Chapter12s

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  • Practice Problem
  • Chapter12s

    1. 1. Chapter 12: Key Concepts Identify and explain the purposes and content in the Statement of Cash Flows. Discuss the usefulness of the Statement of Cash Flows. Prepare a Statement of Cash Flows.Financial Accounting-Eiler 1
    2. 2. Information in Statement of Cash Flows Three-fold: 1. Where does the cash come from? 2. What does the cash get spent on? 3. What explains the change in cash between periods?Financial Accounting-Eiler 2
    3. 3. Usefulness of Statement of Cash Flows Helps predict future cash flows.  Investments today should generate operating cash flows tomorrow.  Financing should help spur investment. Useful tool for evaluating managers’ decisions.  Are those investments from the past few years paying off? Helps to determine whether interest and dividends payments can be made. Provides insight about profitability and cash generation.  Are the sales turning into cash?Financial Accounting-Eiler 3
    4. 4. Summary of Statement of Cash Flows Classifies cash inflows and outflows as follows:  Cash Flows from Operating Activities  Cash Flows from Investing Activities  Cash Flows from Financing Activities Reported for a period of time  What other financial statements are reported over a period of time?Financial Accounting-Eiler 4
    5. 5. Statement of Cash Flows Categories Operating  Transactions resulting from day-to-day activities.  Production & Selling  Examples: Investing  Transactions for purchases or sales of long-term assets.  Also includes investments in securities & non-trade receivables  Examples: Financing  Debt & equity transactions that affect “cash”.  Includes non-trade short-term debt, all long-term debt, and stockholders’ equity.  Examples:Financial Accounting-Eiler 5
    6. 6. Statement of Cash Flows: Other Disclosures Disclosures Relating to Noncash Investing & Financing  If transactions that relate to investing or financing are material, have to disclose even if no cash is involved!  Buying long-term assets with a long-term note  Retiring debt by issuing equity securities  Converting preferred stock to common stockFinancial Accounting-Eiler 6
    7. 7. Cash Flows: Relationship to the Balance SheetOperating Operatingcash flows Current assets Current liabilities cash flows Long-term liabilities FinancingInvesting Long-term assets cash flowscash flows Owners’ equity Financial Accounting-Eiler 7
    8. 8. Statement of Cash Flows: Interest payments FAQs  Included as an __________ activity, even though the proceeds from selling the related instruments are included as a ____________ activity. Dividend payments  Included in ______________ activity, consistent with the placement of proceeds from selling stock. Interest and dividends received  Both included as an ____________ activity, even though the related outflows may have been included as an __________ activity. Tax payments/refunds  Included as an __________ activity, regardless of whether underlying taxable income relates to operations or not (e.g. if a firm has a taxable capital gain on the sale of equipment).Financial Accounting-Eiler 8
    9. 9. Statement of Cash Flows: Preparation What information do you need to prepare the SoCF?  Comparative (BOY & EOY) Balance Sheet  Current Year Income Statement  Other Information (Transaction Details) Preparing the SoCF involves 4 general steps 1. Calculate the cash flows from operating activities  Direct or Indirect Method 2. Calculate the cash flows from investing activities 3. Calculate the cash flows from financing activities 4. Calculate net cash flows (use items 1-3 above).  This should tie to the change in cash on the Balance Sheet.Financial Accounting-Eiler 9
    10. 10. Statement of Cash Flows: Preparation Two Ways to approach preparation of the SoCF  By Analyzing the Cash Account  By Analyzing Noncash Accounts Analyzing the Cash Accounts:  Look at cash account & categorize each transaction as operating, investing, or financing.  Then classify into sub-categories like “cash receipts from customers”, “cash from issuing stock”, etc.  Big drawback of this approach is how time consuming it is and small errors could add up.Financial Accounting-Eiler 10
    11. 11. Statement of Cash Flows: Preparation Two Ways to approach preparation of the SoCF  By Analyzing the Cash Account  By Analyzing Noncash Accounts Analyzing the Non-Cash Accounts:  Based on how double-entry accounting works  Debits = Credits  Any transaction that affects the cash account ALSO affects a non- cash account. Noncash Cash + = Liabilities + Equity Assets Cash = Noncash AccountsFinancial Accounting-Eiler 11
