Statement of Cash Flows

Question 1

In the Statement of Cash Flows, when it comes to adjusting Net Income what is the proper way to handle the Common Working Capital Accounts (A/R, Inventory, Prepaid Expenses, & Other Current Assets Accounts) when there are Increases or Decreases?

(*AKA THE Indirect Method)

Answer 1

When there is an INCREASE in these Accounts, the Adjustment should be SUBTRACTED from NI.

When there is a DECREASE in these Accounts, the Adjustment should be ADDED to NI.

Question 2

In the Statement of Cash Flows, when it comes to adjusting Net Income what is the proper way to handle the Common Working Capital Accounts (A/P, Accrued Expenses, Other CL) when there are Increases or Decreases?

(*AKA THE Indirect Method)

Answer 2

When there is an INCREASE in these Accounts, the Adjustment should be ADDED to NI.

When there is a DECREASE in these Accounts, the Adjustment should be SUBTRACTED from NI.

Question 3

Which activity does “Dividends Paid” belong?

Answer 3

Dividends paid are a Financing Activity

Question 4

Which activity does “Dividends Received” belong?

Answer 4

Dividends received are an Operating Activity

Question 5

What is the purpose of the SFC (Statement of Cash Flows)?

Answer 5

The purpose of the SCF is to provide relevant information about and Entity’s Cash Receipts (inflows) and Cash Disbursements (outflows) for a specific period.

Question 6

What are some examples of Operating Activities?

Answer 6

INFLOWS:
Cash from Customers
Interest Income received
Dividend Income from Investments received

OUTFLOWS:
Cash paid to Suppliers (for Goods /Services and SG&A Expenses)
Cash Paid to Employees (Payroll)
Income Taxes & Interest paid

Question 7

What are some examples of Investing Activities?

Answer 7

Purchases/Sale of U.S. Treasury Note
Purchases/Sale of LT Debt Securities (e.g. bonds)
Collection of Payments made by others on Principal Payments
Purchase /Sale of LT Assets (e.g., PP&E, Intangibles, AFS/HTM Securities)
Proceeds from Corporate Owned Life Insurance Policies
Major repairs to equipment

Question 8

What are some examples of Financing Activities?

Answer 8

Issuance of Common & Preferred Stock
Treasury Stock Transactions
Dividends Payments
Borrowing & Repaying of Debt (Principal Payments- payments that reduce the outstanding loan balance)

Question 9

What are some examples of Cash Flows for Operating Activities when the Indirect Method is applied?

Answer 9

Non-Cash Expenses & Non-Operating items that DECREASE NI but should be added back since it doesn’t have an affect on Cash:
-Depreciation
-Amortization Expense (e.g.; Bond Discount, Patents)
-Losses from Sales of Assets
-Allowance for CL (contra-account to A/R)

Non-Cash Revenue & Non-Operating items that INCREASE NI but should be subtracted since it doesn’t have an affect on Cash:
-Equity in earnings from Investee
-Amortization of Bond Premium
-Gain form Sale of Assets (no cash involved)