Ch.13 - Statement of Cash Flows

Question 1

What is the purpose and use of statement of cash flows?

Answer 1

It provides information about the change in cash during an accounting period.

Question 2

Cash inflow (aka cash receipts) examples

Answer 2

DR. Getting cash

• Cash sales
• A/R collections
• Proceeds from asset dispositions

Question 3

Cash outflow (aka. cash payments or cash disbursements) examples

Answer 3

CR. paying with cash

• Expense payments (salaries, utilities, rent, etc.)
• A/P payments
• Asset acquisitions
• Financial instrument purchases
• Dividend payments

Question 4

What are the three types of business activities? (list)

Answer 4

1. Operating
2. Investing
3. Financing

Question 5

What are operating activities?

Answer 5

They are cash activities related to revenues and expenses that determine the net income of an organization.

Inflow: revenue
Outflow: expneses

Question 6

What are investing activities?

Answer 6

They are activities related to investments of cash– particularly buying non-current/long-term assets.

they can also include lending money and collecting loans.

• Generally they are from items on the statement of financial position.

Inflow: NCA disposition proceeds
Outflow: NCA acquisition

Question 7

What are financing activities?

Answer 7

they are activities related to capital structure (financing leverage) of a firm (debt vs. equity)

• they generally include non-current liabilities and shareholders’ equity items.

Inflows:
- issuing debt (bonds, debentures)
- issuing equity (common shares, preferred shares)
- cash received from short-term and long-term borrowing (notes payable, bank loans)

outflows:
- principal repayments on loans
- dividend payments
- share repurchases

Question 8

What are significant noncash activities?

Answer 8

If it does not affect cash, then you DO NOT report it in the statement of cash flows.
- Instead, report it in the notes sections of financial statements

Examples:
- issue of shares to purchase assets or to reduce liabilities
- conversion of debt into equity (bonds turning into share)
-exchange of PPE (asset swaps)

Question 9

What is the direct method for operating?

Answer 9

(we don’t focus on this for this course)

It requires the knowledge of every cash transactions (receipts and disbursements)

Statement of income items are converted from accrual basis to cash basis.

Question 10

What is the indirect method for operating?

Answer 10

Operating activities

1) Net Income xxx

adjustments to reconcile net income to cash provided (used) by operating activities)
2) Depreciation expense xxx
Loss on equipment disposal xxx
3) Decrease in A/R xxx
Increase in supplied (xxx)
Decrease in A/P (xxx)
Increase in Sal. Pay xxx xxx
Net cash used by O. activities xxx