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Managerial Accounting Second Edition Weygandt / Kieso / Kimmel

Gain insights on cash receipts, payments, and cash flow changes in managerial accounting. Explore operating, investing, and financing activities to analyze a company's financial health.

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Managerial Accounting Second Edition Weygandt / Kieso / Kimmel

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  1. Managerial AccountingSecond EditionWeygandt / Kieso / Kimmel Prepared by: Ellen L. Sweatt Georgia Perimeter College ELS

  2. $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ The Statement of Cash Flows

  3. Primary Purpose of Statement To provide information about: • cash receipts • cash payments • the net change in cash resulting from: • operating, • investing • financing activities of a company during a period.

  4. What was the change in the cash balance? Questions the Statement of Cash Flows Answers Where did the cash come from? What was the cash used for?

  5. Meaning of Cash Flows • Cash equivalents are: • readily convertible to known amounts of cash • so near maturity that their market value is relatively insensitive to changes in interest rates. • treasury bills • commercial paper • money market funds • The term cash includes cash equivalents.

  6. Involve Income Statement Items Operating Activities... Include: • The cash effects of transactions that create revenues and expenses and • Enter into determination of net income.

  7. Involve Investments and Long-Term Asset Items Investing Activities... Include: • Acquiring and disposing of investments and productive long-lived assets. • Lending money and collecting the loans.

  8. Involve Long-Term Liability and Stockholders’ Equity Items Financing Activities... Include: • Obtaining cash from issuing debt and repaying the amounts borrowed • Obtaining cash from stockholders and paying them dividends.

  9. Illustration 12-1 Types of Cash Flows -Operating Activities • Cash inflows: • From sale of goods or services • From return on loans (interest received) and on equity securities (dividends received) • Cash outflows: • To suppliers for inventory • To employees for services • To government for taxes • To lenders for interest • To others for expenses

  10. Illustration 12-1 Types of Cash Flows -Investing Activities • Cash inflows: • From sale of property, plant, and equipment • From sale of debt or equity securities of other entities • From collection of principal on loans to other entities • Cash outflows: • To purchase property, plant, and equipment • To purchase debt or equity securities of other entities • To make loans to other entities

  11. Illustration 12-1 Types of Cash Flows -Financing Activities • Cash inflows: • From sale of equity securities (company's own stock) • From issuance of debt (bonds and notes) • Cash outflows: • To stockholders as dividends • To redeem long-term debt or reacquire capital stock

  12. Operating Activities ALERT Some cash flows relating to investing or financing activities are classified as operating activities. For example... • Receipts of investment revenue (interest and dividends) and • Payments of interest to lenders are classified as operating activities because these items are reported in the income statement.

  13. Significant Noncash Activities... • That do not affect cash are NOT reported in the body of the statement of cash flows. • Are reported: • In a separate schedule at the bottom of the statement of cash flows or • In a separate note or supplementary schedule to the financial statements.

  14. Significant Noncash Activities... 1. Issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Issuance of debt to purchase assets. 4. Exchanges of plant assets.

  15. Body of Statement Format for Statement of Cash Flows Three activities: • operating • investing • financing PLUS • noncash investing and financing activities

  16. Product Life Cycle • A series of phases all products go through • The phases are often referred to as: • introductory phase • growth phase • maturity phase • decline phase. • The phase a company is in affects its cash flows.

  17. Introductory Phase... To support asset purchases the company may issue stock or debt. Expect: • cash from operations to be negative • cash from investing to be negative. • cash from financing to be positive.

  18. Growth Phase The company is striving to expand its production and sales. Expect: • small amounts of cash to be generated from operations. • cash from investing to be negative. • cash from financing to be positive

  19. Maturity Phase Sales and production level-off Expect: • cash from operations to exceed investing needs • cash from investing to be neutral • cash from financing to be negative

  20. Decline Phase Sales and production decline Expect: • cash from operations to decline • cash from investing to possibly become positive • cash from financing to possibly become negative

  21. Illustration 12-3 Impact of Product Life Cycle on Cash Flows 0

  22. Why Report Causes of Changes in Cash? Because investors, creditors, and other interested parties want to know what is happening to a company’s most liquid asset, CASH

  23. Statement of Cash Flows Helps Users Evaluate 1. The company’s ability to generate future cash flows. 2. The company’s ability to pay dividends and meet obligations. 3. The reasons for the difference between net income and net cash provided (used) by operating activities. 4. The investing and financing transactions during the period.

  24. Statement of Cash Flows Helps Answer the Following Questions • How did cash increase when there was a net loss for the period? • How were the proceeds of the bond issue used? • How was the expansion in the plant and equipment financed? • Why were dividends not increased? • How was the retirement of debt accomplished? • How much money was borrowed during the year? • Is cash flow greater or less than net income?

  25. Free Cash Flow Cash Provided By Operations – Capital Expenditures – Dividends PaidFree Cash Flow

  26. Capital Expenditure Ratio • An indicator of a company's ability to generate sufficient cash to finance new fixed assets. • Capital expenditures are purchases of fixed assets.

  27. Capital Expenditure Ratio Cash Provided by Operations Capital Expenditures

  28. Assessing Liquidity, Solvency, and Profitability Using Cash Flows The ratios are cash-based instead of accural-based. Rather than using numbers from the income statement for assessment purposes, we use numbers from the statement of cash flows.

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