Acctg 230 Ch. 12 - Statement of Cash Flows

What cash flows are reported as operating activites?

1) Cash receipts from revenues, including interest and dividend revenue

2) Cash payments for expenses, including interest expense. (dividends are NOT paid on expense, they are reported on the finance section)

What is direct method for operating?

directly identifies the major sources and uses of cash. If New South Company earns revenue on account of $500 and collects $400 from customers, the operating activities section will say “cash receipts from customers” amounting to $400

What is the indirect method for operating activities?

Starts with net income and illustrates necessary adjustments to convert the accrual-based net income to cash-basis equivalent. Assume New South Company has a income statement of revenues = $500, expenses = $390, and a net income = $110 (This requires adjustments to convert the net income of $110 to the net cash flows from operating activities of $50).

1) New south earned $500, but collected $400 in cash. The remaining $100 will be collected in the next accounting period. This $100 increase in accounts receivable will need to be subtracted from net income because it increased net income, but not cash

2) New south incurred $390 of expenses, but paid on $350 in cash. This remained $40 will be paid in the next accounting period. This $40 increase in accounts payable must be added back to net income because it decreased net income, but not cash

$110 - 100 + 40 = $50

What cash flows are reported as investing activities?

1) Cash receipts from selling property, plant, equipment, or marketable securities, collections from credit instruments such as notes or mortgages receivables

2) Cash payments for purchasing property, equipment, or marketable securities, making loans to borrowers

What cash flows are reported as financing activities?

1) Cash receipts from borrowing money and issuing stock

2) Cash payments to repay debt, purchase treasury stock, and pay dividends

Why should you focus on the type of activity rather than the type of account when classifying operating, investing, or financing activities?

For instance, buying another company’s common stock is an investing activity, but issuing a company’s own common stock is a financing activity

What are noncash investing and financing activities?

Such as acquiring a long-term asset in exchange for common stock

Do non cash investing and financing activities need to be recorded?

Yes, companies must include with the statement of cash flows a separate schedule of any noncash activities

How are cash flows categories reported in order?

1) Operating activities

2) Investing

3) Financing

4) Net outflow in cash

5) Plus: Beginning cash balance

6) Ending cash balance

7) Schedule of noncash investing and financing activities

What is the indirect method - rule-based approach?

Apply these when applicable:

Rule 1: Add decreases and subtract increases in non cash current assets

Rule 2: Add increases and subtract decreases in non cash current liabilities

Rule 3: Add non cash expenses (e.g., depreciation)

Rule 4: Add losses and subtract gains