GSBA 510 Lecture Deck Class 22 and 23 F24 V1

Accounting Concepts and Financial Reporting

• Course: GSBA 510, focused on Statement of Cash Flows

• Instructor: DeFond, Chapter 11

Class Administration

• Recording: Sessions will be recorded via Zoom and potentially Panopto. Attendees will be recorded.

Today's Class Topics

1. Quiz 4

2. Statement of Cash Flows (DeFond, Chapter 11)

Quiz 4

• Context: USC Leventhal School of Accounting

Statement of Cash Flows Overview

• Key financial statement reflecting cash inflows and outflows over a period.

Learning Objectives

• Objective 1: Discuss the content and format of the statement of cash flows.

Cash and Cash Equivalents

• Definition: Cash is a crucial asset; the statement reports changes between balance sheet dates.

• Cash Management Importance:

  • Sufficient cash for immediate bills necessary.

  • Excess cash is not optimal as it generates low returns.

  • Strategy: Invest in cash equivalents for better returns.

• Components of Cash:

  • Comprises cash and cash equivalents.

  • Examples of cash equivalents include:

    • US Treasury Bills

    • Certificates of Deposit

    • Commercial Paper

    • Money Market Funds

  • The statement of cash flows combines cash and cash equivalents.

Activity Classifications in the Statement of Cash Flows

• Overview of classifications in cash flow statement:

  1. Operating Activities:

     • Cash flow from daily business operations.

  2. Investing Activities:

     • Cash flow from buying/selling long-term assets and investments.

  3. Financing Activities:

     • Cash flow related to financing the business through debt and equity.

Cash Flow from Operating Activities

• Sources: Includes receipts from customers, interest, and dividend receipts.

• Uses: Includes payments to suppliers, employees, interest payments, and taxes.

• Important Note: Cash flows related to account payable, wages payable, and interest are classified under Operating Activities.

Cash Flow from Investing Activities

• Inflows include receipts from sales of assets.

• Outflows include payments for purchasing assets or making loans.

Cash Flow from Financing Activities

• Inflows include receipts from issuing stock or debt instruments.

• Outflows include payments for dividends and repayment of debt.

Noncash Investing and Financing Activities

• Activities that do not affect current cash flows such as stock or bond issuance in exchange for long-term assets.

Preparing the Cash Flow Statement

• Two U.S. GAAP Formats: Direct and Indirect methods, affecting only the operating activities section.

• Change in Cash Computation:

  • Calculated through changes in balance sheet accounts.

  • Formula: Change in cash = Change in current assets - Change in non-cash assets + Change in liabilities + Change in equity.

Information Required for Cash Flow Statement

• The current income statement.

• Two balance sheets from different periods.

• Additional information about changes within various accounts such as dividends paid.

Five Steps to Cash Flow Preparation

1. Calculate changes in balance sheet accounts by subtracting the beginning balances from ending balances.

2. Classify the changes into operating, investing, or financing categories.

3. Build a preliminary cash flow statement by grouping accounts.

4. Integrate the income statement data, replacing retained earnings data with net income and adjusting for non-cash items.

5. Remove non-operating financial effects from the statement's operating activities.

Ratios for Cash Flow Analysis

• Ratios to evaluate cash flow health:

  • Free Cash Flow

  • Operating Cash Flow to Current Liabilities Ratio

  • Operating Cash Flow to Capital Expenditures Ratio.

Free Cash Flow Definition and Example

• Free Cash Flow: Amount available for dividends, calculated as:

  • Free Cash Flow = Cash Flow from Operating Activities - Capital Expenditures.

  • Example: Cash flow from operations = $50,000; Capital expenditures = $17,500 results in Free Cash Flow of $32,500.

Operating Cash Flow to Current Liabilities Ratio

• Indicates ability to cover current liabilities:

  • Formula: Operating Cash Flow / Average Current Liabilities.

  • Example: If operating cash flow = $50,000 and current liabilities = $35,000, the ratio is 1.43.

Preparing Statement of Cash Flows Using Direct Method

• Presents cash flows directly related to income statement items, differentiating it from the indirect method.

• Silo Corporation examples highlighted include revenue adjustments and cash expenditures in both methods.

Conclusion

• The intricacies of cash management, along with proper preparation of the cash flow statement, remain vital in financial reporting and analysis.

• Next Topic: Stockholders' Equity (DeFond, Chapter 10) for Class 25.