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OU ACCT 2113 - Chapter 11 Notes

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ACCT 2113 1st Edition Lecture 11 Outline of Last Lecture II. Stockholders’ EquityA. Paid-in capitalB. Retained earningsC. Treasury stockIII. CorporationsA. Articles of incorporationB. Public or privateC. Advantages and disadvantagesIV. Common stockA. Par ValueB. Accounting for common stock issuesC. Preferred stockD. Accounting for preferred stock issuesV. Treasury stockA. Accounting for treasury stockVI. Retained earnings and dividendsA. Stock dividneds and stock splitsVII. Reporting and analyzing stockholders’ equityA. Return on EquityOutline of Current Lecture II. Statement of Cash FlowsA. FormattingB. Classification of transactions- operating, investing, and financingC. Reporting cash flow activitiesIII. Relationship between financial statementsIV. Operating activities- direct and indirectV. Preparing statement of cash flowsA. Direct and IndirectB. Adjustments for changeC. ExampleVI. Cash Flow AnalysisThese 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 FlowsThe 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. The second half is shown here incorporating the cash flows from investing and financing activities.E-GAMES, INC.Statement of Cash FlowsFor the Year Ended December 31, 2012Cash Flows from Operating ActivitiesNet income $42,000Adjustments for noncash effects:Depreciation expense 9,000Loss on sale of land 4,000Increase in accounts receivable (7,000)Decrease in inventory 10,000Increase in prepaid rent (2,000) Decrease in accounts payable (5,000)Increase in interest payable 1,000Decrease in income tax payable (2,000)Net cash flows from operating activities $50,000Classification of TransactionsThe three primary categories of cash flows are:Operating activities include cash receipts and cash payments for transactions relating to revenue and expense activities. These are essentially the very same activities reported on the income statement. In other words, cash flows from operating activities include the elements of net income, but reported on a cash basis. Common examples of operating activities include the collection of cash from customersor the payment of cash for inventory purchases, salaries, and rent.. Investing activities include cash transactions involving the purchase and sale of long-term assets and current investments. Companies periodically invest cash to replace or expand productive facilities such as buildings, land, and equipment. They might also invest in other assets, such as stocks or bonds of other firms, with the expectation of a return on those investments. Eventually, many of these assets are sold. Investment in and sale of long-term assets and investments are common examples of investing activities.Cash Flows from Investing ActivitiesPurchase of investment(35,000)Sale of land6,000 Net cash flows from investing activities(29,000) Cash Flows from Financing ActivitiesIssuance of common stock5,000Payment of cash dividends(12,000)Net cash flows from financing activities(7,000) Net increase (decrease) in cash14,000 Cash at the beginning of the periodFinancing 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 ActivitiesCash Flows from Operating ActivitiesCash InflowsSale of goods or servicesReceipt of interest and dividendsCash OutflowsPurchase of inventoryFor operating expensesFor interestFor income taxesCash Flows from Investing ActivitiesCash InflowsSale of investmentsSale of property, plant and equipment or intangiblesCollection of notes receivableCash OutflowsPurchase of investmentsPurchase of property, plant and equipment or intangibles Acceptance of notes receivableCash Flows from Financing ActivitiesCash InflowsIssuance of bonds or notes payableIssuance of stockCash OutflowsRepayment of bonds or notes payableReacquisition of stock (treasury stock)Payment of dividendsThe table lists common cash receipts and cash payments for operating, investing, and financing activities. Net cash flows from financing activitiesLet’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 thanfinancing 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 recorddividends 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 InformationWe prepare the income statement, the statement of stockholders’ equity, and the balance sheetdirectly 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 activities2. 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 activities3. Detailed accounting records- sometimes we need additional information from the accounting records to determine specific cash inflows or cash outflows for the periodThe income statement provides important information in determining cash flows from operating activities. We look at the change in asset, liability, and stockholders’ equity


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OU ACCT 2113 - Chapter 11 Notes

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