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CF statement Flashcards

(51 cards)

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1
Q

What are the types of inflows for the operating CF under US GAAP?

A
  • Cash collected from customers
  • Interest and dividends received
  • Proceeds from the sale of securities held for trading
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2
Q

What are the types of outflows for the operating CF under US GAAP?

A
  • Cash paid to employees
  • Cash paid to the supplier
  • Cash paid for other expenses
  • Cash used to purchase trading securities
  • Interest paid
  • Taxes paid
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3
Q

What are the types of inflows for the investing CF under US GAAP?

A
  • Sale proceeds from fixed assets
  • Sale proceeds from long-term investments
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4
Q

What are the types of outflows for the investing CF under US GAAP?

A
  • Purchase of fixed assets
  • Cash used to acquire LT investment securities
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5
Q

What are the types of inflows for the financing CF under US GAAP?

A
  • Proceeds from debt issuance
  • Proceeds from the issuance of equity instruments
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6
Q

What are the types of outflows for the financing CF under US GAAP?

A
  • Repayment of LT debt
  • Payments made to repurchase stock
  • Dividend payments
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7
Q

What is the cash flow from operating activities?

A

It is the inflows and outflows of cash related to a firm’s day-to-day business activities.

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8
Q

What is the cash flow from investing activities?

A

They are inflows and outflows of cash generated from the purchase and disposal of long-term investments.

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9
Q

In which cash flow components foes investments in securities that are highly liquid are included?

A

They are in operating activities and not in investing activities.

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10
Q

What is the cash flow from financing activities?

A

They are cash inflows and outflows generated from the issuance and repayment of capital.

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11
Q

What does the company need to do with non-cash investing and financing activities?

A

They need to report it in a separate note or a supplementary schedule to the CF statement.

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12
Q

Which standard offers more flexibility for CF classification between US GAAP and IFRS?

A

IFRS is more flexible.

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13
Q

How is classified interest received under IFRS and US GAAP?

A
  • IFRS: operating or investing
  • US GAAP: operating
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14
Q

How is classified interest paid under IFRS and US GAAP?

A
  • IFRS: operating or financing
  • US GAAP: operating
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15
Q

How are classified dividends received under IFRS and US GAAP?

A
  • IFRS: operating or investing
  • US GAAP: operating
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16
Q

How are classified dividends paid under IFRS and US GAAP?

A
  • IFRS: operating or financing
  • US GAAP: financing
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17
Q

How is bank overdraft classified under IFRS and US GAAP?

A
  • IFRS: considered part of cash equivalents
  • US GAAP: financing
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18
Q

How are taxes paid classified under IFRS and US GAAP?

A
  • IFRS: generally operating, but it can sometimes be financing or investing
  • US GAAP: operating
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19
Q

What section is different between the different presentation option of the CF statement?

A

The operating section is the only one that is different. CFI and CFF are the same.

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20
Q

What is the presentation under the direct method?

A

It is similar to the form of an income statement. The sales are at the top, and it deducts all the expenses.

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21
Q

What is the presentation under the indirect method?

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A

CF from operations is calculated by applying a series of adjustments to net income. These adjustments are made for non-cash items, nonoperating items, and changes in working capital accounts resulting from accrual accounting.

22
Q

Why is the direct method useful?

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A

Because the information that is provided is very useful in evaluating past performance and making projections of future cash flows

23
Q

Why is the indirect method useful?

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A

It facilitates forecasting of future cash flows since forecasts of future net income simply have to be adjusted for changes in balance sheet accounts that are caused by differences between accrual and cash accounting.

24
Q

How is CFI calculated?

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A

It is calculated from changes in asset balances under the noncurrent assets section of the BS.

