ACCT 3331 - CH 4 - Statement of cash flows

What does the SoCF explain?

how the cash balance at the beginning of the period became the cash balance at the end of the period.

What is special about SoCF

It is the only financial statement that is concerned

with the cash basis of accounting results

Why is SoCF so important

It is one of the four basic (required) financial statements.

What do positive cash flows permit a company to do?

Pay dividends to owners, expand its operations, take advantage of investment opportunities, replace worn assets

Why do some wall street analysts consider SoCF important?

Important to understand the various sources and uses of cash that are associated with business activity.

What are the 3 sections of SoCF in order?

Operating

Investing

Financing

What do all 3 sections of SoCF equal?

Operating + investing + financing = net increase (decrease) in cash & cash equivalants

What are cash from operating inflows and outflows directly related to?

income from normal operations

What are inflows from operating activities

Cash received from customers, Dividends received, Interest on investments

What are outflows from operating activities

Cash paid for: purchases of inventory, salaries and wages, income taxes, interest, etc.

What are cash from investing inflows and outflows directly related to?

purchase and sale of productive assets and investments in the securities of other companies

What are inflows from investing activities

Cash received from: Sale or disposal of PPE, Sale or maturity of investments

What are outflows from investing activities

Cash paid for: Purchases of PPE, Purchases of investments

What are cash from financing inflows and outflows directly related to?

external sources of financing (owners and creditors) for the enterprise

What are inflows from financing activities

Cash received for: Borrowing Long-Term Debt, Issuing Equity

What are outflows from financing activities

Cash paid for: Repayment of principal on debt (not interest), Repurchase of Stock, Dividends

What 3 information sources are used to prepare SoCF

The income statement for the current period

Comparative beginning of period and end of period balance sheets

Additional transaction details not found in the financial statements

Format for operating activities (indirect method)

shows net cash inflow (outflow) from operations as an adjustment to net income

Is indirect method for formating operating activities used commonly?

yes, used by 99% of companies

Format for operating activities (direct method)

reports the components of cash flow from operations as gross receipts and payments

Is direct method for formating operating activities used commonly?

no, rarely used

Which format for operating activities is recommended by FASB?

direct method

Is Cash Flow from Operating Activities is the same under each method

Yeah, just diff formats

Steps to get net CF from operating activities

Start with net income.

Add and subtract items that reconcile net income (accrual basis) to operating cash flows.

What does formatting operating activities with indirect method require

analysis of changes in all current asset and current liability accounts, except cash, and an analysis of non-cash items on the income statement

How to adjust NI to CF from operations [indirect method]

Start with net income. Then. . .

Add back non cash expenses (i.e. depreciation and amortization) included in net income.

Subtract gains (from the disposal of long-term assets) and add back losses.

Add decreases in current asset accounts.

Add increases in current liability accounts.

Subtract increases in current asset accounts.

Subtract decreases in current liability accounts.

Increase in current assets adjustment to NI [indirect method]

Subtract from NI

Decrease in current assets adjustment to NI [indirect method]

Add to NI

Increase in current liabilities adjustment to NI [indirect method]

Add to NI

Decrease in current assets adjustment to NI [indirect method]

Subtract from NI

What do investing activities include?

acquisition and sale of long-term assets.

Acquisition or sale/disposal of property, plant and equipment

Acquisition or sale/maturity of long-term investments

Is interest/dividend received on investments an operating or investing CF

operating

What transactions are included in SoCF

Only the cash impacts related to these transactions are included in SCF

Is interest payments on debt financing or operating

operating

What are financing activities associated with?

associated with generating capital from creditors and owners

Computing CF from financing activities

+ Proceeds from the issuance of long-term notes payable or the issuance of long-term debt

— Principal payments on LT notes payable and debt

+ Proceeds from issuance of common stock

— Purchase of treasury stock

— Cash payments for dividends

Assume a company sold an asset and recorded the following

entry:

DR Cash $10,000

DR Accumulated Depr. 9,000

CR Equipment 14,000

CR Gain on disposal of equipment 5,000

What cash flow should be recorded on SCF? What section?

$10,000—Investing Section

Gain $5,000 must be subtracted in operating section

Indicate if the item is in Operating, Investing, Financial activities [direct method]

Cash collections from customers

Operating

Indicate if the item is in Operating, Investing, Financial activities [direct method]

dividends received on investments in equity securities

operating

Indicate if the item is in Operating, Investing, Financial activities [direct method]

proceeds from issuance of long-term debt

financing

Indicate if the item is in Operating, Investing, Financial activities [direct method]

proceeds from disposal of investment securities

investing

Indicate if the item is in Operating, Investing, Financial activities [direct method]

payments on account

operating

Indicate if the item is in Operating, Investing, Financial activities [direct method]

redemption of our own bonds

financing

Indicate if the item is in Operating, Investing, Financial activities [direct method]

wages paid

operating

Indicate if the item is in Operating, Investing, Financial activities [direct method]

interest payments on a note payable

operating

Indicate if the item is in Operating, Investing, Financial activities [direct method]

purchase of equipment

investing