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Questions and Answers
How does the statement of cash flow differ from the statement of income?
What are some typical transactions for each category of cash flows?
Receipts from customers, payments to suppliers, payments to employees, payments of interest, payments of income taxes.
Cash flows from operating activities are a source for future debt repayments.
True
The cash-to-cash cycle is a cash flow challenge because the payment received by a customer (inflow) may be used by the company to pay towards ______.
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What is the purpose of an internal control system?
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What are the two methods to determine the bad debts amount?
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What is the most common starting point for the operating activities section in the Statement of Income?
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What are the three categories of business activities?
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What is Working Capital?
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Profit = ______
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Public companies' shares trade privately and are not available through public exchanges.
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Match the following terms with their descriptions:
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Study Notes
Statement of Cash Flows vs. Statement of Income
- Statement of Cash Flows: Reflects cash basis accounting, focuses on operating, investing, and financing activities.
- Statement of Income: Reflects accrual basis accounting, focuses solely on operating activities.
- Key Difference: Statement of Income recognizes revenue when earned, while Statement of Cash Flows focuses on when cash is received or paid.
Cash Flow Categories
- Operating Activities: Cash generated from the company's core business operations (e.g., sales, purchases, salaries).
- Investing Activities: Cash used for acquiring long-term assets (e.g., property, equipment) or investing in other companies.
- Financing Activities: Cash obtained from or repaid to external investors or creditors (e.g., borrowing, issuing shares).
Significance of Operating Activities
- Core Business Focus: Reflects the company's ability to generate cash from its primary operations.
- Future Funding Source: Provides resources for debt repayment and dividend distribution.
Direct Method: Categories
- Receipts from Customers: Cash received from sales of goods or services.
- Payments to Suppliers: Cash paid for purchase of goods or services used in operations.
- Payments to Employees: Cash paid for salaries and wages.
- Payments of Interest: Cash paid related to debt financing.
- Payments of Income Taxes: Cash paid for taxes on profits.
Cash-to-Cash Cycle
- Challenge: Companies must manage the timing of cash inflows (from customers) and outflows (for inventory).
Other Key Concepts
- Cash Equivalents: Highly liquid assets readily convertible to cash (e.g., short-term investments).
- Internal Control System: safeguards company assets from misuse, fraud, or theft.
- Customer Payment Risk: Customers may not pay on time, leading to potential bad debts.
- Carrying Amount of Accounts Receivable: Total accounts receivable less the allowance for doubtful accounts (potential bad debts).
Bad Debts Estimation Methods
- Percentage of Credit Sales Method: Estimates bad debts based on a percentage of credit sales.
- Aging of Accounts Receivable Method: Estimates bad debts based on the age of outstanding receivables.
Statement of Income: Starting Point
- Net Earnings (Net Income) is often used as the starting point for the operating activities section of the Statement of Cash Flows.
Aging of Accounts Receivable Method
- Basis: Utilizes the age of various receivables to estimate bad debt expense.
- Financial Position Method: The method is also known as the statement of financial position method.
Corporate Structures
- Public Companies: Shares traded on public stock exchanges.
- Private Companies: Shares traded privately, not available on public exchanges.
Financial Statement Reporting
- Frequency: Financial statements are typically prepared for shareholders quarterly (every three months).
Business Activities
- Financing Activities: Obtaining funds from investors or creditors.
- Investing Activities: Acquiring long-term assets or investing in other entities.
- Operating Activities: Day-to-day business operations, generating revenue and incurring expenses.
Sources of Financing
- Investors: Issuing shares of stock.
- Creditors: Taking out loans or making purchases on credit
Operating Activities
- Inflows: Cash received from customers.
- Outflows: Cash paid for business expenses.
Statement of Income
- Purpose: Measures the company's performance over a specific period by reporting on its revenues and expenses.
Profit
- Formula: Income (revenues) minus expenses.
Earnings per Share
- Calculation: Company's net income divided by the average number of outstanding common shares owned by shareholders.
Earnings per Share: Value to Shareholders
- Investment Perspective: Shows shareholders how much money they would potentially receive per share at the end of a fiscal year.
Statement of Changes in Equity
- Purpose: Details how each component of shareholders' equity changed during a reporting period, distinguishing between transactions with shareholders and operational changes.
Key Liquidity Measures
- Working Capital: A common measure of liquidity, representing a company's short-term ability to meet its financial obligations.
Working Capital Formula
- Formula: Current Assets minus Current Liabilities.
Current Liabilities
- Definition: Liabilities due within the next 12 months.
Accounting Equation
- Formula: Assets equal Liabilities plus Shareholders' Equity.
Asset Classification
- Current Assets: Short-term assets used within the next 12 months (e.g., cash, accounts receivable, inventory).
- Non-Current Assets: Long-term assets held for more than one year (e.g., property, plant, equipment, intangible assets).
Goodwill
- Definition: A premium paid for acquiring another company, reflecting the value of factors like brand reputation or customer relationships.
Liability Characteristics
- Present Obligation: A commitment to pay or provide something in the future.
- Future Economic Benefits: Outflow of resources that will benefit the company.
- Past Event: The obligation arises from an event that has already occurred.
Accrued Liabilities
- Definition: Liabilities related to expenses that have been incurred but not yet paid (e.g., interest expense, warranty expense).
Public vs Private Accounting Standards
- Public Companies: Adopt International Financial Reporting Standards (IFRS).
- Private Companies: Typically use Accounting Standards for Private Enterprises (ASPE).
Key Focus of IFRS and ASPE
- IFRS: Meets the needs of shareholders (current and potential) and creditors.
- ASPE: Tailored for smaller, privately-held companies, providing simplified reporting requirements.
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Description
This quiz explores the differences between the Statement of Cash Flows and the Statement of Income, detailing their respective focuses on cash vs. accrual accounting. It also delves into the categorization of cash flow activities, such as operating, investing, and financing. Test your understanding of these critical financial concepts.
