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14 Cards in this Set

  • Front
  • Back
  • 3rd side (hint)
Statement of CF's
-Required part of a full set of F/S's for all business enterprises.
-Purpose is to provide information about the sources of cash and cash equivalents and the uses of cash and cash equivalents including:
1. Operating CF's: cash receipts and disbursements from transactions reported on the I/S and current asset and liabilities.
2. Investing CF's: cash receipts and disbursements from noncurrent assets.
3. Financing CF's: cash receipts and disbursements from debt (including noncurrent liabilities) and equity.
-Statement also presents information about material noncash events.
Cash & Cash Equivalents
-Statement of CF's reconciles the cash and cash equivalents amount presented on the beginning B/S to the cash and cash equivalents presented on the ending B/S (i.e. the change in cash for the period).
1. Cash is defined as actual cash
2. Cash equivalents are defined as short-term liquid investments that are: quickly convertible and so near maturity (original maturity date to the investor was w/in 3 months of the purchase date) that the risk of changes in value b/c of interest rate changes are insignificant.
-Under GAAP, bank overdrafts are excluded from cash and classified as financing. Under IFRS, cash may include bank overdrafts repayable on demand if they're an integral part of an entity's cash management.
-Purpose: cash concept used b/c investors, creditors, and other interest parties need information about the entity's available cash and cash needs.
Methods of Presenting the Statement of CF's
-2 ways, the direct method and the indirect method. GAAP and IFRS encourage the use of the direct method but most firms use the indirect method.
-Presentation of investing and financing activities is the same for both. Operating activities are presented slightly differently and certain of the required disclosures are different (although both come up w/ the same amount).
Direct Method
-Operating activities section shows the major classes of operating cash receipts and disbursements. Noncash items (depreciation, amortization, depletion, income from affiliates) do not appear in direct method operating cash flow.
-A reconciliation of net income to net cash flows from operating activities is required to be provided in a separate schedule under GAAP (basically the indirect method). Reconciliation isn't required under IFRS.
-If assets go up from a period, you are buying them = outflow. Assets go down, selling them = inflow.
-If Liabilities or Equity goes up, you're getting money = inflow. If they go down, you're paying money = outflow.
Indirect Method
-Companies that choose are required to report the same amount of net cash flows from operating activities indirectly, by adjusting net income to reconcile it to net cash flows from operating cash flows, as follows:
CFO = Net income + Noncash expenses / losses - noncash income / gains + increases (decreases) in operating liabilities / (assets) - Increases (decreases) in operating assets / (liabilities)
Operating Activities
-Involve producing goods and delivering services to customers. All transactions not categorized as investing or financing are operating activities. GAAP requires reconciliation of net income to net cash provided by operating activities. If direct method is chosen, a reconciliation will appear in a supplemental schedule.
-If the indirect method is chosen, reconciliation is part of the body of the formal statement. "Most" working capital is here.
-Change in operating assets = all current cash except cash and cash equivalents.
-Change in operating liabilities = all non-interest bearing liabilities.
Direct Method- Operating
-Major classes of cash receipts and disbursements are presented in their gross amounts and totaled to arrive at "net cash flow provided by (used in) operating activities." Following categories are reported separately (1-5 inflows, 6-11 outflows):
1. Cash received from customers = Revenues ± Decrease (Increase) in Receivables ± Increase (Decrease) in Unearned Revenue
2. Interest Received*
3. Dividends Received* (paid = financing outflow)
4. Other operating cash receipts (ex: insurance proceeds, lawsuit settlements)
5. Cash from sale of trading securities (all other investing)
6. Cash paid to suppliers = COGS ± Increase (Decrease) in Inventory ± Decrease (Increase) in A/P
7. Cash paid to employees = Salaries and Wages Expense ± Decrease (Increase) in Wages Payable
8. Interest Paid*
9. Income taxes paid*
10. Cash paid for trading securities
11. Other operating cash payments = Other Operating Expenses ± Increase (Decrease) in Prepaid Expenses ± Decrease (Increase) in Accrued Liabilities
*US only
Indirect Method- Operating
Net Income Per I/S + Depreciation and amortization (discount) + Losses - Gains and amortization (premium) - Equity earnings affiliate ± the change: Decrease (Increase) in operating assets ± the change: Increase (Decrease) in operating liabilities = CFO
1. Adjustment to Net Income is done by removing the effects on net income of: all deferrals of past operating cash receipts and disbursements (Ex: subtracting increase of inventory and prepaid items), all accruals of expected future operating cash receipts and disbursements (Ex: subtracting increase in A/R, adding increase in A/P), all items that are included in net income that don't affect operating cash receipts and disbursements (Ex: adding deprivation, subtracting gains).
Determination of Effect on Cash Flow:
1. An increase to an asset or a "debit balance" account will have the effect on the statement of cash flows as a decrease to cash (indirect effect).
2. A decrease to an asset of a "debit balance" account will have an increase to cash (indirect effect).
3. An increase in a liability, an equity, or a "credit balance" account will have an increase to cash (direct effect).
4. A decrease in a liability, an equity, or a "credit balance" account will have a decrease to cash (direct effect).
Short-Cut CF Effects
1. Changes in debit balance accounts will have the opposite effect on cash flows (b/c cash is a debit balance account).
2. Changes in credit balance account will have the same effect on cash flows.
Gains and Losses
-"Non-operating," investing inflow
1. Gains: are adjusted out of the operating activities section and (generally) into the investing activities section by subtracting their effects from net income.
2. Losses: are adjusted out of the operating activities section and (generally) into the investing activities section by adding their effect to net income.
Investing Activities
-The change in noncurrent assets. Has an "inverse" relationship: noncurrent assets go up = you bought more, outflow. Noncurrent assets go down = you sold, inflow. Types:
1. Making loans to other entities (outflow)
2. Purchasing (outflow) or disposing of (inflow) trading securities (if classified as noncurrent), AFS securities, and held-to-maturity investment securities.
3. Acquiring (outflow) or disposing of (inflow) PP&E
4. Acquiring another entity under the acquisition method using cash (outflow). Payment is shown net of cash acquired.
Financing Activities
-The change in interest bearing debt and equity. "Direct" effect, if they go up = inflow, if they go down = outflow.
1. Equity (Owner-Oriented) Activities: obtaining resources from owners such as issuing stock (inflow), or providing owners w/ a return on their investment such as paying dividends or repurchasing stock (outflow).
2. Noncurrent Liabilities (Creditor-Oriented) Activities: (1) Obtaining resources from creditors such as issuing bonds, notes, or other borrowings (inflow). (2) Payments of principal (not interest which is in operating section) on amount borrowed (outflow).
Noncash Investing and Financing Activities
Ex's are: purchase of fixed assets by issuance of stock, conversion of bonds to equity, acquiring assets through capital lease obligation, exchange of noncash asset for another noncash asset.
-Information should be provided separately in a supplemental disclosure.
IFRS Differences in Reporting CF's
-IFRS allows more flexibility than GAAP in classifying cash flows relating to interest, dividends, and income taxes. IFRS classifies taxes paid as CFO but allows allocation to CFI or CFF for portions specifically identified with investing and financing activities.
-IFRS requires disclosure of tax related cash shows separately w/in the statement of CF's.
-GAAP requires the disclosure of interest and taxes paid in a footnote if not presented in the statement of CF's.
-Table summarizing differences below.