CFA Exams|544 Questions and Essays with
100% Verified Answers
Presentation format: There is a difference in the presentation requirements for
cash flow from operating activities.
Classification of cash flows: Certain cash flows are classified differently under IFRS
and U.S. GAAP. IFRS off...
CFA Exams|544 Questions and Essays with
100% Verified Answers
Presentation format: There is a difference in the presentation requirements for
cash flow from operating activities.
Classification of cash flows: Certain cash flows are classified differently under IFRS
and U.S. GAAP. IFRS offers more flexibility regarding the classification of certain
cash flows.
Presentation format: There is a difference in the presentation requirements for
cash flow from operating activities.
- ✔️✔️Under both IFRS and U.S. GAAP, there are two acceptable formats for
presenting the cash flow statement—the direct method and the indirect method.
These methods differ only in the presentation of the CFO section of the cash flow
statement; calculated values for CFO are the same under both
highlights important differences between IFRS and U.S. GAAP with respect to cash
flow statements. - ✔️✔️Topic IFRS U.S. GAAP
Classification of cash flows:
Interest received
Operating or investing. Operating
Interest paid
,Operating or financing. Operating
Dividends received
Operating or investing. Operating
Dividends paid
Operating or financing. Financing
Bank overdrafts
Considered part of cash equivalents.
Not considered part of cash and cash equivalents and classified as financing
Taxes paid
Generally operating, but a portion can be allocated to investing or financing if it
can be specifically identified with these categories. Operating
Format of statement
Direct or indirect; direct is encouraged Direct or indirect.
Direct is encouraged. A reconciliation of net income to cash flow from operating
activities must be provided regardless of method used
Direct method - ✔️✔️Under the direct method, income statement items that are
reported on an accrual basis are all converted to cash basis. All cash receipts are
reported as inflows, while cash payments are reported as outflows.
,Indirect method - ✔️✔️Under the indirect method, cash flow from operations is
calculated by applying a series of adjustments to net income. These adjustments
are made for noncash items (e.g., depreciation), nonoperating items (e.g., gains
on sale of noncurrent assets), and changes in working capital accounts resulting
from accrual accounting
- ✔️✔️The direct method explicitly lists the actual sources of operating cash
inflows and outflows, whereas the indirect method only provides net results for
these inflows and outflows.
The argument is similar to the one for having an income statement that lists all
revenue and expense items, as opposed to one that only provides the end result
(i.e., net income).
The information provided in the direct format is very useful in evaluating past
performance and making projections of future cash flows.
- ✔️✔️The indirect method provides a list of items that are responsible for the
difference between net income and operating cash flow.
These differences can then be used when estimating future operating cash flows.
The indirect method 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.
, - ✔️✔️Investments in held-for-trading securities are classified as an operating
activity, while investments in held-to-maturity securities are classified as an
investing activity.
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.
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