    12. 12. Cash Flows from Operating Activities Cash Flows from Operating Activities can be calculated using either the Direct Method or the Indirect Method. Direct Method  Reconcile based on major income statement categories.  “Cash Received From…” / “Cash Paid To…”.  Recommended by FASB / Required by IASB. Indirect Method  Start with Net Income and reconcile based on the type of account affected.  Used more often due to simplicity. Either way, net cash flows from operating activities will be the same.Financial Accounting-Eiler 12
    13. 13. Cash Flows from Operating Activities: Indirect Method What you need from the Income Statement: What you need from the comparative Balance Sheets: And “other” information, such as:Financial Accounting-Eiler 13
    14. 14. Indirect Method: Types of Adjustments Income Statement Adjustments  __________ Gains on sales of PP&E.  __________ Losses on sales of PP&E  Why make these adjustments?  Expenses without cash outflows are added to Net Income  Examples?Financial Accounting-Eiler 14
    15. 15. Indirect Method: Types of Adjustments Changes in current assets (NOT CASH!!)  Accounts Receivable, Prepaid Accounts  Decreases are added to Net Income  If A/R decreases, you’ve collected more cash than the amount reflected in sales. Changes in current liabilities (for operations)  Accounts Payable, Interest Payable  Decreases are subtracted from Net Income  If A/P decreases, you’ve paid more cash out to suppliers than you actually purchased.Financial Accounting-Eiler 15
    16. 16. Operating Activities  It can be challenging to keep straight whether a balance should be added or subtracted from Net Income. Change in Account Balance During the Year Increase DecreaseCurrent AssetsCurrent Liabilities Financial Accounting-Eiler 16
    17. 17. Indirect Method FormatNet Income + - + + - + - =Financial Accounting-Eiler 17
    18. 18. Step 2: Cash Flows From Investing Activities  Transactions you will encounter most often: Balance Sheet Investing Activity Cash Flow Account(s) EffectPlant Assets, Purchase of Plant Assets orIntangibles Intangibles for cash Sale of Plant Assets or Intangibles for cashShort- or Long-term Purchase of InvestmentInvestments Securities for cash(stocks & bonds from Sale (maturity) or investmentother companies) securities for cash Financial Accounting-Eiler 18
    19. 19. Sales of Assets: Calculating Cash Received Based on: Cash - (Cos - A/D) = Gain/<Loss> t Use t-account to determine Cost and/or Accumulated Depreciation at the time of the sale.Financial Accounting-Eiler 19
    20. 20. Step 3: Cash Flows From Financing Activities  Transactions you will encounter most often: Balance Sheet Financing Activity Cash Flow Account(s) EffectShort-Term Debt Borrowing Cash from bank(Notes Payable) Repayment of Loan PrincipalLong-Term Debt Issuance of Bonds for Cash Repayment of Bond PrincipalCommon Stock & Issuance of Stock for CashContributed Capital Repurchase (Retirement) of Stock with CashRetained Earnings Payment of Cash Dividends Financial Accounting-Eiler 20
    21. 21. Calculating Cash Flows from Financing Activities: Examples Long-Term Debt Beginning balance Payments of debt Issuance of new debt Ending balance Retained Earnings Beginning balance Dividends declared Net income Ending balanceFinancial Accounting-Eiler 21
    22. 22. Step 4: Proving the Cash Balance  Finally! Cash flows from Operating Activities + Cash flows from Investing Activities + Cash flows from Financing Activities Net Increase in Cash + Cash Balance, Beginning of Year This amount must tie Cash Balance, End of Year to the amount on the Balance SheetFinancial Accounting-Eiler 22
    23. 23. Other Disclosures Remember, still need to disclose non-cash investing and financing transactions. Example:  Acquisition of building by issuing common stock  Acquisition of land by issuing note payable  Payment of long-term debt by issuing stock  Bonds converted into common stock  Stock dividends distributedFinancial Accounting-Eiler 23
    24. 24. Chapter 12: Key Concepts Identify and explain the usefulness and content in the Statement of Cash Flows. Know how to classify items as Operating, Investing, Financing, or Non-cash investing and financing. Be able to prepare a Statement of Cash Flows.Financial Accounting-Eiler 24
    25. 25. Financial Accounting-Eiler 25
    26. 26. Statement of Cash Flows:Noncash Accounts (cont.) Assets = Liabilities + Equity NoncashCash + Assets = Liabilities + Equity NoncashCash + Assets = Liabilities + EquityCash = Liabilities + Noncash Equity - Assets 26
    27. 27. Statement of Cash Flows:Noncash Accounts (cont.) Assets = Liabilities + Equity NoncashCash + Assets = Liabilities + Equity NoncashCash + Assets = Liabilities + Equity Cash = Noncash Accounts 27

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