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TAMU ACCT 209 - Statement of Cash Flows
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ACCT 209 1nd Edition Lecture 14 Outline of Last Lecture I. Comparison of organizationsII. Bonds compared to capital stockIII. Stock TermsIV. Stock Holder rightsV. Issuing stocka. ExampleVI. Cash Dividendsa. ExampleVII. Sock Dividendsa. ExampleVIII. Stock SplitsIX. Treasury StocksX. Summary of effects of Stock Transactionsa. ExampleXI. Earnings per shareXII. Retained EarningsOutline of Current Lecture XIII. Types of Cash Flowa. ExampleXIV. How to determine Cash flowsa. Exampleb. Another Examplec. Another ExampleCurrent LectureTHE STATEMENT OF CASH FLOWSPurpose: The Statement of Cash flows is needed to show the total change in cash, and the reasons for the change. This information is not available from the other statements, since they are prepared on an accrual basis. The Statement of Cash flows complements the other statements by reporting and explaining changes in cash over a period of time in three categories: operating, investing, and financing.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Cash – in statement of cash flows – includes cash and cash equivalents (readily convertible to a known amount of cash, original maturity of three months or less)Usefulness of statement:1. helps predict firm’s ability to generate future cash flows2. helps predict firm’s ability to pay dividends and meet obligations ( pay debts)3. explains differences between reported (accrual basis ) net income and cash flows4. explains investing and financing cash flows, and shows significant non-cashtransactions (likely to affect future cash flows)5. Helps evaluate management decisions Format: Shows cash receipts (inflows, sources, increases) and payments (outflows, uses, disbursements, decreases) in three categories:ACTIVITY GENERAL GUIDELINES EXAMPLESOPERATING Transactions that involve producing and selling goods and servicesIncome statement ItemsInflows: selling goods and services, dividend revenue, interest revenueOutflows: for inventory, salaries, taxes, interest, other expensesINVESTING Transactions that involve acquiringand disposing of long-term assetsInflows: sale of plant assets, sale of investments, collection of loansOutflows: purchase of plant assets, purchasing investments, lending fundsFINANCING Transactions that involve obtainingresources and providing a return: long term debt and equity financing(SH)Inflows: selling stock, issuing bonds, notes, mortgagesOutflows: purchasing treasury stock, paying dividends, repaying principal on borrowingsAlso: significant non cash transactions: Recorded at bottom of cash flow statement or in notes. Are things that probably affect cash in the future.Example #1For each of the following items, state whether the item would be shown on the statement of cash flows as an operating, investing, or financing activity. If the item would not be shown on the statement of cash flows, indicate non-cash item.a. Salary payments to employees - Ob. Cash to acquire new computers for use in the business- Ic. Cash proceeds from sale of common stock at an amount greater than par value- Fd. Cash dividends declared and paid on common stock- Fe. Stock dividends declared and distributed on common stock (company distributed additional shares of stock to stockholders)- Non cash transactionsf. Interest paid during the year- Og. Cash used to pay dividends declared but not paid last year- Fh. Cash used to purchase long-term investments in common stock of another company-I i. Cash used to pay bonds payable at the maturity date- Fj. cash payments for income taxes- OPREPARING THE STATEMENT OF CASH FLOWS:We know from the balance sheet equation that Assets = Liabilities + Equity.We can expand the equation to: Cash + Non-cash assets = Liabilities + Equity.In order for the equation to stay in balance, every change in cash must be accompanied by a change in another balance sheet account. We can find the reasons for the increases anddecreases in Cash indirectly; by analyzing changes in the balance sheet accounts, other than cash, we can determine how cash was affected.OPERATING ACTIVITIESGenerally, cash flows from operating activities are determined using income statement amountsadjusted by changes in current assets (other than cash) and current liabilities.Two approaches to determining operating cash flows:1. indirect method: starts with net income (loss), then adjusts for revenues and expenses that did not create an equal change in cash; Is over whelming used in practice because it is easier2. direct method: shows major categories of gross cash receipts and gross cash payments; companies using direct method must reconcile change in cash with net income; Financial Acct. standard boards prefers this method.BOTH METHODS PRODUCE SAME RESULT; companies can choose either approach. INVESTING ACTIVIITES – analyze changes in long-term asset accountsFINANCING ACTIVITIES – analyze changes in long-term liability and equity accountsExample #2 The following information pertains to Grimes Company.Grimes CompanyComparative Balance SheetsDecember 31Assets 20X5 20X4Cash $ 273 $ 210 - Up 63Accounts receivable 120 80 – Down 40Inventory 85 100 – Down 15Prepaid rent 35 30 – up 5Land 30 40Equipment 400 400Accumulated depreciation ( 100) (75)Total assets $ 843 $ 785Liabilities and stockholders’ equityAccounts payable $ 175 $ 160 – up 15Wages payable 20 32 – down 12Bonds payable 120 135 – down 15Common stock 80 70 – up 10Additional paid in capital 125 115 – up 10Retained earnings 323 273Total liabilities and stockholders’ equity $ 843 $ 785Grimes CompanyIncome StatementFor the year ended December 31, 20X5Sales revenue $ 625Cost of goods sold 375Gross profit 250Operating expenses:Selling and administrative $120Depreciation 25 145 105Gain on sale of land 4Income before taxes 109Income tax expense 25Net income $ 84Operating activites – Indirect method (Order not important)Net Income+ Depreciation expense- Gain or + lossChange in CA and CL- Increases in CA other than Cash+ Decreases in CA othe than Cash+ Increases in CL- Decreases in CLCash FlowsRequired: 1. Reconcile cash flows with the change in cash shown on the balance sheet.Grimes CompanyStatement of Cash FlowsFor the year ended 12/31/20X5Operating


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