Cashflow & Financial Statement Analysis

Question 1

The principal advantage of the Indirect method of reporting cash flow:

Answer 1

Focuses on the difference between net income and net cash flow from operating activities, linking the income statement to the statement of cash flows.

Question 2

Current Ratio

Answer 2

Current Assets / Current LiabilitiesPrimary measure liquidity - able to meet current obligations

Question 3

Rate of Return on Investment

Answer 3

ROI = Asset Turnover / Profit Margin

Question 4

True or False? Under IFRS Cash Flow per share can be disclosed.

Answer 4

True. The cash flow effect of a discontinued operation must be disclosed separately IFRS also permits the disclosure of a cash flow per share. This is not allowed under US GAAP.

Question 5

The primary purpose of the Statement of Cash Flows is?

Answer 5

To provide external users with relevant information concerning an enterprise’s gross cash receipts and payments during a period.

Question 6

Generally, cash receipts and payments must be presented as ______ rather than as net changes in related balance sheet amounts.

Answer 6

gross amounts

Question 7

Noncash investing and financing activities that affect recognized assets or liabilities shall be reported in?

Answer 7

Related disclosures (either narrative or summarized in a schedule).

Question 8

Transactions which results in no cash inflow or outflow during the period; however, they affect the assets, liabilities, and/or equity of the enterprise.

Answer 8

Noncash Investing And Financing Activities

Question 9

Indirect Method of Reporting Cash Flows

Answer 9

The indirect method reports the same amount for net cash flow from operating activities; however, it does not report major classes of gross cash receipts and payments from operating activities.

Question 10

Ratio Analysis

Answer 10

Develops comparisons and measures relationships between two amounts from a single statement or from two different statements.

Question 11

Debt-Equity

Answer 11

Debt / EquityRelative debt funds - financial structure

Question 12

Under IFRS, interest and dividends paid may be reported as either ____ or ____ activities.

Answer 12

operating, financial

Question 13

ASC 230 requires that __________

Answer 13

all business enterprises include a statement of cash flows in a complete set of financial statements.

Question 14

The statement shall group and classify cash receipts and cash payments as resulting from _______.

Answer 14

operating, investing or financing activities of the enterprise.

Question 15

A reconciliation of net income to net cash flow from operating activities shall be provided. If the indirect method is used the reconciliation will be provided in?

Answer 15

A reconciliation may either reported within the statement of cash flows or provided in a separate schedule, with the statement of cash flows reporting only the net cash flow from operating activities.

Question 16

Transactions related to obtaining resources from owners and providing them with a return on, and return of their investment; borrowing money and repaying or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit.

Answer 16

Financing Activities

Question 17

Two Disadvantages of the Direct Method of Reporting Cash Flows:

Answer 17

1) The direct method does not link the net income reported on the income statement to the cash flow from operating activities2) The direct method does not provide information about intervals of lead and lags between cash flows and income by showing how the changes in current assets and current liabilities, relating to operations, affect operating cash flows.

Question 18

Statements which express each items on a particular financial statement as a percentage of a base amount emphasize the relationship among the items included, the relative importance of amounts included, and the significance of changes in items from one period to the next.

Answer 18

Common Size Statements

Question 19

Inventory Turnover

Answer 19

Cost of Goods Sold / Average InventoryLiquidity of inventory and inventory efficiency

Question 20

Under IFRS, interest and dividends received may be reported as either ________ or ________ activities.

Answer 20

Operating, Investing

Question 21

The statement shall use descriptive terms such as ______ or ______ rather than ambiguous terms such as funds.

Answer 21

Cash, Cash and Cash Equivalents

Question 22

A reconciliation of net income to net cash flow from operating activities shall be provided. If the direct method is used the reconciliation will be provided in ______.

Answer 22

in a separate schedule

Question 23

Activities related to the acquisition and disposal of asset other than those directly related to the enterprise’s operations (such as trade accounts and notes receivable, inventory, prepaid expenses).

Answer 23

Investing Activities

Question 24

Principal advantage of the direct method of reporting cash flows is _______.

Answer 24

that it shows gross operating cash receipts and payments

Question 25

Financial statements for two or more years and statements of percentages indicating the relative change in items on the statements over time facilitate the identification, comparison and evaluation of trends.

Answer 25

Comparative Financial Statements and Horizontal Analysis

Question 26

Receivables Turnover

Answer 26

Net Credit Sales / Average Receivables (net)Liquidity of receivables - efficiency of collection period

Question 27

The major difference between IFRS and GAAP on the cash flow statement is:

Answer 27

The location on the cash flow statement of interest and dividends. Interest and dividends received may be reported as either operating or investing activities.

Question 28

Requirements for Cash Equivalents (2)

Answer 28

1) Readily converted to known amounts of cash.2) So near maturity that they present insignificant risk of change in value because of changes in interest rates

Question 29

The total amounts of cash and cash equivalents at the beginning and end of the period shown in the statement of cash flows shall be the _____ as similarly titled line items or subtotals shown on the balance sheet as of those dates.

Answer 29

same amounts

Question 30

All transactions and other events that are not defined as investing or financing activities. Operating activities generally involve producing and delivering goods and/or providing services to customers.

Answer 30

Operating Activities.

Question 31

The direct method of reporting operating cash flows reports _______.

Answer 31

major classes of gross cash receipts and gross cash payments and the resulting net cash flow from operating activities.

Question 32

Two Disadvantages of the Indirect Method of reporting Cash Flows

Answer 32

1) The indirect method does not show gross operating cash receipts and payments.2) The indirect method is inconsistent with the statement objective of providing information concerning gross cash receipts and payments during the period.

Question 33

Quick Ratio (Acid Test Ratio)

Answer 33

(C+M/S+Rec)/CL OR (CA - Inv)/CLDegree of immediate liquidity

Question 34

The DuPont system of analysis

Answer 34

Highlights and examines in detail the elements comprising the rate of return on investment, emphasizing the effect that various elements of the financial statements have on the Rate of Return on Investment ratio.

Question 35

Cash Equivalents

Answer 35

Temporarily idle cash as part of an enterprise’s cash management activities, purchasing and selling short-term, highly liquid investment such as treasury bill, commercial paper and money market funds.

Question 36

The statement shall report ______ by operating, investing and financing activities and the ____ of those flows on cash and cash equivalents during the period in the manner that reconciles beginning and ending cash and cash equivalents.

Answer 36

Net Cash Provided or Used, Net Effect

Question 37

Cash flow per share shall _____ be reported in financial statements.

Answer 37

not

Question 38

ASC 230 _____ enterprises to use the direct method in reporting cash flows from operating activities; however, it does not require its use.

Answer 38

encourages