Cash Flow

Question 1

What is the purpose of the statement of cash flows

Answer 1

1. Report cash receipts and payments of an entity over some time
2. Detail the changes in the cash account on the balance sheet
3. Classify the cash flows as operating, investing and financing activities
4. Shows the relationship of net income to changes in cash balances
5. Helps predict future cash flows
6. Evaluates how management generates and uses cash
7. Determines a company’s ability to pay interest, dividends and debt when they are due - highlights liquidity
8. Identifies specific increases and decreases in a firm’s productive assets

Question 2

What type of management decisions affect cash?

Answer 2

operating decisions, financing decisions or investing decisions

Question 3

Define collectively exhaustive in the context of cash flow

Answer 3

Operating, investing and financing activities are collectively exhaustive - There are only 3 categories

Question 4

Define mutually exclusive in the context of cash flow

Answer 4

Mutually exclusive as if one is one type of activity it cannot be another

Question 5

Define cash equivalents

Answer 5

Cash equivalents are highly liquid short term investments that a company can easily and quickly convert into cash - Ex: money market fund with maturity of less than 90 days

Question 6

What are operating activities

Answer 6

Operating activities are transactions that affect the purchase, processing and selling of a company’s products and services ex: making sales, collecting A/R, purchasing inventory, paying accounts payable

Question 7

What section do operating activities go in on the SOCF

Answer 7

Cash flows from operating activities

Question 8

How is interest treated on the SOCF

Answer 8

Interest on a loan in Europe can be treated in different ways. In America, it must be an operating activity. For this course, Interest is an operating activity

Question 9

What are financing activities

Answer 9

Financing activities are a company’s transactions that obtain resources from debt and equity transactions
Ex: Issuance of additional stock, repayment of a principal loan, borrowing money from the bank, repaying previous loans

Question 10

Where do financing activities go in on the SOCF

Answer 10

Cash flows from financing activities

Question 11

Where do investing activities go in on the SOCF

Answer 11

Cash flows from Investing activities

Question 12

Define investing activities

Answer 12

Investing activities are transactions that acquire or dispose of assets that are expected to provide services for more than one year - Purchasing and disposing of equipment

Question 13

What is the equation of cash flow

Answer 13

CFO +CFF+CFI = cash flow

Question 14

How do I determine cash inflows and outflows of investing activities

Answer 14

Increases in cash (inflows) front decreases in long-lived assets, loans and investments
Decreases in cash (outflows) from increases in long-lived assets, loans and investments

Question 15

How do I determine cash inflows and outflows of financing activities

Answer 15

Increases in cash (inflows) from increases in long term liabilities or paid-in capital
Decreases in cash (outflow) from decreases in long term liabilities or paid-in capital

Question 16

What is the direct method of calculating CFO

Answer 16

Subtract operating cash disbursements from operating cash collections
Examining what transactions are left over after investing and financing activities and adding them up.

Question 17

What si the theory behind the Indirect method of calculating the CFO

Answer 17

Adjusts accrual-based net income from the income statement to reflect only cash receipts and disbursements - used by most companies

Question 18

Explain the indirect method

Answer 18

Adjust from revenues and expenses not requiring cash: Add back depreciation and any other adjustments like it
Then adjust for changes in non-cash assets/liabilities relating to operating activities:

Add decreases in assets: Prepaid asset, A/R, inventory
Deduct increases in assets
Add increases in liabilities ex: wages payable, A/P
Deduct decreases in liabilities

Question 19

What is the schedule of noncash investing and financing activities

Answer 19

Report of and items as such: financing and investing activities that do not affect cash

Question 20

Explain why most companies use the indirect method

Answer 20

If you use the direct method you also prepare a report or Reconciliation statement to reconcile net income to net cash using the indirect method. So you ahve to do the same thing anyways

Question 21

Explain free cash flow

Answer 21

A measure of cash management performance. Refers to cash flows from operations fewer capital expenditures (and sometimes fewer dividends)

Question 22

What does US GAAP stand for

Answer 22

General accounting accepted practice in America

Question 23

What does IFRS stand for

Answer 23

International financial reporting standard - Europe, Australia

Question 24

What are the practices of IFRS and GAAP on interest in the SOCF

Answer 24

IFRS allows preparers to choose to include interest expense as financing or operating activity
The US has an interest as operating activity