ACCT 2113 1st Edition Lecture 11 Outline of Last Lecture II Stockholders Equity A Paid in capital B Retained earnings C Treasury stock III Corporations A Articles of incorporation B Public or private C Advantages and disadvantages IV Common stock A Par Value B Accounting for common stock issues C Preferred stock D Accounting for preferred stock issues V Treasury stock A Accounting for treasury stock VI Retained earnings and dividends A Stock dividneds and stock splits VII Reporting and analyzing stockholders equity A Return on Equity Outline of Current Lecture II Statement of Cash Flows A Formatting B Classification of transactions operating investing and financing C Reporting cash flow activities III Relationship between financial statements IV Operating activities direct and indirect V Preparing statement of cash flows A Direct and Indirect B Adjustments for change C Example VI Cash Flow Analysis 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 Current Lecture Chapter 11 Statement of Cash Flows The statement of cash flows provides a summary of cash inflows and cash outflows during the reporting period Illustration presents the statement of cash flows for E Games Inc E GAMES INC Statement of Cash Flows For the Year Ended December 31 2012 Cash Flows from Operating Activities Net income 42 000 Adjustments for noncash effects Depreciation expense 9 000 Loss on sale of land 4 000 Increase in accounts receivable 7 000 Decrease in inventory 10 000 Increase in prepaid rent 2 000 Decrease in accounts payable 5 000 Increase in interest payable Decrease in income tax payable Net cash flows from operating activities 1 000 2 000 50 000 The second half is shown here incorporating the cash flows from investing and financing activities C a P 35 000 s u S 6 000 h r a N c lF e h 29 000 C e l ta a o Is 5 000 s o w sce P 12 000 h fs sa a N u so yF lf e a h fN 7 000 m la rt n e n Cash at the 14 000 o cfit n w d m ce ln beginning ts of the a o vi Is period o w e n o fn Classification of Transactions h fsc frv tr o e The three primary categories of cash flows are fcm e cm s lo re a a to relating to Operating activities include cash receipts and cash payments for transactions m n sF i revenue and expense activities These are essentially the very same activitiesw m te reported on the h in so the elements of income statement In other words cash flows from operating activities include n g n i net income but reported on a cash basis Common examples of operating activities include the d a fn d i n A collection of cash from customers rsve vc o te cit or the payment of cash for inventory purchases salaries and rent m o sr d n i cte g v fkia n ii n Investing activities include cash transactions involving the purchase and salesd A tnof long term g e sc ia or expand assets and current investments Companies periodically invest cash to replace productive facilities such as buildings land and equipment They might alsote n ainvest in other is ci on those assets such as stocks or bonds of other firms with the expectation of a return v itn of long term investments Eventually many of these assets are sold Investment in and sale i n i t assets and investments are common examples of investing activities g vc i ia e a ts s cih te is v t i e s Financing activities are both inflows and outflows of cash resulting from the external financing of a business A major portion of financing for many companies comes from external sources specifically stockholders and lenders Common financing activities are borrowing and repaying debt issuing and repurchasing stock and paying dividends Reporting Cash flow Activities Cash Flows from Operating Activities Cash Inflows Cash Outflows Sale of goods or services Purchase of inventory Receipt of interest and dividends For operating expenses For interest For income taxes Cash Flows from Investing Activities Cash Inflows Cash Outflows Sale of investments Purchase of investments Sale of property plant and equipment or intangibles Purchase of property plant and equipment or intangibles Collection of notes receivable Acceptance of notes receivable Cash Flows from Financing Activities Cash Inflows Cash Outflows Issuance of bonds or notes payable Repayment of bonds or notes payable Issuance of stock Reacquisition of stock treasury stock Payment of dividends The table lists common cash receipts and cash payments for operating investing and financing activities Let s look at a few of the cash flows For example we report interest and dividends received from investments with operating activities rather than investing activities Similarly we report interest paid on bonds or notes payable with operating activities rather than financing activities Why are these classified as operating activities They are included in operating activities because each is a cash flow from an activity reported in the income statement interest revenue dividend revenue and interest expense As we discussed earlier operating activities are those we report on the income statement On the other hand we record dividends paid as a financing activity Recall that dividends are not an expense and therefore paying dividends has no effect on net income The payment of dividends simply reduces assets cash and stockholders equity retained earnings Sources of Information We prepare the income statement the statement of stockholders equity and the balance sheet directly from the adjusted trial balance Unfortunately though the accounts listed on the adjusted trial balance do not directly provide the cash inflows and cash outflows we report on the statement of cash flows We need to rely on other sources to determine the amounts necessary to prepare the statement of cash flows 1 Income statement provides important information in the determination of cash flows from operating activities 2 Balance sheets we look at the change in asset liability and stockholders equity account from the end of the last period to the end of this period to find cash flows from operating investing and financing activities 3 Detailed accounting records sometimes we need additional information from the accounting records to determine specific cash inflows or cash outflows for the period The income statement provides important information in determining cash flows from operating activities We look at the change in asset liability and stockholders equity accounts from the