Intermediate accounting 17e stice skousen cengage chapter 05

Stice | Stice | Skousen Intermediate Accounting,17E Statement of Cash Flows and Articulation PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2010 Cengage Learning What Good is a Cash Flow Statement? • It explains the change during the period in cash and cash equivalents • Sometimes earnings fail • Everything is on one page • It is used as a forecasting tool 5-2 Pro Forma Cash Flow Statement A pro forma cash flow statement is a prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented 5-3 Cash Equivalent • A cash equivalent is a shortterm, highly liquid investment that can be converted easily into • cash To qualify as a cash equivalent, an item must be:  Readily convertible into cash  So near to its maturity that there is insignificant risk of changes in value due to changes in interest rates 5-4 Cash Flow Activities • Operating activities include those transactions and events that enter into the determination of net income • Investing activities include those transactions and events that involve the purchase and sale of financial instruments not intended for trading purposes; property, plant, equipment; and other assets not generally held for resale, as well as the making and collecting of loans 5-5 Cash Flow Activities • Financing activities include those transactions and events whereby resources are obtained from or repaid to owners and creditors 5-6 (continues) 5-7 (continues) 5-8 5-9 Cash Flow Pattern The normal pattern of positive inflows or negative outflows of cash reported are as follows: • Cash from operating activities, + • Cash from investing activities, − • Cash from financing activities, + or − 5-10 Building Known (continues) 5-44 Building Building(s) costing $76 must have been purchased during the year 5-45 Step Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions 5-46 Financing Activities Cash Inflow • Issuance of own stock • Borrowings Cash Outflow • Dividend payments • Repaying principal on borrowing • Treasury stock purchase 5-47 Long-Term Debt We can infer that Orchard Blossom repaid $21 in long-term loans during the year 5-48 Retained Earnings Retained earnings decreased by $9 We know there was a $15 net income, so we can use a Taccount to determine the amount of the dividend 5-49 Long-Term Debt The $6 debit, or “squeeze” figure, has to be the dividends declared (and we will assume paid) during the year 5-50 Step Prepare a formal statement of cash flows 5-51 5-52 Step Prepare supplemental disclosures • Cash paid for interest and income taxes • Noncash investing and financing activities 5-53 Cash Flow Ratios Cash Flow to Net Income Cash from operations Cash-flow-to-net= Net income income ratio • Measure of earnings quality • Tends to be greater than • Should remain fairly stable for the years for a specific company 5-54 Cash Flow Ratios Cash Flow Adequacy Cash flow = adequacy ratio Cash from operations Capital expenditures and acquisitions • Measures relationship between investment spending and cash generated by operations • Indicate a company’s attitude towards reinvestment in long-lived production assets • When ratio is small it indicates that cash flows from operations fall short of funding growth 5-55 Cash Flow Ratios Cash Times Interest Earned Cash times interest earned ratio = Cash from operations + Interest paid + Taxes paid Interest expense • Measures ability to service debt • Generally, a higher ratio indicates more solvency 5-56 Articulation In an accounting context, articulation means that the three primary financial statements are not isolated lists of numbers but are an integrated set of reports on a company’s financial health 5-57 Forecasted Statement of Cash Flows Compute the change in cash Convert the income statement from an accrual basis to a cash basis Analyze the long-term asset accounts Analyze the long-term debt and stockholders’ equity accounts Prepare the statement of cash flows Disclose any significant noncash 5-58