Classification of cash flows

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Classification of cash flows

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  • Classification of cash flows

    1. 1. <ul><li>Transactions and other events characteristic of each kind of activity are as follows: </li></ul><ul><li>1 Operating activities include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income. </li></ul><ul><li>2 Investing activities include a) acquiring and disposing of investments and productive long-lived assets, and b) lending money and collecting the loans. </li></ul><ul><li>3 Financing activities include a) obtaining cash from issuing debt and repaying the amounts borrowed, and b) obtaining cash from stockholders and providing them with a return on their investment. </li></ul>CLASSIFICATION OF CASH FLOWS
    2. 2. Cash inflows: From returns on loans (interest received) and on equity securities (dividends received) To suppliers for inventory To government for taxes To others for expenses Cash inflows: From collection of principal on loans to other entities Cash outflows: To make loans to other entities Financing activities From issuance of equity securities (company’s own stock) Cash outflows: To stockholders as dividends ILLUSTRATION 14-2 TYPICAL RECEIPTS AND PAYMENTS CLASSIFIED BY ACTIVITY From sale of property, plant, and equipment To purchase debt or equity securities of other entities Types of Cash Inflows and Outflows Operating activities From sale of goods or services Cash outflows: To employees for services To lenders for interest Investing activities From sale of debt or equity securities of other entities To purchase property, plant, and equipment Cash inflows: From issuance of debt (bonds and notes) To redeem long-term debt or reacquire capital stock
    3. 3. <ul><li>Not all of a company’s significant activities involve cash. </li></ul><ul><li>Examples of significant noncash activities are: </li></ul><ul><li>1 Issuance of common stock to purchase assets. </li></ul><ul><li>2 Conversion of bonds into common stock. </li></ul><ul><li>3 Issuance of debt to purchase assets. </li></ul><ul><li>4 Exchange of plant assets. </li></ul><ul><li>Significant financing and investing activities that do not affect cash are not reported in the body of the SCF . </li></ul><ul><li>Such activities are reported in either 1 a separate schedule at the bottom of the SCF or 2 in a separate note or supplementary schedule to the financial statements . </li></ul>SIGNIFICANT NONCASH ACTIVITIES
    4. 4. <ul><li>The 3 activities previously discussed – operating , investing , and financing – plus the significant noncash investing and financing activities constitute the general format of the SCF, an example of which is shown below. </li></ul>ILLUSTRATION 14-3 FORMAT OF STATEMENT OF CASH FLOWS
    5. 5. ILLUSTRATION 14-18 STATEMENT OF CASH FLOWS, 2001 — INDIRECT METHOD COMPUTER SERVICES COMPANY Statement of Cash Flows For the Year Ended December 31, 2001 Cash flows from operating activities Net income $ 139,000 Adjustments to reconcile net income to net cash provided by operating activities: $ 15,000 Loss on sale of equipment 3,000 10,000 Increase in prepaid expenses ( 4,000) Increase in accounts payable 55,000 79,000 Net cash provided by operating activities 218,000 Cash flows from investing activities Purchase of building $(160,000) Purchase of equipment ( 25,000) Sale of equipment 4,000 Net cash used by investing activities (181,000) Cash flows from financing activities Payment of cash dividends ( 15,000) Net cash used by financing activities ( 15,000) Net increase in cash 22,000 Cash at beginning of period 34,000 Cash at end of period $ 56,000 Noncash investing and financing activities Issuance of bonds payable to purchase land $ 130,000 Depreciation expense Decrease in accounts receivable
    6. 6. ILLUSTRATION 14-44 STATEMENT OF CASH FLOWS, 2001 — DIRECT METHOD JUAREZ COMPANY Statement of Cash Flows For the Year Ended December 31, 2001 Cash flows from operating activities Cash receipts from customers $ 978,000 Cash payments: To suppliers $ 638,000 For operating expenses 179,000 For income taxes 24,000 (841,000) Net cash provided by operating activities 137,000 Cash flows from investing activities Purchase of equipment (180,000) Sale of equipment 17,000 Net cash used by investing activities (163,000) Cash flows from financing activities Issuance of bonds payable 90,000 Payment of cash dividend ( 32,000) Net cash provided by financing activities 58,000 Net increase in cash 32,000 Cash at beginning of period 159,000 Cash at end of period $ 191,000 Noncash investing and financing activities Issuance of common stock to purchase land $ 100,000

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