CMA Part 1: Statement of Cash Flows – Detailed Revision Notes
These notes cover all key concepts from your Hock CMA Part 1 study material on the
Statement of Cash Flows (SCF) for quick revision before the exam.
1. Overview of the Statement of Cash Flows (SCF)
Definition:
The Statement of Cash Flows (SCF) shows how a company’s cash and cash equivalents
change over a period. It helps in analyzing:
Cash inflows (receipts) and outflows (payments).
Liquidity position & cash management.
Ability to meet obligations & pay dividends.
Importance of SCF:
✔ Helps investors & lenders assess financial health.
✔ Explains differences between net income & cash flow.
✔ Identifies how a company finances its operations.
Limitations of SCF:
✘ Does not include non-cash transactions like depreciation.
✘ Needs context from other financial statements to be useful.
✘ May not fully explain cash flow quality (e.g., delayed payments).
2. Components of the Statement of Cash Flows
The SCF is divided into three sections:
Cash Equivalents (Definition in SCF)
Short-term investments (≤ 3 months maturity).
Examples: Treasury Bills, Commercial Paper, Money Market Funds.
Includes Restricted Cash (e.g., set aside for loan repayment).
3. Cash Flows from Operating Activities
Definition:
Includes cash inflows & outflows from day-to-day business operations.
Interest received & paid, dividends received, taxes paid are operating cash flows.
Two Methods to Calculate Operating Cash Flows
1. Direct Method (Preferred by FASB but rarely used)
2. Indirect Method (Most commonly used)
3. Direct Method (Operating Activities)
Reports actual cash received & paid from business operations.
Converts each line of the income statement into cash basis.
Formula for Direct Method Adjustments:
1. Cash Received from Customers
\text{Sales Revenue} + \text{Beginning A/R} - \text{Ending A/R}
\text{COGS} + \text{Increase in Inventory} - \text{Increase in Accounts Payable}
Add all expenses paid in cash.
4. Cash Paid for Interest & Taxes
Record the actual cash payments.
Example Calculation (Direct Method)
Given Data:
Sales Revenue = $500,000
Beginning A/R = $50,000
Ending A/R = $70,000
Cash Received from Customers:
500,000 + 50,000 – 70,000 = 480,000
✔ Advantages:
More transparent.
Helps in cash flow forecasting.
✘ Disadvantages:
Harder to prepare (requires detailed cash records).
5. Indirect Method (Operating Activities)
Starts with Net Income and adjusts for non-cash & working capital changes.
Most commonly used in practice & required for the CMA exam.
Formula for Indirect Method Adjustments:
Step 1: Start with Net Income
Depreciation & Amortization (Non-Cash Expense)
Gains on Asset Sales (Investing Activity)
Losses on Asset Sales
Changes in Working Capital:
Example Calculation (Indirect Method)
Given Data:
Net Income = $120,000
Depreciation Expense = $30,000
Gain on Sale of Equipment = $5,000
Increase in A/R = $15,000
Increase in A/P = $10,000
Cash Flow Calculation:
120,000 + 30,000 – 5,000 – 15,000 + 10,000 = 140,000
✔ Advantages:
Easier to prepare from the income statement.
More commonly used.
✘ Disadvantages:
Does not show actual cash receipts & payments.
6. Cash Flows from Investing Activities
Definition:
Buying & selling long-term assets & investments.
Includes cash paid or received for property, plant & equipment (PP&E), investments, and
loans made to others.
Formula for Investing Cash Flows:
1. Cash Paid for Asset Purchase
= \text{Purchase Price (PP&E)}
= \text{Book Value} + \text{Gain (or -Loss)}
✔ Example:
Equipment sold for $13,000 with a $5,000 gain.
Cash Received = $13,000 (not the gain).
7. Cash Flows from Financing Activities
Definition:
Raising & repaying capital.
Includes borrowing & repaying debt, issuing stock, and paying dividends.
Formula for Financing Cash Flows:
1. Cash Received from Issuing Stock
= \text{Number of Shares} × \text{Price per Share}
= \text{Loan Principal Paid}
= \text{Declared Dividends – Stock Dividends}
✔ Example:
Loan Repayment of $50,000 → Financing Outflow
8. Statement of Cash Flows Disclosures
1. Non-Cash Investing & Financing Activities
Must be disclosed separately but not included in SCF.
✔ Examples:
Debt converted to equity
Leased assets recorded without cash payment
2. Cash Equivalents Policy Disclosure
Companies must define what qualifies as cash equivalents.
3. Cash Paid for Interest & Taxes Disclosure
If using Indirect Method, these must be disclosed separately.
4. Reconciliation of Net Income to Cash Flow
Required for both Direct & Indirect Methods.
9. Final Summary: Direct vs. Indirect Method
10. Exam Strategy & Tips
✔ Focus on the Indirect Method (Most tested on CMA exam).
✔ Understand how changes in working capital impact cash flows.
✔ Remember the formulas for direct & indirect methods.
✔ Practice past exam questions with calculations.
Would you like additional practice questions or a summary cheat sheet for quick review?
