Financial accounting 10th pratt peters chapter 14

Chapter 14: The Statement of Cash Flows Learning Objective Define cash and provide a general description of the statement of cash flows The Statement of Cash Flows Summary of company’s transactions that involve the cash account over a period of time Transactions are classified as:    Operations Investments Financing Statement of Cash Flows •Required for financial statements by SFAS 95 (1987) •Primary purpose is to provide relevant information about cash receipts and cash disbursements of the company during the period •Serves to complement the other financial statements •Focus is on cash flows, not income •Reconciles the balance sheet and the income statement The Definition of Cash •Cash consists of coin, currency, and available funds on deposit at the bank Negotiable instruments such as money orders, certified checks, cashier’s checks, personal checks, and bank drafts are also considered cash •Also certain cash equivalents, which include commercial paper and other debt investments with maturities of less than three months are included in the statement of cash flows A General Description of the Statement of Cash Flows •Explains the change in the cash balance from one balance sheet to the next •Format of SCF includes the following three sections: •cash flow from operating activities •cash flow from investing activities •cash flow from financing activities •Like US GAAP, IFRS requires the presentation of a SCF, and the format is largely the same General Description of the Statement of Cash Flows Cash Provided (Used) by Operating Activities •Cash inflows and outflows associated directly with the acquisition and sale of the company’s inventories and services •Cash flows from operating activities is based on the income statement, and converts income activity to a cash basis •There are two formats for the presentation of CF from operating activity: •Direct Method: this technique shows cash received from customers and cash paid to various entities for operating activities This activity relates directly to the cash T-account •Indirect Method: this technique starts with net income and makes adjustments to net income to convert it to a cash basis from an accrual basis Cash Provided (Used) by Operating Activities •Both the direct and indirect method arrive at the same dollar amount •If the direct method is used, the indirect method must be presented in a supplementary schedule •FASB recommends companies use the direct method including the supplementary schedule •The direct method is more straight-forward and provides more information with the supplementary disclosure, but the vast majority of companies present only the indirect method 10 Deriving Cash Flow from Accrual Financial Statements Financing – Issuance of Common Stock and Treasury Stock Cash inflows from the issuance of common stock and treasury stock can be determined by looking at changes in the common stock, additional paid-in capital and treasury stock accounts (See Next Slide) 37 Figure 14-16 Determining cash inflow from stock issuances 38 Deriving Cash Flow from Accrual Financial Statements Financing – Cash Dividends The cash dividend payment can be determined by looking at changes in the dividend payable account Figure 14-17 Determining cash outflow from dividend payments 39 The Complete Statement of Cash Flows - The Direct Method Figure 14-18 Statement of cash flows for ABC Enterprises: Direct Method 40 The Complete Statement of Cash Flows - The Indirect Method To understand the adjustments to get from net income to Cash Flow from Operations, we can classify the adjustments into various categories: • • Noncash changes to non current accounts Changes in current noncash accounts (See Next Slide for Example) 41 The Complete Statement of Cash Flows - The Indirect Method Figure 14-19 Statement of cash Flows: Indirect Method 42 The Complete Statement of Cash Flows - The Indirect Method Figure 14-20 Explaining current adjustments to net income in the calculation of net cash provided (used) by operating activities 43 Concept Practice 44 Concept Practice (cont.) 45 Learning Objective Describe how the statement of cash flows can be analyzed 46 Analyzing the Statement of Cash Flows: An Application • Operating Activities may provide positive or negative cash flows regardless of net income (see ABC Enterprises Inc in previous slides) Remember that Operating Activities and the cash in this section are considered more sustainable • Looking at Investing and Financing Transactions helps to further explain the cash management of the organization during a given period Is the organization acquiring or selling long-term assets? How were activities financed beyond cash from operations - through debt or equity? • Noncash transitions in the notes may also provide key additional information about how a company is operating, managing its growth, and/or addressing solvency 47 International Perspective: The Statement of Cash Flows • Interpreting the statement of cash flows for large multinational corporations can be tricky for a variety of reasons • • • Many involve consolidations Doing business in multiple countries means multiple currencies Exchange gains and losses are noncash, but affect income 48 Which one of the following is consistent with a company recording a large operating income but having a net cash outflow from operations? a A great amount of depreciation expense b An increase in accounts receivable and inventory c An increase in accounts payable d Acquisition of new plant assets for cash 49 Which one of the following is consistent with a company recording a large operating loss but still having healthy cash flows from operations? a A large amount of depreciation and/or amortization expense b An increase in accounts receivable and inventory c A decrease in accounts payable d All sales are on a cash basis 50 Wiley © 2018 51 .. .Chapter 14: The Statement of Cash Flows Learning Objective Define cash and provide a general description... receivable and the allowance for doubtful accounts Figure 14- 6 Determining cash inflow from sales 26 Deriving Cash Flow from Accrual Financial Statements Operating – Service Revenue Cash inflow... determined by looking at changes in the advance account Figure 14- 7 Determining cash inflow from fees earned 27 Deriving Cash Flow from Accrual Financial Statements Operating – Cost of Goods Sold Cash