WGU Intermediate Accounting Ch 23 – Flashcards

provide information about a company's cash receipts and cash payments during a period. A secondary objective is to provide cash-basis information about the company's operating, investing, and financing activities. The statement of cash flows therefore reports cash receipts, cash payments, and net change in cash resulting from a company's operating, investing, and financing activities during a period

1. The entity's ability to generate future cash flows. 2. The entity's ability to pay dividends and meet obligations 3. The reasons for the difference between net income and net cash flow from operating activities. 4. The cash and noncash investing and financing transactions during the period.

1. Operating activities involve the cash effects of transactions that enter into the determination of net income, such as cash receipts from sales of goods and services, and cash payments to suppliers and employees for acquisitions of inventory and expenses. 2. Investing activities generally involve long-term assets and include (a) making and collecting loans, and (b) acquiring and disposing of investments and productive long-lived assets. 3. Financing activities involve liability and stockholders' equity items and include (a) obtaining cash from creditors and repaying the amounts borrowed, and (b) obtaining capital from owners and providing them with a return on, and a return of, their investment. **Remember Loans are in Investing and Bonds are in Financing.

Note the following general guidelines about the classification of cash flows. 1. Operating activities involve income statement items. 2. Investing activities involve cash flows resulting from changes in investments and long-term asset items. 3. Financing activities involve cash flows resulting from changes in long-term liability and stockholders' equity items.

Things needed (3 sources): 1. Comparative balance sheets 2.Current income statement data 3.Selected transaction data Followed by 3 major steps: 1.Determine the change in cash. 2.Determine the net cash flow from operating activities. 3.Determine net cash flows from investing and financing activities.

the indirect method adjusts net income for items that affected reported net income but did not affect cash. (See image) DIRECT METHOD cash receipts-cash payments= net cash from operating activities cash receipts from customers= sales revenue (+ decrease in AR or - increase in AR) cash payments to suppliers= COGS (+ increase in inventory or - decrease in inventory) and/or (+ decrease in AP or - increase in AP) Cash payments for operating expenses=operating expenses (+ increase in prepaid expenses or - decrease in prepaid expenses) and/or (+ decrease in accrued expenses payable or - increase in accrued expenses payable)

The principal advantage of the direct method is that it shows operating cash receipts and payments. The principal advantage of the indirect method is that it focuses on the differences between net income and net cash flow from operating activities. That is, it provides a useful link between the statement of cash flows and the income statement and balance sheet. the FASB encourages the use of the direct method over the indirect method FASB requires that the company provide in a separate schedule a reconciliation of net income to net cash flow from operating activities. If a company uses the indirect method, it can either report the reconciliation within the statement of cash flows or can provide it in a separate schedule, with the statement of cash flows reporting only the net cash flow from operating activities

A major difference in the definition of cash and cash equivalents is that in certain situations, bank overdrafts are considered part of cash and cash equivalents under IFRS (which is not the case in GAAP). Under GAAP, bank overdrafts are classified as financing activities. IFRS requires that non-cash investing and financing activities be excluded from the statement of cash flows. Instead, these non-cash activities should be reported elsewhere. This requirement is interpreted to mean that non-cash investing and financing activities should be disclosed in the notes to the financial statements instead of in the financial statements. Under GAAP, companies may present this information in the cash flow statement. One area where there can be substantive differences between IFRS and GAAP relates to the classification of interest, dividends, and taxes. IFRS provides more alternatives for disclosing these items, while GAAP requires that except for dividends paid (which are classified as a financing activity), these items are all reported as operating activities.