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What does the statement of cash flows report? |
The statement of cash flow reports on a business’s cash receipts and cash payments for a specific period. |
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How does the statement of cash flows help users of financial statements? |
The statement of cash flow helps users do the following: · Predict future cash flows. · Evaluate management decisions. · Predict ability to pay debts and dividends. |
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Describe the three basic types of cash flow activities |
The three basic types of cash flow activities are: operating, investing, and financing. Operating activities are ones that create revenue or expenses in the entity’s business. Investing activities increase or decrease long-term assets. Financing activities include cash inflows and outflows involved with long-term liabilities and equity. |
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"What types of transactions are reported in the non-cash investing and financing activities section of the statement of cash flows?" |
Investing and financing transactions that do not involve cash are called non-cash investing and financing activities. |
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"Describe the two formats for reporting operating activities on the statement of cash flows." |
The two formats for reporting the operating activities section are the indirect and direct methods. The indirect method starts with net income and adjusts it to net cash provided by operating activities. The direct method restates the income statement in terms of cash. It shows all the cash receipts and cash payments from operating activities. |
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"Describe the five steps used to prepare the statement of cash flows by the indirect method." |
The five steps used to prepare the statement of cash flows by the indirect method are: Step 1: Complete the cash flows from operating activities section using net income and adjusting for increases or decreases in current assets (other than cash) and current liabilities. Also, adjust for gains or losses on long-term assets and non-cash expenses such as depreciation expense. Step 2: Complete the cash flows from investing activities section by reviewing the long-term assets section of the balance sheet. Step 3: Complete the cash flows from financing activities section by reviewing the long-term liabilities and equity sections of the balance sheet. Step 4: Compute the net increase or decrease in cash during the year. The |
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Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method. |
Depreciation expense, depletion expense, and amortization expense all impact the income statement decreasing net income. None of these use cash at the time they are expensed, these expenses occurred when the asset was purchased. Therefore, to go from net income to cash flows, depreciation must be removed by adding it back to net income. |
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If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why? |
A loss on disposal of long-term assets would be removed from the net income on the statement of cash flows by adding it back in the operating section. The loss was originally included in net income, but the cash from the sale needs to be shown in the investing section of the statement of cash flows. |
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"If current assets other than cash increase, what is the effect on cash? What about a decrease in current assets other than cash?" |
An increase in a current asset other than cash causes a decrease in cash. A decrease in a current asset other than cash causes an increase in cash. |
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"If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?" |
An increase in current liabilities causes an increase in cash. A decrease in current liabilities causes a decrease in cash. |
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"What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?" |
The long-term assets accounts must be evaluated when completing the investing activities section of the statement of cash flow. |
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"What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?" |
The long-term liability accounts and the equity accounts must be evaluated when completing the financing activities section of the statement of cash flow. |
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"What should the net change in cash section of the statement of cash flows always reconcile with?" |
The net change in the cash section of the statement of cash flows reconciles the statement of cash flows. It is computed by combining the cash provided for or used by operating, investing, and financing activities. This amount should equal the change in cash on the balance sheet. |
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What is free cash flow, and how is it calculated? |
Free cash flow is the amount of cash available from operating activities after paying for planned investments in long-term assets and after paying dividends to shareholders. It is calculated as: Net cash provided by operating activities – Cash planned for investments in long-term assets – Cash dividends. |
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