Chapter 16: Reporting the Statement of Cash Flows Flashcards Preview

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Flashcards in Chapter 16: Reporting the Statement of Cash Flows Deck (45):

What is the purpose of the statement of for cash flows?

To report cash receipts (inflows) and cash payments (outflows) during the beginning and ending balances of cash and cash equivalents.

This includes identifying the cash flows related to operating, investing, and financing activities.

It does more than simply reporting changes in cash. It is the detailed disclosure of individual cash flows that make this statement useful to users.


What questions do the statement of cash flows help answer?

How does a company obtain its cash?

Where does a company spend its cash?

What explains the change in the cash balance?

This is done by summarizing, classifying, and reporting a company's cash inflows and cash outflows for each period.


How can cash flows influence decision makers?

Companies are favored when they finance its expenditures with cash from operations than ones that do it by selling its assets.

Helps users decide whether a company has enough cash to pay its existing debts as they mature.

To see if the company has the ability to meet unexpected obligations and pursue unexpected opportunities.


What do external information want to accomplish?

To assess a company's ability to take advantage of new business opportunities.


What do internal information want to accomplish?

Managers, for example, use cash flow information to plan day-to-day operating activities and make long-term investment decisions.


What do cash flows include?

Cash and cash equivalents.


What are two criteria that cash equivalents must satisfy?

1. be readily convertible to a known amount of cash

2. sufficiently close to its maturity so its market value is unaffected by interest rate changes.


Why are individual cash receipts/payments labeled?

To identify their originating transactions or events.


What is a net cash inflow (source)?

Occurs when the receipts in a category exceed the payments.


What is a net cash outflow (use)?

Occurs when the payments in a category exceed the receipts.


What are operating activities?

Transactions and events that determine net income.

Example: production and purchase of merchandise, he sale of goods, and services to customers, and the expenditures to administer the business. cash payments


What is not included as an operating activities?

Unusual gains and losses


What are financing activities?

Transactions and events that affect long-term liabilities and equity.


What are examples of financing activities?

1. obtaining cash from issuing debt and paying the amounts borrowed

2. receiving cash from or distributing cash to owners.


Who requires that payments of interest expense be classified as operating activites?



Which of the following items are classified as non-cash investing and financing activities?

Retirement of debt by issuing stock.

Purchase of a building with a note.

Issuance of common stock in exchange for land.


Which question could not be answered from the statement of cash flows?

What are the earnings-per share of common stock?


What is the full-disclosure principle?

Requires that important investing and financing activities that do NOT affect cash receipts or payments must be disclosed at the bottom of the statement of cash flows, or in a note to the financial statements.


What are the commonly disclosed noncash investing and financing activities?

Retirement of debt by issuing equity stock.

Conversion of preferred stock to common stock.

Lease of assets in a capital lease transaction.

Purchase of long-term assets by issuing a note or bond.

Exchange of noncash assets for other noncash assets.

Purchase of noncash assets by issuing equity or debt.


What three ways must a company report cash flows

Operating, investing, and financing.


How do you prepare a statement of cash flows?

1. Compute net increase or decrease in cash.

2. Compute net cash from operating activities.

3. Compute net cash from investing activities.

4. Compute net cash from financing activities.

5. Prove and report beginning and ending cash balances.


How do you compute net increase or net decrease?

current period's cash balance-prior period's cash balance.

This is the bottom-line figure for the statement of cash flows and is a check on accuracy.


Where does the information come from in order to prepare a statement of cash flows?

Comparative balance sheets at the beginning and end of the period, and an income statement for the period.


How can prepare a statement of cash flows?

Analyze the cash account and analyze noncash accounts.


What is reported in the cash account?

A company's cash receipts and cash payments.


How are cash flows provided by operating activities reported?

The direct method and the indirect method


What is the direct method?

Separately lists each major item of operating cash receipts (such as cash received from customers) and each major item of operating cash payments (such as cash paid for merchandise). The cash payments are subtracted from cash receipts to determine the net cash provided by operating activities.


What is the indirect method?

Reports net income and then adjusts it for items necessary to obtain net cash provided or used by operating activities. It does not report individual items of cash inflows and cash outflows from operating activities. Instead, the indirect method reports the necessary adjustments to reconcile net income to net cash provided or used by operating activities.


Is the net cash amount provided by operating activities identical under both the direct and indirect methods?

Yes, the equality always exists. The difference in the methods are the computation and presentation of the amount.


What method does the FASB recommend?

Direct method, because it is not required and the indirect method is arguably easier to compute, nearly all companies report operating cash flows using the indirect method.


How is net income computed?

Using accrual accounting, which recognizes revenues when earned and expenses when incurred.
Revenues and expenses do not necessarily reflect the receipt and payment of cash.


Formula to compute net cash flows through the indirect method?

net income-noncash increases+noncash charges


Examples of changes in noncash current assets

sales affecting accounts receivable and building usage affecting prepaid rent.


What is account analysis?

setting up a t-account and reconstructing its major entries to compute cash receipts or payments.


Explain the adjustments for operating items not providing or using cash

The income statement usually includes some expenses that do not reflect cash outflows in the period.

Examples are depreciation, amortization, depletion, and a bad debts expense.


Explain adjustments for nonoperating items.

Net income often includes losses that are not part of operating activities but are part of either investing or financing activities.

Examples are a loss from the sale of a plant asset and a loss from retirement of notes payable.


How is net income adjusted when computing net cash provided or used by operating activities under the indirect method?

+decrease in noncash current asset
-increase in noncash current asset
+increase in current liability*
-decrease in current liability*

+Depreciation, depletion, and amortization

+losses from disposal of long-term assets and retirement of debt
-gains from disposal of long-term assets and retirement of debt.


What is the difference between net income and operating cash flows?

operating cash flows can be either higher or lower than net income.


What is the fourth major step in preparing the statement of cash flows?

To compute and report cash flows from financing activities.


How do you compute and report cash flows from financing activities?

Identify changes in all noncurrent liability accounts and the equity accounts. These accounts include long-term debt, notes payable bonds payable, common stock, and retained earnings.


What is the fifth and final step in preparing the statement?

Report the beginning and ending cash balance and prove that the net change in cash is explained by operating, investing, and financing cash flows.


How do you compute cash flow on total assets?

Cash flow from operations/average total assets


Which of the following items would be added to net income when reporting cash flows from operating activities, using the indirect method?

increase in unearned fees and increase in accounts payable.


A loss from the sale of an investment would be ___ to (from) net income when computing cash flow from operations, using the indirect method.



A gain from the sale of equipment would be ____ to (from) net income, when computing cash flows from operations using the indirect method.