Financial accounting the impact on decision makers makers 9e chapter 12

Chapter 12 The Statement of Cash Flows Cash Flows and Accrual Accounting  Statement of cash flows complements an accrual-based income statement by providing information on a company’s cash flows from operating, investing, and financing activities  External parties have an interest in a company’s cash flows:  Stockholders  Creditors LO Exhibit 12.1—Cash Flows and Net Income for Four Companies (all amounts in millions of dollars) Purpose of the Statement of Cash Flows  Summarizes an entity’s cash receipts and cash payments during the period from operating, investing activities, and financing activities  Reports the changes in cash over a period of time and explains those changes  Assess company’s performance on a cash basis Cash Equivalents  Readily convertible to a determinable amount of cash  Maturity date of three months or less  Less degree of risk in terms of price changes  Combined with cash on a statement of cash flows  Examples: Commercial paper, Money market funds, and Treasury bills LO Operating Activities  Activities concerned with the acquisition and sale of products and services  Examples:  Collection of customer accounts  Payment to suppliers for inventory  Payment of wages  Payment of taxes LO Investing Activities  Activities concerned with the acquisition and disposal of long-term assets  Examples:  Capital expenditures  Purchase of another company  Sale of plant and equipment  Sale of another company Financing Activities Activities concerned with the raising and repaying of funds in the form of debt and equity  Examples:  Issuance of capital stock  Issuance of bonds  Issuance of bank note  Repurchase of stock  Retirement of bonds  Repayment of notes  Payment of dividends  Exhibit 12.2—Format for the Statement of Cash Flows Exhibit 12.3—Classification of Items on the Statement of Cash Flows Exhibit 12.14—Completed Statement of Cash Flows (continued) Exhibit 12.15—Indirect Method for Reporting Cash Flows from Operating Activities Summary of Adjustments to Net Income under the Indirect Method Comparison of the Indirect and Direct Methods  The Direct method Provides valuable information in evaluating a company’s operating efficiency  Reveals too much to competitors by telling them the amount of cash receipts and cash and payments from operations   The Indirect method Focuses attention on the differences between income on an accrual basis and a cash basis  Should separately disclose two important cash payments—income taxes paid and interest paid  Cash Flow Adequacy  Measures a company’s ability to meet future debt obligations after paying taxes and interest costs and making capital expenditures LO The Ratio Analysis Model Did Nordstrom generate enough cash this year from its operations to pay for its capital expenditures and meet its maturing debt obligations? Gather the information from the financial statements Calculate cash flow adequacy ratio Compare the ratio with prior years and with competitors Interpret the ratios The Business Decision Model If you were a banker, would you loan money to Nordstrom, Inc.? Gather information from the financial statements and other sources Compare the company's ratios with industry averages and look at trends Loan money or find an alternative use for the money Monitor your investment periodically Work-Sheet Approach—Indirect Method Enter end and the beginning of the period account balances LO Work-Sheet Approach—Indirect Method (continued) Record the various operating, investing, financing, and noncash activities Work-Sheet Approach—Indirect Method (continued) Enter net income Work-Sheet Approach—Indirect Method (continued) Enter noncash revenues or expenses Work-Sheet Approach—Indirect Method (continued) Enter changes in noncash current assets and current liabilities Work-Sheet Approach—Indirect Method (continued) Total columns Work-Sheet Approach—Indirect Method (continued) Determine net cash inflow (outflow) End of Chapter 12 [...]... operations to pay for its capital expenditures and meet its maturing debt obligations? Gather the information from the financial statements Calculate cash flow adequacy ratio Compare the ratio with prior years and with competitors Interpret the ratios The Business Decision Model 1 2 3 4 5 If you were a banker, would you loan money to Nordstrom, Inc.? Gather information from the financial statements and other...  Assume Wolk sells stock on the open market for $25,000 and then pays this amount in cash to the inventor for the rights to the patent Example 12- 3 Determining Noncash Investing and Financing Activities (continued)  Next, the acquisition of the patent can be identified and analyzed as follows: Supplemental schedule of noncash investing and financing activities Acquisition of patent in exchange for...Example 12. 3—Determining Noncash Investing and Financing Activities  Assume that at the end of the year, Wolk Corp issues capital stock to an inventor in return for the exclusive rights to a patent Although the patent has no ready market value, the stock could have been sold on the open market for $25,000 Example 12- 3 Determining Noncash Investing and Financing Activities (continued)  Assume... income is adjusted for the effects of accruals and deferrals  Net cash provided by Operating Activities is the same under both methods LO 4 Exhibit 12. 4—Boulder Company’s Income Statement Exhibit 12. 5—Boulder Company’s Balance Sheet Exhibit 12. 6—Statement of Cash Flows Using the Direct Method Exhibit 12. 7—Statement of Cash Flows Using the Indirect Method Accounting Equation and the Statement of Cash... Exhibit 12. 14—Completed Statement of Cash Flows (continued) Exhibit 12. 15—Indirect Method for Reporting Cash Flows from Operating Activities Summary of Adjustments to Net Income under the Indirect Method Comparison of the Indirect and Direct Methods  The Direct method Provides valuable information in evaluating a company’s operating efficiency  Reveals too much to competitors by telling them the amount... financing activities  Exhibit 12. 8—Julian Corp.’s Income Statement Exhibit 12. 9—Julian Corp.’s Comparative Balance Sheets Exhibit 12. 10—Schedule of Cash Flows from Operating Activities Exhibit 12. 11—Conversion of Income Statement Items to Cash Basis Exhibit 12. 12—Schedule of Cash Flows from Investing Activities Exhibit 12. 13—Schedule of Cash Flows from Financing Activities Exhibit 12. 14—Completed Statement... payments from operations   The Indirect method Focuses attention on the differences between income on an accrual basis and a cash basis  Should separately disclose two important cash payments—income taxes paid and interest paid  Cash Flow Adequacy  Measures a company’s ability to meet future debt obligations after paying taxes and interest costs and making capital expenditures LO 7 The Ratio Analysis... Nordstrom, Inc.? Gather information from the financial statements and other sources Compare the company's ratios with industry averages and look at trends Loan money or find an alternative use for the money Monitor your investment periodically Work-Sheet Approach—Indirect Method Enter end and the beginning of the period account balances LO 8 ... Method Accounting Equation and the Statement of Cash Flows LO 5 Summary of Various Possibilities for Inflows (+) and Outflows (−) of Cash An Approach to Preparing the Statement of Cash Flows: Direct Method  Step1: set up three schedules with the following headings:    a Cash Flows from Operating Activities b Cash Flows from Investing Activities c Cash Flows from Financing Activities Step 2: determine ... and then pays this amount in cash to the inventor for the rights to the patent Example 12- 3 Determining Noncash Investing and Financing Activities (continued)  Next, the acquisition of the patent... market value, the stock could have been sold on the open market for $25,000 Example 12- 3 Determining Noncash Investing and Financing Activities (continued)  Assume Wolk sells stock on the open market... Retirement of bonds  Repayment of notes  Payment of dividends  Exhibit 12. 2—Format for the Statement of Cash Flows Exhibit 12. 3—Classification of Items on the Statement of Cash Flows Example 12. 3—Determining