Statement of Cash Flows Overview
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Questions and Answers

What is the Cash Flow from Operations (CFO) using the Indirect Method calculated in the content?

  • $143,000
  • $122,000
  • $134,000
  • $112,000 (correct)

    • Which adjustment is added to net income when calculating CFO due to depreciation?

  • Increase in receivables
  • Amortization of patents
  • Decrease in inventories
  • Accumulated depreciation (correct)

    • Which of the following changes in working capital decreases CFO?

  • Increase in payables
  • Increase in receivables (correct)
  • Increase in accrued liabilities
  • Decrease in prepaid expenses

    • How does an increase in inventories affect the calculation of CFO?

    <p>It decreases CFO</p> Signup and view all the answers

    When calculating CFO, how do increases in liabilities influence the cash flow?

    <p>They increase cash flow</p> Signup and view all the answers

    What is the impact of a decrease in receivables on the CFO calculation?

    <p>It increases CFO</p> Signup and view all the answers

    Which expense adjustment is included in the calculation of net income presented in the financial statements?

    <p>Depreciation of equipment</p> Signup and view all the answers

    The Cash Flow from Operations indicates what aspect of a company's financial health?

    <p>Liquidity and cash-generating ability</p> Signup and view all the answers

    What is the net cash from operating activities?

    <p>$194,000</p> Signup and view all the answers

    What is the total cash flow from investing activities?

    <p>(338,000)</p> Signup and view all the answers

    Which account represents a cash inflow from financing activities?

    <p>Issuance of bonds</p> Signup and view all the answers

    What is the overall impact on cash as indicated by the net decrease or increase in cash?

    <p>Decrease of $12,000</p> Signup and view all the answers

    How does depreciation affect cash flow from operations?

    <p>It reduces taxable income, affecting cash flow positively.</p> Signup and view all the answers

    Which of the following represents a current liability change affecting cash flow?

    <p>Increase in accounts payable</p> Signup and view all the answers

    What impact do purchases of fixed assets have on cash flow from investing activities?

    <p>They create an outflow.</p> Signup and view all the answers

    What is the proper classification of long-term bonds issued?

    <p>Financing inflow</p> Signup and view all the answers

    What is the first step in the Indirect Method for calculating Cash Flow from Operations (CFO)?

    <p>Start with Net Income from the Income Statement.</p> Signup and view all the answers

    How is depreciation treated when calculating CFO using the Indirect Method?

    <p>It is added back to Net Income.</p> Signup and view all the answers

    What impact does an increase in accounts receivable have on Cash Flow from Operations?

    <p>It results in an operating outflow.</p> Signup and view all the answers

    In which scenario is an increase in inventory considered an operating outflow during CFO calculations?

    <p>When the inventory is purchased for resale.</p> Signup and view all the answers

    What type of transactions should be eliminated when calculating Cash Flow from Operations?

    <p>Non-operating transactions.</p> Signup and view all the answers

    Which of the following would NOT be a non-cash item to adjust for in CFO calculations?

    <p>Interest payments.</p> Signup and view all the answers

    How would a decrease in accounts payable affect Cash Flow from Operations?

    <p>It represents an operating outflow.</p> Signup and view all the answers

    What is the correct treatment of a loss on sale of PPE when calculating CFO?

    <p>Add the loss to net income.</p> Signup and view all the answers

    In terms of changes in working capital, what does an increase in prepaid insurance indicate?

    <p>An operating outflow.</p> Signup and view all the answers

    Which of the following is a correct example of an operating inflow?

    <p>Increase in accounts payable.</p> Signup and view all the answers

    When calculating CFO, which of the following statements is true regarding changes in working capital?

    <p>A decrease in current liabilities is an outflow.</p> Signup and view all the answers

    To convert Net Income to CFO, adjustments must be made for which of the following?

    <p>Non-cash items, non-operating items, and changes in working capital.</p> Signup and view all the answers

    Which of the following would be considered a non-operating activity when analyzing cash flows?

