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PSU ACCTG 211 - Statement of Cash Flows

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Lecture 14 Outline of Last Lecture I. Example Problems From Unit 6II. Stock and Financing Outline of Current Lecture II. Statement of Cash FlowsIII. Two Methods of FlowsIV. Unit 7 Example Problem Current LectureLecture 14 Accounting I. Statement of Cash Flowsa. Income Statement is an “accrual” statementb. Statement of Stockholders’ Equity is an “accrual” statementc. Balance Sheet is an “accrual” statementi. And although GAAP requires the use of accrual accounting, it really helps users of the financial statements if we provide them with a “cash-based” picture of thebusiness.ii. In 1987, a GAAP standard was implemented that required firms to provide a Statement of Cash Flows (SOCF).iii. SOCF is essentially a statement that reconciles accrual accounting with cash accounting.II. Format of SOCFa. Inflows = positive cash b. Outflows = negative cash c. Cash flows are put into 3 categories i. Operating 1. Income statement activitiesii. Financing 1. Long term liabilities and equity ACCTG 211 1st Editioniii. Investing 1. Long term assetsd. To prepare a SOCF you need:i. Income statement ii. Balance sheet iii. Any additional information about clarification of transactions III. Two Methods of Preparing SOCFa. Direct Method: i. CFFO is the difference between cash inflows and cash outflows related to operating activities.b. Indirect Method: i. CFFO can be derived by reconciling accrual-based net income to cash-based CFFO.ii. The indirect method is the more often-used method. iii. Provides less company-sensitive information to readers.iv. Tends to be easier to derive.IV. GAAP requires companies that use the direct method to also provide “a reconciliation of net income to CFFO.” So companies that use the direct method also have to provide the indirect method. Here, less disclosure is more desirable to companies.V. Unit 7 Example Problem a. Attic Treasures Comparative FinancialsI. Using the direct method a. Objective: for each income statement account, determine the cash effect (if any)i. Start with Sales1. Beginning A/R $12,0002. Plus: Credit Sales $234,9003. Minus: Cash Collections ???a. Will be 223,450b. Beginning A/R + Credit Sales – Cash Collections = Ending A/R4. Equals: Ending A/R $23,450ii. Next do COGS1. Beginning Inventory $25,2002. Plus: Purchases =???a. Will equal $181,750b. Beginning Inventory + Purchases – COGS = Ending Inventory 3. Minus: COGS $178,8504. Equals: Ending Inventory $28,1005. But we shouldn’t assume all payments were made in cash a. Beginning A/P $12,300b. Plus: Purchases $181,750c. Minus: Cash Payments ???i. Will be $167,850d. Equals: Ending A/P $26,200iii. Next selling expenses 1. Total Cash Payments for Selling Expenses $24,000a. Includes $2,000 rent and $6,000 depreciation expenseiv. Next General expenses 1. What is included in general expenses? a. $2,000 in rent expense, $6,000 in depreciation expense, and (assumed) $500 “other”2. Any relevant accrual accounts? a. Prepaid Rent.3. Beginning Prepaid Rent $6,0004. Plus: Prepayments ???a. Will be $1,500b. Beginning Prepaid Rent + Prepayments – Rent Expense = Ending prepaid Rent 5. Minus: Rent Expense $2,0006. Equals: Ending Prepaid Rent $5,5007. Depreciation expense is a “non-cash” expense, so no cash payments there8. No related accrual accounts for the “other” expenses, so it is fair to assume that is a cash expense9. Prepayments of Rent $1,50010. “Other” Cash Payments $50011. Total Cash Payments for General Expenses $2,000v. Next: Interest Expense1. Seeing no accrual accounts related to interest expense, it is fair to assume that this item is entirely in cash2. Total Cash Payments for Interest Expense $1,200vi. Finally: Income Tax Expense1. Question: should we assume that this item is entirely in cash?a. No, which accrual account is related to income tax expense?i. Income tax payable 2. Beginning Income Taxes Payable $10,0003. Plus: Income Tax Expense $3,4004. Minus: Cash Payments $5,300a. Beg. Income Taxes Payable + Income Tax Expense – Cash Payments = Ending Income Taxes Payable 5. Equals: Ending Income Taxes Payable $8,100vii. Now you have the operating portion of the SOCF from the direct method1. Cash Collected from Customers $223,4502. Cash Paid to Vendors for Inventory (167,850)3. Cash Paid for Selling Expenses (24,000)4. Cash Paid for General Expenses (2,000)5. Cash Paid for Interest (1,200)6. Cash Paid for Income Taxes (5,300)7. Net Cash Provided by Operating Activities $23,100b. Now find CFFI using either method i. Objective: account for cash changes to Long-Term Assets1. Relevant accounts in our example:a. Property, Plant, and Equipmentb. Accumulated Depreciationc. PP&E decreased by $9,500, implying a sale of PP&Ed. But consider also A/D i. When we sell PP&E, we remove the “cost” AND the A/Dii. Depreciation Expense should have increased A/D by $6,000iii. But A/D only increased by $5,000, implying that A/D must have increased by $6,000 AND decreased by $1,000iv. So $1,000 must be the A/D associated with the sale2. Run a sale of PP % Ea. Cash $8,500 (Plug)Asset $9,500A/D $1,000Gain $0b. Cash Proceeds from Sale of PP&E $8,500c. Now find CFFF using either method i. Objective: account for cash changes to Long-Term Liabilities and Equityii. Relevant accounts in our example:1. Long-Term Notes Payable2. Common Stock and APIC3. Retained Earnings (for Dividends)4. Long-Term Notes Payable decreased by $13,900a. No other information, so assume a cash decrease5. Common Stock and APIC increased by $1,500a. No other information, so assume a cash increaseiii. Retained Earnings increased by $15,9501. Test for Dividends: run a R/E “Roll-forward” and see if any dividends were declared2. Absent a Dividends Payable account, or absent any change in an existing Dividends Payable account, the Dividends from the R/E “Roll-forward” may be assumed to be a cash amounta. Beginning R/E $41,200Plus: Net Income 18,950Minus: Dividends (3,000) (Plug)Equals: Ending R/E $57,150b. Cash Paid on Loan Principal $(13,900)c. Cash Proceeds from Stock Issuance 1,500d. Cash Paid for Dividends (3,000)d. Final SOCF for Attic Treasures using Direct Method


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