Chapter 11 Statement of Cash Flows PDF

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Instructor Ming Deng, Notes from Textbook...

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Chapter 11: Statement of Cash Flows Wednesday, November 29, 2017

8:20 PM

Indirect Method - Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows. More popular Easier and less costly Direct Method - Adjusts the items on the income statement to directly show the cash inflows and outflows from operations, such as: - cash received from customers - cash paid for inventory, salaries, rent, interest, and taxes. First step is to change from accrual basis to cash basis (calculate net cash flow from operating activities) (Cash inflow) - Look at revenue and subtract the increase in accounts receivable - This gives you the actual amount of cash received by customers Next find Cash paid to suppliers (Cash outflow) - Look at cost of goods sold, and subtract decrease in inventory - Then from that number, add the decrease in accounts payable - This gives you the actual cash outflow Next look at operating expenses - If there is an increase of supply/utilities/prepaid rent expense, then add it to the operating expense number Depreciation expense No effect on cash flows Not reported on SOCF Loss on sale of land No effect on cash flows Not reported in SOCF Interest Expense If increase in interest payable, subtract it from interest expense to record Interest Tax expense If income tax payable decreased, subtract it from interest tax

expense and record it. INDIRECT METHOD AMOUNT= DIRECT METHOD AMOUNT Cash Return on Assets Return on Assets = net income / average total assets - Common measure used to compare companies CASH Return on Assets = operating cash flows / average total assets - Can be separated into: ○ Cash flow to sales (is the same as profit margin) § (operating cash flows / net sales) § measures the operating cash flows generated for each dollar of sales. ○ Asset turnover § (Net sales / Average total assets) § measures the sales revenue generated per dollar of assets Cash inflow - cash outflow = Net Cash Flow Classifying Transactions Operating activities

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Investing activities

- Include cash transactions involving the purchase - Include sale of long-term assets and investments - Investing/improving land, facilities, buildings, equipment - Investing in stocks and bonds of other companies

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Include cash receipts Include cash payments Relate to revenue and expense activities Essentially the same as what is reported in income statement but on cash basis - Common examples: • collection of cash from customers • the payment of cash for inventory, salaries, and rent. • Receipt of interest

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Financing activities

- are both inflows and outflows of cash resulting from the external financing of a business. - Financing from External sources (stockholders and lenders) - Examples: borrowing and repaying debt, issuing and repurchasing stock, paying dividends

Non Cash activities - Reported as noncash activities either directly under SOCF or in a note to the financial statements Steps to preparing SOCF: 1. Calculate net cash flows from operating activities using information from the income statement and changes in current assets, other than cash, and current liabilities from the balance sheet. 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the balance sheet. 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders' equity accounts from the balance sheet. 4. Combine the operating, investing, and financing activities, and make sure the total change from these three activities agrees with the net increase or decrease in cash shown at the bottom of the statement of cash flows. Indirect Method: Reporting Operating activities -

Start with net income and remove noncash activities 1. Noncash Items (These items include revenues and expenses that never affect cash) i. Depreciation expense + ii. Amortization expense + 2. Non operating items (these items include gains and losses on the sale of long-term assets that do not affect operating cash flows)

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i. Loss on sale of assets + ii. Gain on sale of assets Changes in current assets and current liabilities (These changes represent the noncash portion of some revenues and expenses.) i. Increase in a current asset ii. Decrease in a current asset + iii. Increase in a current liability + iv. Decrease in a current liability -...