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CFA Exams|544 Questions and Essays with 100% Verified Answers
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CFA Exams|544 Questions and Essayswith 100% Verified Answers
Cash Flow Classification Under U.S. GAAP - ✔ ✔ CFO
Inflows
Cash collected from customers.
Interest and dividends received
Proceeds from sale of securities held for trading
Outflows
Cash paid to employees.
Cash paid to suppliers.
Cash paid for other expenses.
Cash used to purchase trading securities.
Interest paid.
Taxes paid.
CFI
Inflows
Sale proceeds from fixed assets.
Sale proceeds from long-term investments
Outflows
Purchase of fixed assets.
,Cash used to acquire LT investment securities.
CFF
Inflows
Proceeds from debt issuance.
Proceeds from issuance of equity instruments
Outflows
Repayment of LT debt.
Payments made to repurchase stock.
Dividends payments.
- ✔ ✔ The sum of cash flow from operating, investing, and financing
activities equals the change in cash over the year
- ✔ ✔ Operating income and expense items are recognized on the income
statement on an accrual basis, which means that revenues and expenses are
recognized when incurred, irrespective of when the associated cash flows occur.
When the timing of an expense or revenue item differs from the associated cash
flow, it is reflected in changes in balance sheet accounts. For example, if revenue
is recognized prior to the receipt of cash, accounts receivable will increase.
- ✔ ✔ If an expense is incurred but not paid for, it is charged on the
income statement and accounts payable increase.
,- ✔ ✔ CFI is calculated from changes in asset balances under the noncurrent
assets section of the balance sheet.
CFF is calculated from changes in the equity and noncurrent debt sections of the
balance sheet.
- ✔ ✔ A company's retained earnings (on the balance sheet) represent
cumulative net income that has not been distributed to shareholders. Every year,
if the company makes a profit, some of it may be distributed to shareholders as
dividends, while the rest is added to retained earnings.
- ✔ ✔ If inventory levels have increased from the previous year, more liquidity
of the firm is tied up in inventories. This is a use of cash for the firm.
If inventory levels have decreased over the year, less of the firm's cash is tied up
in inventory. This is a source of cash for the firm.
Increases in current assets are uses of cash and decreases in current assets are
sources of cash. Changes in asset balances and cash are negatively related.
- ✔ ✔ If the total amount due to the firm's creditors has increased over the year,
it implies that the firm has borrowed more money. This represents a source of
cash to the firm.
If the amount payable to creditors has fallen over the year, some creditors
have been paid back, which is a use of cash for the firm.
Increases in current liabilities are sources of cash, while decreases in current
liabilities are uses of cash. Changes in liability balances and cash are positively
related.
, The Direct Method - ✔ ✔ Step 1: Start with sales on the income statement. Go
through each income statement account and adjust it for changes in related
working capital accounts on the balance sheet. This serves to remove the effects
of the timing difference between the recognition of revenues and expenses and
the actual receipt or payment of cash.
Step 2: Determine whether changes in these working capital accounts indicate
a source or use of cash. Make sure you put the right sign in front of the income
statement item. Sales are an inflow item so they have a positive effect on cash
flow, while COGS, wages, taxes, and interest expense are all outflow items that
have negative effects on cash flow.
Step 3: Ignore all nonoperating items (e.g., gain/loss on sale of plant and
equipment) and noncash charges (e.g., depreciation and amortization).
The Indirect Method - ✔ ✔ Step 1: Start with net income. Go up the income
statement and remove the effects of all noncash expenses and gains from net
income. For example, the negative effect of depreciation is removed from net
income by adding depreciation back to net income. Cash-based net income will
be higher than accrual-based net income by the amount of noncash expenses.
Step 2: Remove the effects of all nonoperating activities from net income. For
example, the positive effect of a gain on sale of fixed assets on net income is
removed by subtracting the gain from net income.
Step 3: Make adjustments for changes in all working capital accounts. Add all
sources of cash (increases in current liabilities and declines in current assets) and
subtract all uses of cash (decreases in current liabilities and increases in current
assets)
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