Reporting and Analyzing Cash Flows
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Transcript of Reporting and Analyzing Cash Flows
Reporting and Analyzing Cash Flows
Chapter 17
Purposes of the Statementof Cash FlowsDesigned to fulfill the following:– predict future cash flows– evaluate management decisions– determine the ability to pay dividends plus
interest and principal– show the relationship of net income to
changes in the firm’s cash
Cash Balance Includes...
– cash on hand.– cash in the bank.– cash equivalents.
Cash Equivalents Are....
…short-term, highly liquid investments convertible into cash with little delay.
– money market accounts.– U.S. Government Treasury bills.
Basic Organization of theStatement of Cash FlowsA business may be evaluated in terms of three
types of business activities:1 Operating activities2 Investing activities3 Financing activities
Operating Activities
Related to transactions that make up net income.
Also affect current assets and current liabilities on the balance sheet.
Outflows – cash paid from incurring expenses Salaries and wages. Payments to suppliers
for inventory. Taxes and fines. Interest paid to lenders Other expenses
Operating Activities
Inflows – cash receipts from earning revenues Sale of goods or
services Interest revenue Dividend revenue Other revenues
Focus your attention on: income statement, and changes in current assets, current liabilities
Investing Activities
Investing activities increase and decrease the assets that are available to the business.
Related to the Long-Term Asset accounts.
Investing Activities
Outflows Purchase long-term
productive assets. Purchase equity
investments. Purchase debt
investments. Make loans.
Inflows Selling long-term
productive assets. Selling equity
investments. Collecting of
principal on loans. Other.
Focus your attention on changes in:plant assets, long-term investments, other long-term assets
Financing Activities
Transactions involving obtaining resources from the owners or returning resources to them.
Also involves obtaining resources from creditors and repaying the amount borrowed.
Financing ActivitiesInflows
Issuing stock. Issuing bonds and
notes.
Outflows Cash dividends or
withdrawals by owner. Purchase treasury
stock. Repay cash loans.
Focus your attention on changes in:long-term debt and stockholder’s equity
Investing and financing activities that affect the company’s financial position, but not the entity’s cash flow during the period.
Items requiring separate disclosure include: Retirement of debt by issuing equity securities. Conversion of preferred stock to common stock. Acquiring land by issuing a note payable.
Noncash Investing and Financing
Format of the Statementof Cash Flows FASB Statement 95 approved two methods
for reporting cash flows from operating activities.
1 Indirect method2 Direct method
Cash flows from operating activities:
Net cash provided (used) by operating activites $ #####Cash flows from investing activities:
Net cash provided (used) by investing activites #####Cash flows from financing activities:
Net cash provided (used) by financing activites #####Net increase (decrease) in cash $ #####Cash (and equivalents) balance at beginning of period #####Cash (and equivalents) balance at end of period $ #####
[List]
[List]
Company NameStatement of Cash Flows
For the Period Ended XXXX
[List]
Format of Statement
Direct Method of Determining Cash Flows from Operating Activities Examine each income statement item with
the objective of reporting how much cash was received or disbursed in association with the item.
Start with Sales or Revenues Earned and work your way down through the income statement.
Think about itCash collected from customers = $24,440
orSales – increase in accounts receivable$24,623 - 183 = $24,440
If accounts receivable is increasing, then our
customers are charging more and paying less.
Think about it.Cash Paid for Inventory, $18,516
orCost of goods sold + increase in inventory -
increase in accounts payable18,048 + 651 – 183 = $18,516
If inventory increases, you’re going to have to pay cash for it.
If accounts payable
increases, you are charging
more, paying less
Think about it:Cash paid for operating expenses = $4,793
Or
Operating expenses – increase in accrued liabilities
$4,883 – 90 = $4,793
Acquisitions of property and equipment:
Property & EquipmentBeg bal 3,428
End bal 4,345
1,186
269 Depreciation3,159
Borrowing:
Long-term liabilitiesBeg bal 464
End bal 478
14
Proceeds from issuance of common stock:
Common stockBeg bal 446
End bal 676
230
Payment of cash dividends:
Retained earningsBeg bal 3,788
End bal 4,531
Net inc. 886
1434,674
Indirect Method of Determining Cash Flows from Operating ActivitiesBegin with net income as reported on the
income statement and adjust: Add any noncash expenses or any losses Deduct any noncash gains or revenues Adjust for changes in current operating assets
and liabilities
Net Income
Cash Flows from Operating
Activities
Changes in current assets and current liabilities.
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization.
Indirect Method of Reporting Operating Cash Flows
Indirect Method of Reporting Operating Cash Flows
Cash + Other Assets = Liabilities + Capital
Cash flows provided by operating activities: $80,000Cash flows from investing activities: Cash paid to acquire plant assets $(101,000) Cash received from sale of land 24,000Net cash flows used by investing activities (77,000)Cash flows from financing activities: Cash received from stock issuance $30,000 Cash paid on long-term note (15,000) Cash paid for dividends (11,000)Net cash flows provided by financing activities 4,000Net increase (decrease) in cash $7,000Cash balance, beginning of year 20,000Cash balance, end of year $27,000