Chapter 12 Reporting and Analyzing Cash Flows Basics of Cash Flow Reporting Statement of cash flows purpose is to report cash receipts inflows and cash payments outflows during a period o Information helps answer how does a company obtain its cash where does a company spend its cash what explains the change in the cash balance We look more favorably at a company that is financing its expenditures with cash from operations than one that does it by selling its assets Managers use cash flow information in order to plan day to day operating activities and make long term investment decisions Cash flows include both cash and cash equivalents Cash flows reported as operating investing or financing activities Operating activities include those transactions and events that determine net income production and purchase of merchandise the sale of goods and services expenditures to administer the business o Cash inflows from customers for cash sales from borrowers for interest from cash dividends received form collections on credit sales from lawsuit statements o Cash outflows to salaries wages to lenders for interest to charities to suppliers for goods services to governments for taxes fines Investing activities generally include those transactions and events that affect long term assets namely the purchase and sale of long term assets also include the purchase and sale of short term investments in the securities of other entities and lending collecting money for notes receivable o Cash inflows from collecting principles on loans from selling long term productive assets from selling investments in securities from selling discounting of notes o Cash outflows to make loans to others to purchase long term productive assets to purchase investments in securities Financing activities include those transactions and evens that affect long term liabilities and equity obtaining cash from issuing debt and repaying the amounts borrowed and receiving cash from or distributing cash to owners o Cash inflows from issuing notes and bonds from contributions by owners from issuing its own equity stock from issuing short and long term debt o Cash outflows to repay cash loans to pay withdrawals by owners to purchase treasury stock to pay dividends to shareholders When important investing and financing activities do not affect cash receipts or payments they are still disclosed at the bottom of the statement of cash flows or in a note o Retirement of debt by issuing equity stock conversion of preferred stock to common stock lease of assets in a capital lease transaction purchase of long term assets by issuing a note or bond exchange of noncash assets for other noncash assets purchase of noncash assets by issuing equity or debt Format o Cash flows from operating activities o Cash flows from investing activities o Cash flows from financing activities o Net increase decrease in cash o Cash balance at prior period end o Cash balance at current period end Preparing the statement of cash flows o 1 Compute the net increase or decrease in cash Current period s cash balance minus the prior period s cash balance bottom line figure for the statement of cash flows 2 alternative approaches to preparing the statement Analyzing the cash account o Look at cash t account however has 2 limitations most companies have many individual cash receipts and payments making it difficult to review them all the cash account does not usually carry an adequate description of each cash transaction Analyzing noncash accounts o All cash transactions eventually affect noncash balance sheet accounts o Changes in cash liabilities equity noncash assets o 2 Compute and report the net cash provided or used by operating o 3 Compute and report the net cash provided or used by investing o 4 Compute and report the net cash provided or used by financing activities activities activities o 5 Compute the net cash flow by combining net cash provided or used by operating investing and financing activities and then prove it by adding it to the beginning cash balance to show that it equals the ending cash balance Information to prepare the statement of cash flows comes from 3 sources comparative balance sheets used to compute changes in noncash accounts from the beginning to the end of the period the current income statement used to help compute cash flows from operating activities additional information Cash Flows From Operating Direct method separately lists each major item of operating cash receipts and each major item of operating cash payments Indirect method reports net income and then adjusts it for items necessary to obtain net cash provided or used by operating activities Difference between these methods is with the computation and presentation of this amount Indirect Method o Adjustments for changes in current assets and current liabilities Adjustments for changes in noncash current assets Decreases in noncash current assets are added to net income Increases in noncash current assets are subtracted from net income Accounts receivable merchandise inventory prepaid expenses Adjustments for changing in current liabilities Increases in current liabilities are added to net income Decreases in current liabilities are subtracted from net income Interest payable accounts payable income taxes payable o Adjustments for operating items not providing or using cash Examples not using cash depreciation amortization depletion and bad debts expense Expenses with no cash outflows are added back to net income Revenues with no cash inflows are subtracted from net income o Adjustments for nonoperating items Examples loss from the sale of a plant asset and a loss from retirement of notes payable Nonoperating losses are added back to net income Nonoperating gains are subtracted from net income o SUMMARY on page 514 Cash Flows From Investing Identify changes in noncurrent asset accounts and the current accounts for both notes receivable and investment in securities Reporting of investing activities is IDENTICAL under the direct method and indirect method 1 Identify changes in investing related accounts 2 Explain these changes using reconstruction analysis o Purchased plant assets of 70 000 by issuing 60 000 in notes payable to the seller and paying 10 000 cash Debit plant assets 70 000 Credit notes payable 60 000 Credit cash 10 000 o Sold plant assets costing 30 000 with 12 000 accumulated depreciation for 12 000 cash resulting in a 6 000 loss Debit cash 12 000 Debit
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