 Hello and welcome to this session. This is Professor Farhad and this session will work practice questions that deals with the overview for the statement of cash flow. This topic is covered in intermediate accounting and very heavily an important topic on the CPA exam FAR section. If I said practice, it means I have already explained this topic in a prior session. Please look in the link in the description to see the prior session if you're interested. As always, I would like to remind you to connect with me on LinkedIn. YouTube is where you would need to subscribe. I have 1500 plus accounting, auditing, finance and tax lectures. This is a list of all the courses and the number of lectures I have, including CPA questions. On my website, you can have access to additional information and resources such as PowerPoint slides, notes, true, false, multiple choice, quasi simulations and 2000 plus CPA questions. I'll have the prerequisite for this section in the description. The first step we're going to look at are true false questions that deal with the statement of cash flow. And it's very important that you understand, you know the basics of the cash flow statement by, can you identify if a statement is true or false? Starting with the first statement. The information in a statement of cash flow should help investors and creditors and others to assess the reasons for the difference between net income and net cash flow from operating activities. Is this true? Does the cash flow statement help you reconcile the difference between the net income from the income statement and cash flow from operating activities? The answer is yes. That's one of the major purposes of the cash flow statement. It takes your net income and converted into cash net income, which is cash flow from operating activities. This statement is true. Let's take a look at the second statement. Operating activities as defined by GAP involve the cash effect of the transaction that entered into determination of net income. Is operating activities deals with net income? I just told you yes. Yes, operating activities takes their income and converted into operating cash flow, which is under the operating activities of the cash flow statement, which is also true statement. Three, the statement of cash flow provides information not available from other financial statement. Yes, it does provide information not available. It shows you the changes and the detail changes in the activity. So that information is not provided on another cash flow statement. Four, financing activities include making and collecting loans and acquiring and disposing of investments and productive long-lived asset. Did I say this is the financing activities or is this something else? When you make a loan, you are making an investment. When you make loans, when you are making an investment, when you lend money, you are making an investment. When you buy and sell, when you acquire and dispose of investments, stocks, bonds, property, plant and equipment, that's not financing. That's investing. That's investing. Financing deals with your own stocks and your own bonds, your own stocks and your own bonds, your long-term debt and your stockholders' equity. This statement is false. The statement financing activities include will be a correct statement. The cash received from the sale of property, plant and equipment at a gain, although reported in the income statement, is classified as an investment activities. Exactly. Yes, and here there's a point I'm going to emphasize. When you sell property, plant and equipment, when you sell it, when you sell PPNE, when you sell property, plant and equipment, when you sell them oftentimes, not often, most of the time, you're going to have either a gain or a loss. Now the gain or the loss goes on the income statement because the gain and loss goes on the income statement. And we said anything that goes on the income statement is operating activities. Yes, that's true. It's gain and losses will be on the operating activities, but the sale and you'll see how later on, but the sale of the property, plant and equipment will be part of your investing activities, will be part of your investing activities. So this statement is true. Okay. Although the gain and the loss goes on the income statement, the selling of the property, plant and equipment is considered an investing activities, and we'll see this later on when we work actually with numbers, but this is the theory. Let's take a look at this question. Which of the following is not, so be careful when the word not on the exam, they might not highlight the word not. So read the question carefully, which is not a benefit of investors and creditors can expect as a result of the presentation of the statement of cash flow. So three are and one is not. A, cash flow assesses the enterprise ability to meet its obligation and its ability to pay dividend and its need to external financing. Oh, of course, the cash flow statement tells you if you can pay dividend, tells you if you can meet your obligation, tell you if you need extra money. So the statement is one of the benefit, therefore it's out. Assess the effect of an enterprise financial position of both its cash and non-cash investing and financing transaction during the period. Does the cash flow statement show you your cash and non-cash investing and transaction? Yes, it does. So this one is out. Assess the enterprise. Now you're down to 50-50. Assess the enterprise's ability to expand its operating facilities through the issuance of long-term debt. Well, this is very specific. I would hold on and say let's look at D because you're down to 50-50. Assess the reasons for the difference between net income and the associated cash receipts and payment. This is true. This is basically net income and cash and cash net income. The difference between net income and cash net income. So yes, it does D because it shows you your net income and your cash from operating activities. So by process of elimination and C did not sound right, it doesn't, the cash flow statement, this is very specific. It doesn't assess your ability to expand your operating facilities through the issuing of long-term debt. This is basically a managerial decision. The cash flow gives you the big picture. Now how would you, how would you use the big picture? It's up to you, but it's not C. That's the answer. The answer is C because they're looking, the answer that is not. Of the following questions, which one would not, again, would not be answered by the statement of cash flow? Would the statement of cash flow tell you where did the cash come from during the period? Yes, that's one purpose of the cash flow statement. It tells you where the cash came from. What was the cash used during the period? Yes, it tells you how it's coming and how it's being spent. Now you're down to 50-50. Were all cash expenditure of benefit to the company during the period? Or what was the