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16 Cards in this Set
- Front
- Back
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Compare and Contrast cash flows:
cash flow statement |
items on the CF come from 2 sources:
1. income statement items 2. changes in balance sheet accounts |
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Compare and Contrast cash flows:
CF operating |
consists of the inflows and outflows of cash resulting from transactions that affect a firms net income
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Compare and Contrast cash flows:
CF investing |
consists of the inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and certain investments
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Compare and Contrast cash flows:
CF financing |
consists of inflows and outflows of cash resulting from transactoins affectin a firms capital structure
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Compare and Contrast cash flows:
operating activities |
Inflows:
cash collected from customers interest and dividends received sale proceeds from trading securities Outflows: cash paid to employees and suppliers cash paid fro other expenses acquisition of trading securities interest paid taxes paid |
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Compare and Contrast cash flows:
investing activities |
Inflows:
sale proceeds from fixed assets sale proceeds from debt and equity investments principal rreceived from loans made to others Outflows: acquisition of fixed assets acquisition of debt and equity investments loans made to others |
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Compare and Contrast cash flows:
financing activities |
Inflows:
principal amounts of debt issued proceeds from issuing stock Outflows: principal apid on debt payments to reacquire stock dividends paid to shareholders |
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Compare and Contrast cash flows:
Debt and equity investments and loans made to others are |
reported as investing activities, however the income from these investments are reported as an operation, and the principal amounts borrowed from others are reported as financing, however the interest paid is reported as operations, and dividends paid to shareholders is financing,
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Compare and Contrast cash flows:
noncash investing and financing activities |
not reported in the CF statement, they do not result in inflows or outflows of cash,
must be disclosed in the footnotes or supplemental schedule to the CF statement |
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The key differences in CF statements prepared GAAP and IFRS
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GAAP - dividends paid to the firms shareholders are reported as financing while interest paid is reported as operations, interest and dividends recieved from inestments are also reported as operations
IFRS - more flexibility, interest and dividends recieved may be either operating or investing, dividends paid to the companys shareholders and interest paid on the companys debt may be either operating or financing GAAP - all taxes paid are reproted as operating, even those in financing and investing, IFRS - income taxes reported as operating unless the expense is associated with an investing or financing transaction |
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Difference between the direct and indirect method of presenting cash from operating activities
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1. Both methods are permitted under GAAP and IFRS
2. Both standards encourage the direct method 3. the difference relates to the presentation of CF from operating activities 4. investing activities and financing activities are the same under GAAP and IFRS |
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Understanding CF:
Direct Method |
each line item of the accrual based income statement is converted into cash receipts or caash payments, this is because under the accrual method the timing of revenue and expense recognition may differ from the timing of related CF's, under the cash-basis accounting, revenue and expense recognition occur when cash is received or paid, simply stated, the direct method converts an accrual basis income statement into a cash basis income statemnet
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Understanding CF:
Indirect method |
net income is converted to operating cash flow by making adjustments for transactions that affect net income but are not cash transactions, these adjustmnts include eliminating noncash expenses (depreciation, amortization), nonoperating items (gains and losses), and changes in balance sheet accounts resulting from accrual accounting events
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Arguments in Favor of Direct and Indirect method
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Direct method - presents the firms operating cash receipts and payments, while the indirect method only presents the net result of these receipts adn payments, therefore the direct method provides more info than the indirect method, this info is useful in estimating future operating cash flows
Indirect - focuses on the differences in net income and operating cash flow, provides a useful link to teh income statement when forecasting future operating CF, analysts forecast net income and then derive operating CF by adjusting net income fro the differences between accrual accountings and the cash basis of accounting |
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Disclosure of Direct and Indirect method
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GAAP - direct method presentation must also disclose the adjustments necessary to reconcile net income to CF from operating actibities, this disclosure is the same information that is presented in an indirect method CF statement, this reconciliation is not required under IFRS
IFRS - payments for interest and taxes must be disclosed separately in hte cash flow statement underr either mehtod, GAAP payments for interest and taxes can be reported in the cash flow statement or disclosed in the footnotes |
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The CF statement link to the I/S and the B/S
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reconciles the beginning and end balances of cash over an accounting period,
operating cf + investing cf + financing = change in cash balance + beginning cash balance = ending cash balance Important to remember, this is accrual accounting, net income is not the same as cash earnings, when timing of revenue or expense recognition differs from the receipt or payment of cash, it is reflected in changes in B/S accounts |
