A304 - Chapter 11

What are Operating Activities?

What are Operating Activities?

cash receipts and cash payments for transactions relating to revenue and expense activities

What are Investing Activities?

cash transactions involving the purchase and sale of long-term assets and current investments

What are Financing Activities?

inflows and outflows of cash resulting from the external financing of a business (transactions with lenders and with stockholders)

What are some examples of operating cash inflows?

• Sale of goods/services

• Collection of interest/dividend

What are some examples of operating cash outflows?

• Purchase of inventory

• Payment for operating expenses

• Payment of interest

• Payment of income taxes

What are some examples of investing cash inflows?

• Sale of investments

• Sale of long-term assets

• Collection of notes-receivable

• Sale of subsidiary

What are some examples of investing cash outflows?

• Purchase of investments

• Purchase of long-term assets (CAPEX)

• Lending w/ notes receivable

• Cash acquisition of another company

What are some examples of financing cash inflows?

• Issuance of bonds or notes payable

• Issuance of stock

What are some examples of financing cash outflows?

• Repayment of bonds or notes payable

• Payments to repurchase stock (treasury stock)

• Payment of dividends

Where do you source the information to build the statement of cash flows?

Income Statement, Balance Sheet, Detailed Accounting Record

What is the Direct Method for preparing the statement of cash flows?

• Uses actual cash in/outflows from operations

• More intuitive

• Time consuming

What is the Indirect Method for preparing the statement of cash flows?

• Requires converting accrual basis accounting to cash basis by preparing a list of “adjustments to net income”

• Most popular method

• Easier and less costly

What is the difference when dealing with the cash flow from operations?

only difference is the method used, but both methods give the same result

What are the steps to preparing the statement of cash flows?

1. Net cash flows from operating activities

2. Net cash flows from investing activities

3. Net cash flows from financing activities

4. Sum all activities to verify it equals change in cash in balance sheet

When you use the indirect method, you start with net income and then adjust this number for what?

• Income Statement Items (noncash revenues/expenses & nonoperating gains/losses)

• Balance Sheet Items (changes in current assets and current liabilities)

What are the income statement adjustments to net income based on the cash flows from operating activities?

+ Depreciation Expense

+ Amortization Expense

+ Stock-based Compensation Expense

+ Loss on sale of assets

- Gain on sale of assets

What are the balance sheet adjustments to net income based on the cash flows from operating activities?

- Increase in a current asset

+ Decrease in a current asset

+ Increase in a current liability

- Decrease in a current liability

What is the pattern in the statement of cash flows for Operating Cash Flows by life cycle?

• Startup: -

• Growth: +

• Strady State: +

• Decline: -

What is the pattern in the statement of cash flows for Investing Cash Flows by life cycle?

• Startup: -

• Growth: -

• Strady State: -

• Decline: +

What is the pattern in the statement of cash flows for Financing Cash Flows by life cycle?

• Startup: +

• Growth: +

• Strady State: -

• Decline: + / -

What is the Cash Return on Assets Ratio?

Measures the operating cash flow generated per dollar of assets

What is the formula for the Cash Return on Assets Ratio?

Operating Cash Flows / Average Total Assets

What is the Cash Flow to Sales Ratio?

Measures the operating cash flows generated for each dollar of sales

What is the formula for the Cash Flow to Sales Ratio?

Operating Cash Flows / Net Sales

What is the Asset Turnover Ratio?

Measures the sales revenue generated per dollar of assets

What is the formula for the Asset Turnover Ratio?

Net Sales / Average Total Assets