    <p>Income from investing activities.</p> Signup and view all the answers

    Study Notes

    Statement of Cash Flows

    • A financial statement that tracks the inflow and outflow of cash and cash equivalents over a specific period.
    • It's crucial for understanding a company's ability to generate cash from its core operations.
    • This statement is presented along with the income statement and balance sheet.
    • Classifies cash flows into three main categories: operating, investing, and financing activities.

    Learning Outcomes

    • Understanding the need for the Statement of Cash Flows (it helps to understand how a company generates funds for short-term and long-term liabilities).
    • Cash flow classifications are Operating, Investing, and Financing.
    • Different types of Cash Flow-related ratios are used to analyze a company's financial health.
    • How to calculate Cash from Operations (CFO).
    • The procedure to prepare a Cash Flow Statement.

    The Statement of Cash Flows

    • The International Accounting Standards Board (IASB) issued IAS 7, Cash Flow Statement in 1992 (effective since 1994).
    • It became mandatory for businesses to include a statement of cash flows in their financial reports apart from the income statement and balance sheet.
    • The Statement of Cash Flows (CFS) provides insights into the inflows and outflows of cash and cash equivalents during an accounting period.
    • Cash equivalents are highly liquid, marketable securities or cash on deposit.
    • The CFS breaks down cash inflows and outflows into operating, investing, and financing categories.
    • The information concerning cash flow is also found in the balance sheet, however, it's not presented in the same way as the CFS.

    Utility of the CFS

    • Helps in determining a company's ability to pay dividends.
    • Bankers use the CFS to analyze the ability of a firm to repay loans on time.
    • Suppliers use it to check if the company can settle debts timely.
    • Tax authorities use it to determine if the company is liable to pay tax.
    • Competitors use it to examine the company's position in cash management.
    • In case of negative cash, companies can explore options like short-term loans (overdraft) or selling accounts receivable to a bank.

    Statement of Cash Flows - General Structure

    • The statement is usually presented in a tabular format.
    • Cash flow from operating activities (e.g., paying salaries, selling equipment) is shown in the table.
    • Cash flow from investing activities (e.g., selling or purchasing plants and equipment) is documented.
    • Cash flow from financing activities (e.g., contracting or repaying loans) is recorded.
    • The net increase or decrease in cash and cash equivalents is presented.
    • Cash and cash equivalents at the beginning of the year and the end of the year are indicated.
    • The overall change in cash and cash equivalents is the difference between the beginning and ending balances.

    The CFS Classification of Activities

    • Operating: This concerns the normal business operations, including revenue and expenses.
    • Investing: This concerns inflows and outflows from long-term assets like purchases or sales of land, property, and equipment.
    • Financing: This relates to financing activities such as issuing bonds, paying dividends, retiring loans and issuing equity.

    Calculating Cash from Operating Activities (CFO)

    • This is a crucial step to calculate the Cash Flow Statement.
    • The CFO can be positive or negative.
    • A negative CFO means that the company used more cash in its operations than it generated.
    • This is a warning signal to financial analysts.
    • The CFO can be calculated using the direct method or the indirect method.
      • Direct method: involves adding up cash inflows and subtracting outflows.
      • Indirect method: starts with net income and makes adjustments for non-cash items and changes in working capital.

    Changes in Working Capital

    • The indirect method requires adjustments to Net Income for changes in working capital.
    • Working capital includes current assets and liabilities.
    • The rule to decide whether increases or decreases in working capital are inflows or outflows.
      • Decrease in current assets (except cash) generally indicates an inflow.
      • Increase in current liabilities or current assets (except cash) generally indicates an outflow.

    Exercise Examples

    • Multiple exercises are provided to illustrate how to apply the different concepts in the statement of cash flows.
    • Different situations are presented, requiring selections of growth firms, firms in danger of bankruptcy, etc.

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    Description

    Explore the fundamentals of the Statement of Cash Flows, a financial statement that records cash inflows and outflows over a specific period. This quiz covers key classifications, such as operating, investing, and financing activities, and explains how to prepare a Cash Flow Statement and analyze cash flow ratios.

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