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BSAD 221 Introductory Financial Accounting Donna Gunn, CA

BSAD 221 Introductory Financial Accounting Donna Gunn, CA. Cash Flow Statement. This statement is a categorized list of all transactions of the period that affected the Cash account. The three categories are . . . Operating activities, Investing activities, and Financing activities .

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BSAD 221 Introductory Financial Accounting Donna Gunn, CA

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  1. BSAD 221Introductory Financial AccountingDonna Gunn, CA

  2. Cash Flow Statement • This statement is a categorized list of all transactions of the period that affected the Cash account. • The three categories are . . . • Operating activities, • Investing activities, and • Financing activities.

  3. Cash Equivalents Currency Classifications of the Cash Flow Statement Cash • Short-term, highly liquid investments. • Readily convertible into cash.

  4. Statement of Cash Flows • To assess the firm’s ability to generate cash and cash equivalents and • To assess the firm’s cash requirements • Statement of Cash Flows shows: • Where the cash came from • What the cash was used for • The change in the cash balance

  5. Statement of Cash Flows Cash activities are divided into three main categories: • Operating Activities • Main revenue-producing activities • Investing Activities • Changes in long-term assets and investments • Financing Activities • Changes in equity and non-operating liabilities

  6. Cash Flows from Operating Activities The Direct Methodof presenting the Operating Activities section of the cash flow statement reports components of cash flows from operating activities as gross receipts and gross payments. The Indirect Methodof presenting the Operating Activities section of the cash flow statement adjusts net income to compute cash flows from operating activities.

  7. + _ Cash Flows from Operating Activities – Direct Method Inflowsfrom: • Sales to customers • Interest and dividends received Cash Flows from Operating Activities Outflowsto: • Purchase goods (for resale) and services • Salaries and wages • Income taxes • Interest on liabilities

  8. Cash Flows from Operating Activities—Direct Method

  9. +/- Changes in current assets and current liabilities. + Losses and - Gains + Noncash expenses such as depreciation and amortization. Cash Flows from Operating Activities- Indirect Method The indirect method adjusts net income by eliminating non-cash items. Cash Flows from Operating Activities - Indirect Method Net Income

  10. A C B Net Income +/- Adjustments Cash Flows from Operating Activities Depreciation Expense Gains and Losses on the Sale of Long-Term Assets Changes in the Current Asset and Current Liability Accounts

  11. Reporting Cash Flows from Operating Activities—Indirect Method Make adjustments for changes in current assets and current liabilities using the decision table above.

  12. Operating Activities - Indirect Method The Statement of Cash Flows will begin with Net income from the Statement of Earnings.

  13. Operating Activities - Indirect Method The Net income number will be adjusted for non-cash items. In the case of Andrew Peller, those adjustments included amortization expense ($1,908) This is the most common non-cash item and one you will ALWAYS need to adjust

  14. Reporting Cash Flows from Operating Activities—Indirect Method With the indirect method, always start with the net income or net loss for the period. Next, adjust for the non-cash items included in net income.

  15. Reporting Cash Flows from Operating Activities—Indirect Method To complete the Cash flows from operating activities section, you must examine a comparative balance sheet to determine the changes in current assets and current liabilities from the beginning of the period to the end of the period.

  16. Reporting Cash Flows from Operating Activities—Indirect Method Net Income 2,556 Add back amortization 1,908 Change in non-cash working capital: Increase in accounts receivable (6,005) Increase in inventory (1,739) Increase in prepaid expenses (1,172) Increase in accounts payable 6,213 Increase in accrued liabilities 565 Decrease in income taxes payable (470) Net cash provided by (used in) operating activities $1,856 Now, make adjustments for changes in current assets and current liabilities

  17. Direct Method vs. Indirect Method The CICA Handbookrecommends the direct method, but it is rarely seen in practice. Many financial executives have reported that they do not use it because it is more expensive to implement than the indirect method.

  18. + _ Cash Flows from Investing Activities Inflowsfrom: • Sale or disposal of property, plant, and equipment. • Sale or maturity of investments in securities. Cash Flows from Investing Activities Outflowsto: • Purchase property, plant, and equipment. • Purchase investments in securities.

  19. + _ Cash Flows from Financing Activities Inflowsfrom: • Borrowing on notes, mortgages, bonds, etc. from creditors • Issuing equity securities to shareholders Cash Flows from Financing Activities Outflowsto: • Repay principal to creditors (excluding interest) • Repurchase equity securities from owners • Pay dividends to shareholders

  20. Relationship to the Balance Sheet and Income Statement Information needed to prepare a cash flow statement: • Comparative Balance Sheets • Income Statement • Additional details concerning different types of transactions and events

  21. Derives from . . . Assets = Liabilities Shareholders’ Equity Relationship to the Balance Sheet and Income Statement  Cash = Liabilities Shareholders’ Equity Non-cash Assets

  22. Additional Cash Flow Disclosures • Required Supplemental Information • Reconciliation of net income to cash flow from operations. • Cash paid for income taxes and interest. • Significant non-cash investing and financing activities.

  23. Adjustment for Gains and Losses Transactions that cause gains and losses should be classified on the cash flow statement depending on their dominate characteristics. For example, if the sale of equipment produced a gain, it would be classified as an investing activity. Gains must be subtracted from net income to avoid double counting the gain. Gains Losses must be added to net income to avoid double counting the loss. Losses

  24. Interpreting Cash Flows from Operating Activities Managers sometimes attempt to boost declining sales by extending credit terms or by lowering credit standards. The resulting increase in accounts receivable can cause net income to outpace cash flows from operations. Accounts Receivable Changes Inventory growth can be a sign that planned sales growth did not materialize. A decline in inventory can be a sign that the company is anticipating lower sales in the next quarter. Inventory Changes

  25. Interpreting Cash Flows from Financing Activities The long-term growth of a company is normally financed from three sources: internally generated funds, the issuance of shares, and money borrowed on a long-term basis. The statement of cash flows shows how management has elected to fund its growth. This information is used by analysts who wish to evaluate the capital structure and growth potential of a business.

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