Vol. 3 LM3 Classification of Cash Flows Flashcards
Classification of Cash Flows and Non-Cash Activities
All companies engage in ____, ____, and ___ activities.
Cash Flows and Non-Cash Activities
operating, investing, [and] financing [activities]
Cash Flows and Non-Cash Activities
concept
- include the company’s day-to-day activities that create revenues, such as selling inventory and providing services, and other activities.
Cash Flows and Non-Cash Activities
Cash flows from operating activities
Cash Flows and Non-Cash Activities
concept
- include purchasing and selling long-term assets and other investments.
- These long-term assets and other investments include property, plant, and equipment; intangible assets; other long-term assets
Cash Flows and Non-Cash Activities
Cash flows from investing activities
Cash Flows and Non-Cash Activities
concept
include obtaining or repaying capital, such as equity and long-term debt.
Cash Flows and Non-Cash Activities
Cash flows from financing activities
Cash Flows and Non-Cash Activities
describe
cash outflows from operating activities
Cash Flows and Non-Cash Activities
- result from cash payments for
- inventory,
- salaries,
- taxes, and
- other operating-related expenses and
- from paying accounts payable
Cash Flows and Non-Cash Activities
describe
cash inflows from operating activities
Cash Flows and Non-Cash Activities
- result from cash sales
- from collection of accounts receivable
Cash Flows and Non-Cash Activities
describe
cash inflows from investing activities
Cash Flows and Non-Cash Activities
include cash receipts from the sale of non-trading securities:
* PPE;
* intangibles; and
* other long-term assets.
Cash Flows and Non-Cash Activities
describe
cash outflows from investing activities
Cash Flows and Non-Cash Activities
cash payments for the purchase of these assets
Cash Flows and Non-Cash Activities
describe
cash inflows from financing activities
Cash Flows and Non-Cash Activities
Include cash receipts from issuing stock (common or preferred), or bonds, and cash receipts from borrowing.
Cash Flows and Non-Cash Activities
describe
cash outflows from financing activities
Cash Flows and Non-Cash Activities
Include cash payments to repurchase stock (e.g. treasury stock) and to repay bonds and other borrowings.
* NOTE: indirect borrowing using accounts payable is not considered a financing activity
Cash Flows and Non-Cash Activities
The company would report net cash flow from investing activities at
- If a company recorded the following in Year 1:
* Proceeds from issueance of long-term debt: €500,000
* Purchase of equipment: €200,000
* Loss on sale of equipment: €70,000
* Proceeds from sale of equipment: €120,000
* Equity in earnings of affiliate: €10,000
A. (€150,000)
B. (€80,000)
C. (€200,000)
Cash Flows and Non-Cash Activities
B. (€80,000) = 200,000-120,000
The only two items that would affect the investing are:
* the purchase of equipment, and
* the proceeds from sale of equipment
Explanation: The loss on sale of equipment and the equity in earnings of affiliate affect net income but are not cash flow.
Cash Flows and Non-Cash Activities
classification and reporting under US GAAP
dividends received
Cash Flows and Non-Cash Activities
always reported as operating activities, unlike under IFRS, which grants discretion for classification as either operating or financing.
Cash Flows and Non-Cash Activities
classification and reporting under US GAAP
dividends paid
Cash Flows and Non-Cash Activities
always reported as financing activities
Cash Flows and Non-Cash Activities
Which most accurately reflects the effect of both transactions (IFRS)
On 31 December 2018, a company issued a £30,000 180-day note at 8 percent and used the cash received to pay for inventory and issued €110,000 long-term debt at 11 percent annually and used the cash received to pay for new equipment.
A. operations are unchanged
B. financing increase £110,000
C. operations decrease £30,000
Cash Flows and Non-Cash Activities
C. operations decrease £30,000.
The payment for inventory would decrease cash flows from operations by £30,000 from the £30,000 received from financing.
The issuance of debt is part of financing and would by £140,000
The purchase of equipment is an investing activity
Cash Flows and Non-Cash Activities
define
non-cash transaction
Cash Flows and Non-Cash Activities
- Any transaction that does not involve an inflow or outflow of cash.
- For example,
- if a company exchanges one non-monetary asset for another non-monetary assets
- if a company issues common stock in connection with conversion of a convertible bond or preferred stock.
Cash Flows and Non-Cash Activities
