BUAD 302

Comprehensive income

All changes in equity (net assets) during period except net new investments in firm which is equity changing due to owners investing or withdrawing money, = Net income + OCI

Items consisted in OCI

Certain unrealized gains/losses on investment securities arising during period like Available for Sale, currency translation adjustments, pension adjustments, and unrealized hedging gains and losses

Trading securities or Fair value option

Company intends to buy and sell soon to make money during current period, so unrealized gain/loss goes into NI which is before tax is calculated for period, to calculate total effect on NI calculate after tax gain/loss

Available for Sale (AFS) classification

Company owns investment and doesn’t trade it but the value changed, this isn’t part of company’s current operating results so unrealized gain/loss goes into OCI which is after tax

Purpose of statement of CF

Shows sources and uses of cash, helps predict future cash flows, helps evaluate management decisions

CF statement structure

Cash flow from operating activities

+ Cash flow from investing activities

+ Cash flow from financing activities

= Change in cash

+ Beginning cash balance

= Ending cash balance

Operating activities

Normal operations of business that’s revenues and their related expenses, relates to current assets and liabilities

• Collections from customers

• Receipts of interest and dividends on investments

• Payment to suppliers, employees, taxes, interest, others for expenses

Investing activities

Includes inflows and outflows primarily associated with company’s long term assets

• Sale of fixed assets, intangibles, most investments

• Collecting loans

• Acquisition of fixed assets, intangibles

• Purchase of most investments

• Making loans

Financing activities

Inflows and outflows related to raising capital from creditors and shareholders

• Issuing stock

• Reissue treasury stock

• Borrowing money

• Payment of dividends

• Purchase of treasury stock

• Repayment of principle on debts

Indirect method

Adjusting for net income

Net income

- Increase (+ Decrease) in AR

- Increase (+ Decrease) in Inventory

- Increase (+ Decrease) in Prepaid expenses

+ Increase ( - Decrease) in Advances from customers

+ Increase ( - Decrease) in Accounts payable

+ Increase ( - Decrease) in Payables

+ Depreciation & Amortization

= Cash from operating activities

Preparation of CF Statement steps 1-3

1. Compute changes from beginning to end of year in all balance sheet accounts (net change in accounts)

2. Translate changes into cash effects, assets increase are cash decreasing while liabilities increase are cash increasing

3. For normal current assets and liabilities you can usually use change calculated in step 1

Preparation of CF Statement steps 4-5

4. For some accounts where beginning to ending change isn’t enough to tell how much cash was involved, look at individual debits and credits to figure out what happened

• Additional info section will include if bonds or stocks issued will be cash inflow, dividends paid cash outflow, depreciation expense added back to net income, equipment purchased is cash outflow

5. If account changed but no cash was involved, don’t put that change on CF statement such as AFS securities and amounts in AOCI and deferred taxes

• Additional info section might include if land was acquired by issuing stock which is noncash so disclosed separately instead of being in CF