1Principles of Accounting IIChapter 25: Cash Flow StatementTake a Deep Breath• While ___________ are measured in several ways, cash is _________.• Cash is like oxygen; businesses need it to ____________.Needed to Survive• Businesses can operate for years without ____________.• Many ______-________ have never been profitable, but they’re still around.• However, businesses cannot operate without ____________!Types of Cash Flows• Since the beginning of Acct 2101, you have been classifying transactions as:o o o • Formal, audited financial statements must include a balance sheet, incomestatement, and _____________ of ________ ____________.2Review Classifications• Operating cash flowso ________________, day-to-day business activitieso Includes _____________ payments (but not ______________)• Financing cash flowso _______________ or ______________ a loano Issuing ___________ and paying ______________• Investing cash flowso Buying and selling ____________ assets (but not _____________)o Buying or selling _________________ (e.g., stocks and bonds)Purposes of Cash Flow Statement1. Evaluate ability to ______________ __________ cash flows2. Evaluate ability to _________ _____________ obligations3. Evaluate differences between __________ and _______ _________4. Evaluate ______________ and _______________ activities3Inquiring Minds Want to Know• Is revenue being collected on a _________ basis?o Look at changes in ____________ ______________.• Are expenses being paid on a ____________ basis?o Look at changes in _____________ _______________.• What expenses don’t involve cash?o Look at ___________________ expense.Review the Fundamentals• The income statement includes ___________ and ____________ in the periodwhen they occur.• A _________ may occur in one accounting period, but the _______________________ may occur in a different period.• An _______________ may occur in one accounting period, but the ________________________ may be made in another.4Reminder• Sales ____________ can be earned before or after __________ is received.o If cash is received before the sale, it’s _____________ revenue (a_____________) until the sale occurs.o If cash is received after the sale, it’s an ___________ _______________until collected.• Expenses can be _______________ before or after cash is ___________.o If paid after incurring the expense, a ______________ exists untilpayment.o If paid before incurring the expense, a ___________ ____________ isrecorded and is expensed as it is used up.Is It Possible?• A high _____ ___________ and _____________ cash flow from operations• A huge ______ __________ and a ____________ cash flow from operationsPossible? Yes. Common? No.• Both contrasts occur from time to time.• Over the long run, the contrasts usually ________ out.• Is the net operating ________ __________ similar to ______________ income?If not, why not?5Profits vs. Cash FlowBonnie creates seven tutoring software programs as a project in her multi-media class.She guarantees her programs will improve grades in just two weeks.Beginning in April, Bonnie decides to package and sell her programs to GSU students.Bonnie’s TransactionsBonnie puts $_______ in her new business checking account.She buys 100 CD blanks ($____ each) at Office Depot with a check.She borrows $_______ from her Dad (interest free) and uses it to buy a new read-writeCD drive from ComputerLand.She pays her neighbor $______ to install the CD drive.She “burns” _______ CDs, eight for each tutoring program.She pays $______ to purchase plastic wrap to seal the CDs.Eight Acct 2102 CDs are sold on account for $_____ each.Eight Acct 4510 CDs are sold for $_______ cash a piece.Bonnie thinks the CD drive will last ______ months.How much cash is in the business checking account on April 30?6The Direct MethodOperating Cash Flow: Cash paid for Cash paid for Cash received fromInvesting Cash Flow: Cash paid forFinancing Cash Flow: Cash received from Cash received fromNet change in cash during AprilBeginning cash balanceEnding cash balanceReview of Cash vs. AccrualIf credit sales are $___________ and accounts receivable increased $___________during the period, what did you collect from customers? (Assume no bad debts.)If salaries expense is $_________ and salaries payable decreased $__________ duringthe period, what did you pay your employees?7Revenue vs. Cash FlowBlockbuster conducts business in three ways: (1) rents movies for cash, (2) rents moviefor credit card charges, and (3) sells gift certificates that can be used in the future to rentmovies. Blockbuster’s April accounting records reveal:April 1 Unexpired gift certificatesApril 30 Unexpired gift certificatesApril 1 Credit card sales not yet collectedApril 30 Credit card sales not yet collectedMovies rented during AprilHow much cash did Blockbuster collect from customers in April?What journal entry records the sale of gift certificates?What journal entry records the use of gift certificates?What journal entry records credit card sales?What journal entry records collections from such sales?8The Indirect Method• When the net ________ _________ from operating activities differs dramaticallyfrom _____ ___________, stakeholders want to know _________.• Sometimes a company may have a sizable _______ ___________ but may have______ __________ in the bank and, thus, have difficulty paying its debts on atimely basis.• To focus on the “_______” question, most companies present net operating cashflows using the ____________ method.Simple Illustration of Indirect MethodNet income $100,000Reconciling adjustments:__________________ expense 21,000Increase in accounts ______________ -7,000_______________ in inventory -9,000Decrease in ______________ rent 4,000Increase in accounts ____________ 19,000Decrease in salaries _____________ -6,000Net cash flow from operations $122,000Let’s Go Back to BonnieStep 1:Step 2:Each change is a partial reason why net income and cash flow differ.9Bonnie’s Income StatementRecall that ________ cash flow _______ $________.Recall that ________ cash flow _______ $________.Why did operating profits _________ $_____ if operating cash flow _______ $_____.The indirect method reconciles _______ _________ with __________ _______ _______.Bonnie’s Cash Flow: IndirectOperating Cash Flow:Investing Cash Flow: Cash paid forFinancing Cash Flow: Cash received from Cash