Analyzing Statements of Cash Flow

Question 1

Cash flow statement

Answer 1

provides information on firm’s liquidity, solvency and financial flexibility

Question 2

CFO

Answer 2

Cash flow from operating activities:
* Cash collected from customers (typically the main component of CFO)
* Cash used in the production of goods and services (cash inputs)
* Cash operating expenses, such as salaries
* Cash paid for interest
* Cash paid for taxes

Question 3

Direct method

Answer 3

Starts with sales at the top of the income statement

Question 4

Proces of direct method

Answer 4

cash collected x (sales - increase in AR + increase in uneraned revenue liab)
cash paid to suppliers (x) (- COGS + decrease in inv - purchases + increase in AP)
cash paid as wages (x) (-wage expense - decrease in wages payable)
cash paid as interest (x) (- interest expense + increase in interest payable)
cash paid as taxes (x) (-tax exoense + increase in taxes payable liability + increase in deferred tax liability)
= CFO

Question 5

Indirect method

Answer 5

Start with net income

Question 6

Process of indirect method

Answer 6

Step 1:start with net income of $39,000.
Step 2: Add back noncash charges:
Depreciation = $7,000
Change in deferred tax liability = $5,000
Loss on disposal of PP&E = $2,000
Deduct noncash gains:
Gain from sale of land = $10,000
Step 3: Subtract increases in receivables and inventories and add increases in payables.

Question 7

Convert cash flow from direct to indirect

Answer 7

Step 1: Aggregate all revenues and gains and all expenses and losses.

Step 2: Remove all noncash charges and disaggregate the remaining items.

Step 3: Convert from accruals to cash flows by adjusting for the change in working capital.

Question 8

CFI

Answer 8

Consists of cash inflows and outflows that result form acquiring or disposing of long-term assets and certain investments

Question 9

CFF

Answer 9

Consists of cash inflows and outflows that result form transactions affecting a firm’s capital structurfe - such as borrowing, repaying debt, and issuing or redeeming equity securities