cash, what was the change in the cash balance during the period? Would it tell you the change in the cash balance? Sure it does because it's going to show you the beginning and the ending. It's going to show you the change. That's, that's the last part of the cash flow statement. D is out. C is the answer. Were all the cash expenditure benefit the company during the period? Well, really it doesn't tell you if it benefited the company or not. Sometimes we may spend money. It may not benefit the company. Not all the expenditure. It doesn't tell you if it benefited or not benefited. We really don't know. We really don't know. So when you spend money, you spend money. You hope it's going to benefit the company, but it doesn't tell you that. The basis recommended by FASB for the statement of cash flow is cash and cash equivalent as described by GAP. What is cash equivalent? Basically, can you pinpoint the definition of cash equivalent? As I told you, it's something you have to memorize. All current assets that have no realization problem, I hope you don't select this one. I have no clue what this is, but not all assets are cash and cash equivalent. Be short-term, highly liquid investments so far so good that are both readily convertible to a known amount of cash in so near their maturity that they present insignificant risk of changes in interest rate. This looks like a good candidate, but let's look at C. All cash and near cash item that will be turned into cash within one operating period. We don't talk about any operating period. If anything, we'll talk about this. All cash and investments in short-term securities that have a maturity of three months or less. This is tempting, but let's read it again. All cash and investment and investments in short-term securities. Investments could mean stocks that have a maturity of three months or less. No, the three months or less has to be original from the original issuance. So remember, I said B is the right answer. B is the right answer. However, you can add to B the original maturity of that investment has to be three months or less. Not that it's not that it's still half three months to mature. The original maturity was three months or less. They always try to trick you on this. Remember, cash and cash equivalent, the cash equivalent security has to have an original maturity of three months or less. Not it's within three months of maturity. Those are two different things. Let's take a look at this question. In general, financing activities as used in the statement of cash flow refers to what? So we're looking at financing activities. Does it refer to liability and equity items that include obtaining cash from creditors, repaying the amount borrowed so you're borrowing and paying back loans that looks like financing so far, obtaining capital from owners and providing them with a return and a return on their investments. Also, getting money from stockholders and paying them basically dividend. A looks like really, really a good candidate, but let's hold on it and make sure we can eliminate the other one. Transaction involving long-term assets out. Long-term assets deals with investment. Only that transaction, no. Financing also involves equity. The cash effect of the transaction that enter into determination of net income. Net income is operating these out. As I suspected, A is a good candidate. The cash received from the sale of property, plant and equipment at no gain or loss. So we sold something, we have no gain, no loss. It's classified as what type of activity? Is it investing only? Is it financing only, operating only? Both of them, two, three, so on and so forth. Let's take a look at it. First of all, we're dealing with property, plant and equipment so we can take out financing. So we can take out financing, yes is out, financing yes is out. So we can eliminate A and C immediately. Now we are left with B. For sure it has to be, you know, if we sold property, plant, equipment, I told you it's investing. So it's either, so A is out, so what we're left is D. So it's investing. Okay, I don't have to look at the other one. It's definitely investing, but I cannot select A. So it's investing, definitely not financing and not operating because we said we have no gain, no loss. Now if we had to gain or loss, we could also say it's investing and operating. But if you are asked, property, plant and equipment, it's always investing. If you are only given that choice, investing will be the answer. Which of the following activities is classified as investing on the statement of cash flow? Investing, okay. Cash received from the sale of goods or services? No, that's operating activities. What you sell, it's operating activities. Cash paid the suppliers for inventory? No, if I'm paying for my suppliers, that's part of my operating activities, that's out. Cash paid to lenders for interest? I'm paying interest on my loan, that's also operating activities. And make a note of this, US GAAP, if you pay interest on your loans, it's operating activities. Not by the process of elimination, D is the answer, but let's make sure D is the answer. Cash received from the sale of property, plant and equipment, perfect. This is investing activities. In a statement of cash flow, the cash flow from investing activities should be what? Okay, so we're looking at investing. The issuance of common stock in exchange for legal services? Well, for one thing, if we're dealing with common stock, if we're issuing common stock, it should be finances, so it's not investing. And specifically, we issued stocks and we received legal services. This is an example of a non-cash transaction. It means we issued stocks, but we did not receive cash. We received something in return, that's out. That's non-cash transaction. Specifically, it's a finance activity, that's of a non-cash nature. Stock split or stock is financing, that's out. The assignment of account receivable, or is it the payment of dividend? Well, if you're down to 50-50, which is good, payment of dividend deals with your own stocks. That's financing. By process of elimination, by process of elimination, the assignment of account receivable, it means you are assigning your account receivable, you are selling them, you are making, you are receiving cash in return, sometimes that assignments, you have to buy them back, it's a form of an investment. Therefore, the assignment of receivable is an investing activities, is an investing activities. If you have any questions, any comments about this session, please let me know. In the next session, we would look at the operating section of the cash flow statement and to be more specific using the indirect method. As always, I would like to remind you to visit my website for additional lectures. This topic is extremely important on the CPA exam and I strongly suggest you consider subscribing. It's an investment in your career. Study hard for your CPA exam and good luck. Thank you.