Chapter 12 Statement of Cash Flows PDF

Preview

Summary

Lecture notes for chapter 12 of financial accounting....

Description

Chapter 12 Statement of Cash Flows Classification of cash flows: Operating, investing and financing. Operating activities: include cash effects of transactions that create revenues and expenses and thus enter into the determination of net income (reflected in changes in current assets and changes in current liabilities). Investing activities: include (1) acquiring and disposing of investments and (2) lending money and collecting the loans (reflected in changes in long-term assets). Financing activities: include (1) obtaining cash from issuing debt and repaying the amounts borrowed, and (2) obtaining cash from stockholders, repurchasing shares, and paying dividends (reflected in changes in long-term liabilities, changes in paid-in capital, changes in treasury stock, and dividends). Preparation of cash flow statements The purpose of statement of cash flows - To provide relevant information about the cash receipts and cash payments of an enterprise during a period Statement of Cash Flows - Cash flow from operating activities + cash flow from investing activities + cash flow from financing activities = net ranges in cash for the period + beginning cash balance = ending cash balance Classifying Accounts - operating : current assets, current liabilities - Investing : long term assets, other investments - Financing : long term liabilities, owner’s equity (except for the net income portion of retained earnings) Indirect method: derives cash flows from accrual based financial statements (balance sheet and income statement) - The investing and financing sections are the same regardless of which method is used STEPS 1. For the indirect method, start with net income 2. Add noncash expenses such as depreciation, amortization, or bad debt expense 3. Add losses / subtract gains from non-operating activities 4. Adjust for changes in current assets and current liabilities Net income + depreciation/amortization/bad debt expense + losses - gains increase in CS (except cash), decrease in CL + decrease in CA (except cash), increase CL = cash flow from operating activities Direct method: derives cash flows directly from each source or use of cash ( NOT REQUIRED for cash flows from operating activities ) Information Required to Prepare Cash Flow Statement - The statement of cash flows is not prepared from an adjusted trial balance

-

Obtained from: comparative balance sheets, the current income statement and selected transaction data How to Prepare Statement of Cash Flows - Assets = liability + owners’ equity - Cash + Non$Assets = Liabilities + Owners’ Equity - Cash = - Non$Assets + liabilities + owners’ equity Computing Cash Flow From Financing Activities - If long term liabilities, owner’s equity going up then cash is coming in - If long term liabilities, owner’s equity is going down then cash is going out Cash flow from operating activities - Net income - Adjustments to reconcile net income to net cash provided by operating activities - + noncash expenses (depreciation etc) - + loss on sale of PPE - - gain on sale of PPE - - Increase in CA (except cash), decrease in CL - + Decrease in CA (except cash), decrease in CL - NET CASH PROVIDED BY OPERATING ACTIVITIES

a...