Cash Flow and Financing Activities Disclosure
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Questions and Answers

What is the main difference between the direct method and the indirect method of determining cash flows from operating activities?

  • The direct method considers major classes of gross cash receipts and payments, while the indirect method adjusts net profit for non-cash transactions. (correct)
  • The direct method involves adjusting sales and costs for non-cash items, while the indirect method focuses on inventories and payables.
  • The direct method adjusts net profit for non-cash transactions, while the indirect method considers gross cash receipts and payments.
  • The direct method adjusts for investing and financing activities, while the indirect method focuses solely on operating activities.

    • Which of the following statements is true regarding the direct method of determining cash flows from operating activities?

  • It only considers net profit and adjusts for non-cash items like depreciation.
  • It involves analyzing gross cash receipts and gross cash payments directly from accounting records. (correct)
  • It primarily focuses on adjusting inventories and payables for changes in the period.
  • It is more complex and time-consuming compared to the indirect method.

    • In the context of the direct method, what type of information can be obtained by analyzing the cash book?

  • Information about non-cash items like depreciation on fixed assets.
  • Information about cash received from trade receivables and payments to trade payables. (correct)
  • Information about changes in inventories and operating receivables.
  • Information about investing or financing activities associated with the company.

    • What is one of the adjustments made in the direct method for determining cash flows from operating activities?

    <p>Adjusting for changes in inventories and operating receivables and payables.</p> Signup and view all the answers

    Which of the following is a key characteristic of the indirect method for determining cash flows from operating activities?

    <p>It begins with net profit and adjusts for non-cash items, deferrals, or accruals.</p> Signup and view all the answers

    What type of items are included in the adjustments made under the indirect method for determining cash flows from operating activities?

    <p>Items that affect net profit but are not actual cash transactions.</p> Signup and view all the answers

    Which of the following is NOT a component of the adjustments made under the direct method for determining cash flows from operating activities?

    <p>Items where the cash effects are associated with investing or financing activities.</p> Signup and view all the answers

    Study Notes

    Cash Flow Disclosures

    • Separate disclosure of cash flows from investing activities is essential for understanding expenditures aimed at generating future income and cash flows.
    • Financing activities involve changes in the size and composition of owner’s capital and borrowings within an enterprise.
    • Separate disclosure of cash flows from financing activities aids in predicting future cash flow claims by providers of funds.

    Calculation of Cash Operating Activities

    • Cash flows from operating activities stem from transactions affecting net profit or loss.
    • Examples include:
      • Cash receipts from sales of goods and services
      • Cash receipts from fees, commissions, and other revenues
      • Cash payments to suppliers and employees.
    • Cash Flow from Operating Activities (Indirect Method) includes:
      • Start with net profit for the year.
      • Add non-cash and non-operating expenses (e.g., depreciation, loss on asset sales).
      • Subtract non-cash and non-operating income (e.g., profit on asset sales).

    Calculation of Cash Investing Activities

    • Cash investing activities pertain to acquiring and disposing of long-term assets, non-operating current assets, and investments.
    • Outflows relate to the acquisition of these assets, while inflows result from their disposal.
    • This category encompasses all inflows and outflows not associated with operating activities.

    Calculation of Cash Financing Activities

    • Cash financing activities involve changes in the enterprise’s capital and borrowings.
    • Actions like redemption of shares and repayment of borrowings lead to cash outflows.

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    Description

    Learn about the separate disclosure of cash flows arising from investing and financing activities in accounting. Understand how these activities impact the size and composition of owner's capital and borrowings.

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