Question 26

The ________may be prepared under the indirect method. The other sections are always prepared under the direct method.

Answer 26

operating section

Question 27

An ______ to net income is made when there is a loss on the retirement of debt, which is a non- operating loss.

Answer 27

addition