Chapter 23- Statement of Cash Flows - Flashcards

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INCORRECT CORRECT

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Statement of Cash Flows

Provides information about company's cash receipts and payments during period

1. Operating Activities- determination of net income (current assets and current liabilities)
2. Investing Activities- long term assets
3. Financing Activities- long tern liability and equity

Asses entity's ability to generate future cash flows, pay dividends and obligations

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Operating Activites

Best measure of company's ability to generate enough cash to continue as a going concern

Income Statement Items

Cash Inflows:

• Sales of goods or services
• Returns on loans (interest) and on securities (dividends)

Cash Outflows:

• Suppliers for inventory
• Employees for services
• Government for taxes
• Lenders for interest
• Others for expenses

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Investing Activities

Long-Term Asset Items

Cash Inflows:

• Sales of property, plant, and equipment
• Sale of debt or equity securities of other entities
• Collection of principle on loans to other entities

Cash Outflows:

• Purchase property, plant, and equipment
• Purchase debt or equity securities of other entities
• Make loans to other entities

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Financing Activities

Long-Term Liability and Equity Items

Cash Inflows:

• Sale of equity securities
• Issuance of debt (bonds and notes)

Cash Outflows:

• Stockholders as dividends
• Redeem long-term debt or reacquire capital stock

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Format of Statement of Cash Flows

Cash flows from operating activities

   Net Income

   Adjustments to reconcile NI to net cash provided by operating

   (List of individual items)

   Net cash provided/used by operating activities

Cash flows from investing activities

   (List of individual items)             

   Net cash provided/used by investing activities

Cash flows from financing activities

   (List of individual items)              

   Net cash provided/used by financing activities               

Net increase/decrease in cash

Cash at beginning of period                                                  

Cash at end of period

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Preparing Statement of Cash Flows

1. Determine Change in Cash- difference between beginning and ending balance of cash on balance sheet
2. Determine Net Cash Flow from Operating- current income statement, comparative balance sheets, other data
3. Determine Net Cash Flows from Investing and Financing- other changes in balance sheet

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Net Cash Flow from Operating

Accrual basis of accounting- record revenues when earned and expenses when incurred

• must determine revenues and expenses on cash basis
• eliminate effects of income statement transactions that do not result in a change in cash

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Direct Method

Income Statement Method- encouraged by FASB

Reports difference between cash receipts and cash disbursements as net cash flow from operations

Cash collected from revenues

- Cash payments to suppliers

- Cash payments for operating expenses   

Income before income taxes

- Cash payments for income taxes              

Net cash provided by operating activities

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Indirect Method

Reconciliation Method- most widely used in practice

Adjusts net income for items that affected reported net income but not cash

• adds back non-cash charges and deducts non-cash credits

1. Non-Cash Expenses- depreciation and amortization
2. Accounting Gains/Losses: Gain (-) Loss (+)
3. Working Capital Accounts: CA and CL move in opp. direction

A/R begin. = A/R end. + Revenues - Cash Receipts

Change in A/R = Revenue - Cash Receipts

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5 Direct Method Sections

Cash Receipts from Customers = Sales Revenue + decr. in A/R

                                                                                            -  incr. in A/R

Cash Payments to Suppliers = CGS + incr. in Inventory + decr. in A/P

                                                                   - decr. in Inventory - incr. in A/P

Cash Payments for Op. Exp. = Op. Exp. + incr. PPD + decr. Accrued

                                                                       - decr. PPD - incr. Accrued

Cash Payments for Int. = Int. Exp. + Amort. of Prem. + decr. Payable

                                                             - Amort. of Disc. - incr. Payable

Cash Payments for Taxes = Tax Exp. + decr. in DTL + decr. Payable

                                                                    - incr. in DTL - incr. in Payable

                

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Significant Non-Cash Transactions

NOT put into Statement of Cash Flows

• Acquisition of assets by assuming debt or issuing equity
• Exchanges on non-monetary assets
• Conversion of convertible securities
• Refinancing of debt
• Retirement of debt by issuance of equity

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Formulas

R/Eend = R/Ebegin + NI - Dividends Declared

NI = ^R/E + Dividends Declared

Deprec. Exp = ^A/D + A/D on Disposition

G/L on Sale = Selling Price - Book Value

^A/R = year2(A/R - Allowance) - year1(A/R - Allowance)

Purchase of PPE = ^PPE + Dispositions - NonCashExpenditure

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Cash Flows from Operating Activities

Net Income

Adjustments

   Depreciation Expense

   Amortization Expense

   Gain on Sale

   Loss on Sale

   Accounts Receivable

   Other Current Assets

   Accounts Payable

   Other Current Liabilities

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Supplemental Disclosures

Cash Paid For:

