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60 Cards in this Set

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What is the primary purpose of the statement of cash flows?
to provide info about an entity's cash receipts and cash payments during a period.
What is a secondary objective of the statement of cash flows?
to provide information on a cash basis about its operating, investing, and financing activities.
What 4 things ahould the statement of cash flows help investors, creditors, and others assess?
1. The entity's ability to generate future cash flows.
2. The entity's ability to pay dividends and meet obligations
3. The reasons for the difference between net income and net cash flow from operating activities.
4. The cash and noncash investing and financing transactions during the period.
What is an primary objective of financial reporting?
to provide info that makes its possible to predict the amounts, timing, and uncertainty of future cash flows.
What are the three classifications of cash flows?
1. Operating activities
2. Investing activities
3. Financing activities
define cash equivalents?
short term highly liquid investments that are both:
a. readily conv to cash
b. so near their maturity that they present insignificant risk of changes in interest rates.
Operating activities involve...
the CASH effects of transactions that enter into the determination of net income.
Investing activities involve...
long-term assets and include
a.making and collecting loans
b.acquiring and disposing of investmentsand productive long-lived assets
financing activities involve...
liability and stockholder's equity items
a.obtaining cash from creditors and repaying the amounts borrowed
b.obtaining capital from ownersand providing them with a return on their investment
Operating Cash Inflows..
Cash Inflows
From sale of Goods or Service
From returns on loans(interest) and on equity securities (dividends)
Operating Cash Outflows....
Cash Outflows
To suppliers for inventory
To employees for services
To govt for taxes
To lenders for interest
To others for expenses
Investing Cash inflows....
Cash Inflows
From sale of PP&E
From sale of debt or equity securities
From collection on principal on loans to other entities
Investing Cash outflows...
Cash Outflows
To purchase PP&E
To purchase debt or equity securities of other entities
To make loans to other entities
Financing Cash inflows....
Cash Inflows
From sale of securities
From issuance of debt (bonds & Notes)
Financing cash outflows...
Cash Outflows
To stockholders as dividends
To redeem long term debt or reacquire capital stock
Is a negative operating cash flow bad (in terms of product life cycle)?
Not always, in the introductory and growth stages of a product the product is likely not generating much revenue.
What is the order of the three sections of the statement of cash flows?
Operating, Investing, and than Financing.
Where does the information come from for the statement of cash flows?
1.Comparative Balance sheets
2.Current income Statement
3.Selected Transaction Data
3 major steps in preparing the statement of cash flows?
1. Determine the change in cash
2. Determine the net cash flow from operating activities
3. Determine net cash flows from investing and financing activities
Step 1. determine the change in cash....
difference in beg cash and ending cash
Net cash provided by operating activities means
operations increase cash
net cash used by operating activities means...
operations decrease cash
Why must net income be converted to net cash flow from operating activities?
because most companies use the accrual basis of accounting
Under the accrual basis of accounting, net income will not indicate the net cash flow from operating activities......explain....
Net income may include
1.credit sales that have not been collected in cash
2.expenses incurred that may not have been paid in cash.
To arrive at net cash flow from operating activities, you must report rev & exp on a cash basis, how is this done?
eliminate the effects of income statement transactions that did not result in a corresponding increase or decrease in cash.
What are the two methods called that are used for converting net income to net cash flow from operating activities?
Direct method (I/S Method)
Indirect Method (reconciliation method)
Explain the direct method...
reports cah recepits and cash dispersements from op activities. The diff is the net cash flow.
Format of the direct method...
Cash from Rev XXX
Cash for Exp XXX
Income b4 Inc Tax XXX
Cash Pmt 4 Inc Tax XXX
Net cash flow op. XXX
Explain the Indirect Method...
the indirect method adjusts net income for items that affected reported net income but did not affect cash.
How do you compute net cash flow with the indirect method...
noncash charges in the income statement are added back
and noncash credits are deducted..
Show the indirect method with a increase in A/R and a increase in A?P?
Net Income XXX
Adj to reconcile NI to net cash provided by operating activities:
Increase in A/R (XXX)
Increase in A/P XXX (XXX)
Net Cash prov by OP XXX
Step 3 - determine NCF's from Investing and Financing activities....
determine whether any changes in balance sheet accounts caused an increase or decrease in cash.
What does the FASB encourage and require regarding the statement of cash flows?
They encourage the use of the direct method and if the direct method is used they require areconciliation of net income to net cash flow from operating activities
Depreciation expense
addition to net income to arrive at net cash flow.
Ammortization (Intangibles,deferred charges, & Bond discount)
addition to net income to arrive at net cash flow.
Increase in deferred income tax liability
addition to net income to arrive at net cash flow.
Loss on investment in Common Stock using equity method
addition to net income to arrive at net cash flow.
Loss on sale of Plant Assets
addition to net income to arrive at net cash flow.
Loss on a writedown of Assets
addition to net income to arrive at net cash flow.
Decrease in receivables
addition to net income to arrive at net cash flow.
decrease in inventories
addition to net income to arrive at net cash flow.
decrease in prepaid expense
addition to net income to arrive at net cash flow.
increase in account payable
addition to net income to arrive at net cash flow.
Ammortization of Bond Premium
deduction from net income to arrive at Net Cash Flow from Operating Activities
Decrease in deferred income tax liability
deduction from net income to arrive at Net Cash Flow from Operating Activities
Income on investment in common stock using equity method
deduction from net income to arrive at Net Cash Flow from Operating Activities
Gain on sale of plant assets
deduction from net income to arrive at Net Cash Flow from Operating Activities
Increase in Receivables
deduction from net income to arrive at Net Cash Flow from Operating Activities
Increase in Inventories
deduction from net income to arrive at Net Cash Flow from Operating Activities
Increase in Prepaid Expense
deduction from net income to arrive at Net Cash Flow from Operating Activities
Decrease in Accounts Payable
deduction from net income to arrive at Net Cash Flow from Operating Activities
Decrease in accrued Liabilities
deduction from net income to arrive at Net Cash Flow from Operating Activities
Why are only major classes of operating cash receipts and cash payments reported in the direct method?
to simplify and condense the operating activities section.
What is the format?
cash receipts-cash payments = net cash provided by operating activities
What are the 2 cash receipts with the direct method?
1.From the sale of goods and services
2.from receipts of interest and dividends on loans and investments
What are the cash payments?
to suppliers
to employees
for operating expenses
for interest
for taxes
cash receipts from customers formula?
cash receipts= rev from sales (+decrease in A/R or -increase in A/R)
Cash payments to suppliers formula?
COGS +/-(+increase in inventory or -decrease in inventory) +/- (+decrease in A/P or -increase in A/P)
Cash Payments for operating expenses?
Operating expenses +/- (+increase in prepaid expense or -decrease in prepaid expense) +/- (+decrease in accrued expenses payable or -increase in accrued expenses payable
Show the format of the direct method....
Cash Flows from Oper Act
Cash receiv from customers
Cash Pmts:
To Suppliers
For Operating Exp
For Income Taxes
Net Cash Provided by Operating Activities