BMGT220: Chapter 11: Statement of Cash Flows Final Review

cash equivalents

-short-term, highly liquid investments

-readily convertible to cash

-typically matures in 3 months or less

statement of cash flows

shows:

-ability to generate future cash flows

-ability to pay dividends and obligations

-difference between net income and net cash provided by operating activities

-cash investing and financing transactions

return on assets

= net income / average total assets

cash return on assets (equation)

= operating cash flow / average total assets

cash return on assets

operating cash flow generated per dollar of assets

cash flow to sales

= operating cash flow / net sales

-operating cash flows generated for each dollar of sales

asset turnover

= net sales / average total assets

-sales revenue generated per dollar of assets

operating activities

day to day transactions related to revenues and expenses

revenues and expenses

part of operating activities that is on the income statement

changes in other current assets, change in current liabilities

part of operating activities that is on the balance sheet

operating inflows

-receipts from sales or services

-cash receipts of interest and dividends from investments

-lawsuit settlements

-refunds from suppliers

operating outflows

-payment to employees or suppliers

-payment to purchase inventories

-payment of interest to creditors for loans

-cash payment of taxes to gov’t

-contributions to charity and lawsuit settlements

indirect method

1) add noncash expenses

2) add losses and subtract gains

3) asset changes (opposite effect)

4) liabilities changes (direct effect)

5) add and subtract all from net income

direct method

1) account for assets: receivables, prepaid insurance, merchandise inventory

2) account for liabilities: deferred rent, payables

3) add all debited cash balances and subtract all credit cash balances from cash received from customers

investing activities

buying and selling long term assets and investments

changes in long term assets

part of investing activities that is on the balance sheet

investing inflows

-sales of property, plant, equipment assets and intangible assets

-sales of investments in government and other company’s stocks and bonds

-repayment of loans by borrowers

investing outflows

-purchase property, plant, equipment assets and intangible assets

-purchase of investments in government and other company’s stocks and bonds

-payment to lend money to borrowers

equipment, accumulated depreciation, depreciation expense, loss on sale of equipment, additional data

relevant sections in balance sheet and income statement for investing activities

Dr. Cash

Dr. Accumulated Depreciation

Dr. Loss on Sale of Equipment

Cr. Equipment

journal entry for sale of equipment

financing activities

borrowing money from lenders or getting investments from stockholders

changes in long-term liabilities, changes in common stock, changes in retained earnings (dividends paid)

part of financing activities that is on the balance sheet

financing inflows

-issuances of common stock and preferred stock and from sales of treasury stock

-issuances of bonds payable mortgage notes payable, other notes payable

financing outflows

-acquire treasury stock

-cash payments or dividends

-settle outstanding bonds, mortgage notes payable, other notes payable

Dr. Long Term Loan Payable

Cr. Cash

journal entry for long term loan

Dr. Cash

Cr. Common Stock

journal entry for common stock

Dr. Retained Earnings

Cr. Cash

journal entry for retained earnings

noncash activities

-purchase long term assets by issuing debt

-purchase long term assets by issuing stock

-conversion of bonds payable into common stock

-exchange long term assets