   Interest

   Taxes

Significant Non-Cash Expenditures:

   Issuance of Note for PPE

   Issuance of Common Stock for N/P

      Mode:   CARDS LIST       ? pages   PRINT EXIT

Statement of Cash Flows	Provides information about company's cash receipts and payments during period Operating Activities- determination of net income (current assets and current liabilities) Investing Activities- long term assets Financing Activities- long tern liability and equity Asses entity's ability to generate future cash flows, pay dividends and obligations
Operating Activites	Best measure of company's ability to generate enough cash to continue as a going concern Income Statement Items Cash Inflows: Sales of goods or services Returns on loans (interest) and on securities (dividends) Cash Outflows: Suppliers for inventory Employees for services Government for taxes Lenders for interest Others for expenses
Investing Activities	Long-Term Asset Items Cash Inflows: Sales of property, plant, and equipment Sale of debt or equity securities of other entities Collection of principle on loans to other entities Cash Outflows: Purchase property, plant, and equipment Purchase debt or equity securities of other entities Make loans to other entities
Financing Activities	Long-Term Liability and Equity Items Cash Inflows: Sale of equity securities Issuance of debt (bonds and notes) Cash Outflows: Stockholders as dividends Redeem long-term debt or reacquire capital stock

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Format of Statement of Cash Flows	Cash flows from operating activities    Net Income    Adjustments to reconcile NI to net cash provided by operating    (List of individual items)    Net cash provided/used by operating activities Cash flows from investing activities    (List of individual items)                 Net cash provided/used by investing activities Cash flows from financing activities    (List of individual items)                  Net cash provided/used by financing activities                Net increase/decrease in cash Cash at beginning of period                                                   Cash at end of period
Preparing Statement of Cash Flows	Determine Change in Cash- difference between beginning and ending balance of cash on balance sheet Determine Net Cash Flow from Operating- current income statement, comparative balance sheets, other data Determine Net Cash Flows from Investing and Financing- other changes in balance sheet
Net Cash Flow from Operating	Accrual basis of accounting- record revenues when earned and expenses when incurred must determine revenues and expenses on cash basis eliminate effects of income statement transactions that do not result in a change in cash
Direct Method	Income Statement Method- encouraged by FASB Reports difference between cash receipts and cash disbursements as net cash flow from operations Cash collected from revenues - Cash payments to suppliers - Cash payments for operating expenses    Income before income taxes - Cash payments for income taxes               Net cash provided by operating activities

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Indirect Method	Reconciliation Method- most widely used in practice Adjusts net income for items that affected reported net income but not cash adds back non-cash charges and deducts non-cash credits Non-Cash Expenses- depreciation and amortization Accounting Gains/Losses: Gain (-) Loss (+) Working Capital Accounts: CA and CL move in opp. direction A/R begin. = A/R end. + Revenues - Cash Receipts Change in A/R = Revenue - Cash Receipts
5 Direct Method Sections	Cash Receipts from Customers = Sales Revenue + decr. in A/R                                                                                             -  incr. in A/R Cash Payments to Suppliers = CGS + incr. in Inventory + decr. in A/P                                                                    - decr. in Inventory - incr. in A/P Cash Payments for Op. Exp. = Op. Exp. + incr. PPD + decr. Accrued                                                                        - decr. PPD - incr. Accrued Cash Payments for Int. = Int. Exp. + Amort. of Prem. + decr. Payable                                                              - Amort. of Disc. - incr. Payable Cash Payments for Taxes = Tax Exp. + decr. in DTL + decr. Payable                                                                     - incr. in DTL - incr. in Payable
Significant Non-Cash Transactions	NOT put into Statement of Cash Flows Acquisition of assets by assuming debt or issuing equity Exchanges on non-monetary assets Conversion of convertible securities Refinancing of debt Retirement of debt by issuance of equity
Formulas	R/Eend = R/Ebegin + NI - Dividends Declared NI = ^R/E + Dividends Declared Deprec. Exp = ^A/D + A/D on Disposition G/L on Sale = Selling Price - Book Value ^A/R = year2(A/R - Allowance) - year1(A/R - Allowance) Purchase of PPE = ^PPE + Dispositions - NonCashExpenditure

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Cash Flows from Operating Activities	Net Income Adjustments    Depreciation Expense    Amortization Expense    Gain on Sale    Loss on Sale    Accounts Receivable    Other Current Assets    Accounts Payable    Other Current Liabilities
Supplemental Disclosures	Cash Paid For:    Interest    Taxes Significant Non-Cash Expenditures:    Issuance of Note for PPE    Issuance of Common Stock for N/P

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