Chapter 12 Statement of Cash Flows 04 20 2014 Statement of cash flows explains how the beginning amount of cash became the ending amount Cash Equivalents Short term highly liquid investments Quickly convertible into cash Near maturity usually maturities of max 3 months Examples Treasury bills short term notes payable money market funds The statement of cash flows reports inflows and outflows in 3 categories 1 Cash Flows from Operating Activities related to earning income from normal operations 2 ways to present the operating activities section on the statement 1 Direct Method Reports components as gross receipts and gross payments inflows and outflows Inflows Cash received from customers dividends and interest on investments Outflows Cash paid for goods and services salaries and wages income taxes interest on liabilities The difference between inflows and outflows is called net cash inflow from operating activities 2 Indirect Method Starts with net income from the income statement and eliminates noncash items in order to arrive to net cash inflow from operating activities act Net Income Adjustments for noncash items Net cash inflow from op used by 99 of large US companies Both methods are alternative ways to arrive to the same number 2 Cash flows from investing activities related to purchase and disposal of long lived assets and investments Inflows cash received from sale of Property Plan Equipment PPE sale or maturity of investments in securities Outflows cash paid for purchase of PPE or investments The difference between inflows and outflows is called net cash inflow from investing activities 3 Cash flows from financing activities related to exchanges of cash with creditors and owners Inflows cash received from borrowing on notes bond etc from creditors issuing stock to owners Outflows cash paid for repayment of principal to creditors Excluding interest which is an operating act repurchasing stock paying dividends financing activities The difference between inflows and outflows is called net cash inflow from Net Increase Decrease in Cash combination of net cash flows from operating investing and financing activities To prepare cash flows we need Comparative balance sheet A complete income statement Additional details Preliminary steps in preparing cash flow statement 1 Determine the change in each balance sheet account This years ending balance Last years ending balance 2 Classify each change as relating to operating O investing I or financing F Accounts that should be market as O Most current assets Except cash short term investments Most current liabilities Except those related to financing act Examples Current Assets Accounts receivable Inventories Prepaid Expenses etc Current Liabilities Accounts Payable Accrued expenses Accounts that should be market as I Short term investments PPE Accounts that should be market as F All the remaining liability and stockholders equity accounts Examples Long term debt Contributed Capital Reporting cash flows from Operating Activities Step 1 Net Income Depreciation and Amortization expense If you had a gain on sale of investing asset If you had a loss on sale of investing asset Step 2 Adjust Net Income for changes in assets and liabilities marker as operating O liability increases liability decreases Add the change when an operating asset decreases or an operating Subtract the change when an operating asset increases or an operating ASSETS If Accounts Receivable Increases is lower subtract Decreases is higher add If Inventories Increases is lower subtract Decreases is higher add If Prepaid Expenses Increases is lower subtract Decreases is higher add LIABILITIES If Accounts Payable Increases is higher add Decreases is lower subtract Reporting cash flows from Investing Activities Purchases of PPE or investment securities outflows Proceeds or sale of PPE or investments inflows Only purchases paid for with cash or cash equivalents are included The amount of cash that is received from the sale of assets is included regardless of whether the assets are sold at a gain or loss Reporting cash flows from Financing Activities Notes Payable issuance of bonds stock inflows Repayment of loan bond principal repurchase of stock payment of dividend outflows Interest payments are cash flows from operating activities If debt or stock is issued for other than cash it is not included in this section Noncash Investing and Financing Activities Have no cash flow effect ex purchase of a 100 000 building with a 100 00 worth mortage These noncash activities are not listed in the 3 main sections of the cash flow statement Supplemental disclosure of these transactions is required narrative or schedule form 04 20 2014 04 20 2014
View Full Document
Unlocking...