25
How is CFF calculated?
It is calculated from changes in the equity and noncurrent debt sections of the BS.
26
What are additions and adjustments to net income using the indirect method?
- Noncash items - Nonoperating losses - Increasing deferred income tax liabilities - Changes in working capital resulting from accruing higher amounts for expenses than the amounts of cash payments or lower amounts for revenues than the amounts of cash receipts.
27
What are substractions adjustments to net income using the indirect method?
- Noncash items - Nonoperating items - Decrease in deferred income tax liability - Changes in working capital resulting from accruing lower amounts for expenses than for cash payments or higher amounts for revenues than for cash receipts.
28
What is the value of gross fixed assets?
It indicates the historical cost of the fixed assets owned by the company at the balance sheet date.
29
What happens when fixed assets increase?
There has been a fixed asset purchase.
30
What happens when fixed assets decrease?
There has been fixed asset disposal.
31
What are net fixed assets?
It is the gross fixed assets minus accumulated depreciation.
32
How is cash flow from financing activities generated?
It is generated from the issuance and repayment of capital and distributions in the form of dividends to shareholders.
33
How does the change in long-term debt affect CFF?
- An increase from one year to the next implies cash inflows from new borrowings. - A decrease implies debt repayment and an outflow of cash.
34
What is the effect of a change in equity on CFF?
- An increase in common stock from one year to the next implies cash inflows from the issuance of new shares. - A decrease implies a share repurchase that results in a cash outflow.
35
What is the 3 steps process for converting an indirect CF statement into a direct statement?
1) Aggregate all revenues and all expenses. 2) Remove the effect of noncash items from aggregated revenues and expenses and separate the adjusted revenues and expenses into their respective CF items. 3) Convert the accrual-based items into cash-based amounts by adjusting for changes in corresponding working capital.
36
Describe the first step of conversion of an indirect CF statement into a direct statement.
- Aggregate all operating and nonoperating revenues and gains, such as sales and gains from the sale of assets. - Aggregate all operating and nonoperating expenses such as wages, depreciation, interest, and taxes.
37
Describe the second step of conversion of an indirect CF statement into a direct statement.
- Deduct noncash revenue items such as gain on sales of assets from total revenue. - Deduct noncash expense items such as depreciation from total expenses. - Break down the adjusted expenses into cash outflow items, such as cost of goods sold, wages, interest expense, and tax expense.
38
Describe the third step of conversion of an indirect CF statement into a direct statement.
An increase in an asset account is a cash outflow. An increase in a liability account is a cash inflow. - Convert revenue into cash receipts from customers by adjusting for accounts receivable and unearned revenue. - Convert COGS into cash payments to suppliers by adjusting for inventory and accounts payable. - Convert wages, interest, and tax expenses into cash amounts by adjusting for wages payable, interest payable, taxes payable, and deferred taxes.
39
What is the CF composition of a company in the early stage?
- Negative CFO as cash used to finance inventory rollout and receivables. - The negative CFO is supported by CFF from the issuance of debt or equity.
40
What is the CF composition of a company in the mature stage?
It has a positive CF from CFO that can repay the previous outflow in CFF.
41
Describe the operating CF.
- Changes in relevant asset and liability accounts should be used to determine whether business operations are a source or use of cash. - Companies should ideally have operating CF that exceeds NI. - The variability of the CFO and NI is an important determinant of the overall risk inherent in the company.
42
Describe the investing CF.
- Changes in long-term asset and investment accounts are used to determine sources and uses of CFI. - Increasing outflows may imply capex. Analysts should then evaluate how the company plans to finance these investments.
43
Describe the financing CF.
- Changes in interest-bearing debt and equity are used to determine sources and uses of CFF. - If debt issuance contributes significantly to CFF, the repayment schedule must be considered. - Increasing the use of cash to repay debt, repurchase stock, or make dividend payments might indicate a lack of lucrative investment opportunities for the company.
44
What is the free cash flow?
It is the excess of a company's CFO over capex undertaken during the year.
45
What is free cash flow to the firm (FCFF)?
It is the cash that is available to equity and debt holders after the company has met all its operating expenses and satisfied its capex and working capital requirements.
46
What are the treatment of dividends and interest for FCFF under IFRS?
- If the company has classified interest and dividends received as investing activities, they should be added back to CFO to determine FCC. - If dividends paid were deducted from CFO, they should be added back to CFO to calculate FCFF.
47
Do dividends need to be adjusted for taxes?
No, dividends paid are not tax deductible.
48
What is free cash flow to equity (FCFE)?
It refers to cash that is available only to common shareholders.
49
What is the indicator of a positive FCFE?
It suggests that the company has CFO available after payments have been made for capex and debt repayment. This excess belongs to common shareholders.
50
What are the 5 performance ratios?
- Cash flow to revenue - Cash return on assets - Cash retun on equity - Cash to income - Cash flow per share
51
What are the 6 coverage ratios?
- Debt coverage - Interest coverage - Reinvestment - Debt payment - Dividend payment - Investing and financing
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