Reading 34: Understanding the Cash Flow Statement - LOS c should, auto, financing, black

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1.According to U.S. Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) GAAP, should dividends paid be treated as a cash flow from financing (CFF) or as a cash flow from operations (CFO)?

U.S. GAAP

IAS GAAP

 

A)                     CFO                      CFF

B)                     CFF                      CFO

C)                     CFF or CFO                 CFO

D)                     CFF                      CFF or CFO

2.The correct set of cash flow treatments as they relate to interest paid according to U.S. generally accepted accounting principles (GAAP) and International Accounting Standards (IAS) GAAP is:

U.S. GAAP

IAS GAAP

 

A)  CFO                                        CFO or CFF

B)  CFF                                        CFF

C)  CFO                                        CFO

D)  CFO or CFF                             CFO

3.What is the difference between the direct and the indirect method of calculating cash flow from operations?

A)   The indirect method starts with gross income and adjusts to cash flow from operations, while the direct method starts with gross profit and flows through the income statement to calculate cash flows from operations.

B)   The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items.

C)   Balance sheet items are not included in the cash flow from operations for the direct method, while they are included for the indirect method.

D)   The direct method will result in a lower or higher cash flow figure for operating activities as it details all of the income statement items, while the indirect method only uses net income.

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答案和详解如下：

1.According to U.S. Generally Accepted Accounting Principles (GAAP) and International Accounting Standards (IAS) GAAP, should dividends paid be treated as a cash flow from financing (CFF) or as a cash flow from operations (CFO)?

U.S. GAAP

IAS GAAP

 

A)                     CFO                      CFF

B)                     CFF                      CFO

C)                     CFF or CFO                 CFO

D)                     CFF                      CFF or CFO

The correct answer was D)

U.S. GAAP treats dividends paid as CFF whereas IAS GAAP treats dividends paid as either CFO or CFF.

2.The correct set of cash flow treatments as they relate to interest paid according to U.S. generally accepted accounting principles (GAAP) and International Accounting Standards (IAS) GAAP is:

U.S. GAAP

IAS GAAP

 

A)  CFO                                        CFO or CFF

B)  CFF                                        CFF

C)  CFO                                        CFO

D)  CFO or CFF                             CFO

The correct answer was A)

U.S. GAAP treats interest paid as CFO whereas IAS GAAP treats interest paid as either CFO or CFF.

3.What is the difference between the direct and the indirect method of calculating cash flow from operations?

A)   The indirect method starts with gross income and adjusts to cash flow from operations, while the direct method starts with gross profit and flows through the income statement to calculate cash flows from operations.

B)   The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items.

C)   Balance sheet items are not included in the cash flow from operations for the direct method, while they are included for the indirect method.

D)   The direct method will result in a lower or higher cash flow figure for operating activities as it details all of the income statement items, while the indirect method only uses net income.

The correct answer was B)

The main difference between the direct and indirect methods of calculating cash flows is the way that cash flow from operations is calculated. The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with income after taxes and adjusts backwards for non-cash and other items. Both methods will have the same result for operating cash flows. The direct and indirect method calculates the financing and investing cash flows the same way and both methods will result in the same cash flow figure.