Tiêu đề LM04 Analyzing Statements of Cash Flows I IFT Notes.pdf ✅

LM04 Analyzing Statements of Cash Flows I 2025 Level I Notes © IFT. All rights reserved 3 1,100 3,200 3,300 1,000 Link between Cash Flow Statement, Balance Sheet, and Income Statement Let’s consider an example of how items on the balance sheet are related to the income statement and the cash flow statement. Suppose the beginning accounts receivable is 200, the revenue during the year is 5,000 and the cash collected from customers is 4,800. What is the ending accounts receivables? The table below makes it easy to compute the missing amount. We see that the ending accounts receivables will be 400. Balance Sheet at 1 Jan 2015 Income Statement Statement of Cash Flows Balance Sheet at 31 Dec 2015 Beginning A/R Plus: Revenue Less: Cash Collected from Customers Ending A/R 200 5,000 4,800 400 This example clearly shows that receivables (balance sheet item), revenue (income statement item) and cash collected from customers (cash flow item) are related as follows: Ending receivables = Beginning receivables + Revenue – Cash collected from customers 3. The Direct Method for Cash Flows From Operating Activities Under IFRS and US GAAP, there are two acceptable formats for reporting cash flow from operating activities: indirect and direct.  The indirect method shows how cash flow from operations can be obtained from reported net income through a series of adjustments.  The direct method shows the specific cash inflows and outflows that result in reported cash flow from operating activities. Indirect Format Sample With the indirect method, we start with net income and make several adjustments for non- cash, non-operating items to arrive at the cash flow from operations. Shown below is a sample of the indirect format for a fictitious company called K2 Corp. Net income 2,775 Depreciation 1,000 Gain on sale of equipment (200) Increase in accounts receivable (150) Increase in inventory (600) Increase in pre-paid expenses (30) Increase in accounts payable 300
LM04 Analyzing Statements of Cash Flows I 2025 Level I Notes © IFT. All rights reserved 4 Increase in wages payable 10 Increase in tax payable 5 Increase in other accrued liabilities 100 Decrease in interest payable (10) Cash flow from operations 3,200 Direct Format Sample In the direct format, we look at the specific cash inflows and outflows that resulted in cash flow from operating activities. This method is encouraged by both IFRS and US GAAP. Cash from customers 24,850 Cash paid to suppliers (10,300) Cash paid to employees (7,990) Cash paid for other operating expenses (1,930) Cash paid for interest (510) Cash paid for taxes (920) Cash flow from operations 3,200 Notice that while the presentation formats are different, the cash flow from operations number is the same under both methods. Operating Activities: Direct Method Only cash flow from operating activities is presented differently under the two methods. Presentation of cash flow from investing activities and cash flow from financing activities is the same under both methods. Direct method: In the direct method, we take each item from the income statement and convert it to its cash equivalent by removing the impact of accrual accounting. The rules to adjust are:  Increase in assets is use of cash (-ve adjustment) and decrease in asset is source of cash (+ve adjustment).  Increase in liability is source of cash (+ve adjustment) and decrease in liability is use of cash (-ve adjustment). Cash collected from customers: Adjust sales for changes in accounts receivable and unearned revenue. Cash for inputs: Adjust COGS for changes in inventory and accounts payable. Cash operating expenses: Adjust SG&A for changes in related accrued liabilities or prepaid