Chapter 11 - Summary Financial Accounting PDF

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Chapter 11: The Statement of Cash Flows

Purpose of Statement of Cash Flow    

Predicts future cash flows Evaluates management decisions Shows relations of net income to cash flows Profitable firms can run into financial trouble without cash flow management.

 GAAP requires receipts of interests and dividends and payments of interests and income tax under operating activities, even though it’s under investing.

Chapter 11: The Statement of Cash Flows

Cash Flows from Operating Activities (CFO)  Current Assets and Current Liabilities.  Indirect Method – Start with net income and reconcile it

Non-Cash Items

Not Operating Activities

Acquiring Assets Require Cash, Includes Prepayments

Increased Liability Means Cash Not Yet Paid

 Direct Method – Report all cash receipts and payments, use T-accounts.  Collections from customers, Payments for inventory, Payments for other operating expenses, Payments for income tax, etc.

Chapter 11: The Statement of Cash Flows

Cash Flows from Investing Activities (CFI)  Long-term assets.  Work with t-accounts that are prepared “net of depreciation”.  Be careful about non-cash investing activities.

 CFI inflows: a) Sale of PPE and other long-term assets. b) Disposal of long-term investments. c) Collections of loans made to others (as investments).  CFI outflows: a) Acquisition of PPE and other long-term assets. b) Purchase of long-term investments. c) Making of loans to others (as investments).

Chapter 11: The Statement of Cash Flows

Cash Flows from Financing Activities (CFF)  Long-term liabilities and Owners’ equity.  Note both the current and non-current potion of long-term debt and both long- & short-term notes as a single account.  Retained earnings to arrive at dividend payments.  Be careful about non-cash financing activities.

 CFF inflows: a) Issuance of shares. b) Proceeds from selling treasury shares. c) Proceeds from loans and borrowings.  CFF outflows: a) Repurchase of shares. b) Repayment of loans: principle amount. c) Paying cash dividends.

Chapter 11: The Statement of Cash Flows

Noncash Investing and Financing Activities  Disclosed in the notes to financial statements.

Additional Notes  Free cash flow – cash available from CFO after paying for capital expenditures like investments in PPE.  Cash realization ratio – ability to generate cash from net/operating profit, CFO/Net Profit....