announcements today is the sba scholarship application deadline class today finish ch. 5 b

1. Announcements TODAY is the SBA scholarship application deadline! Class today Finish Ch. 5 B/S Ch. 5 SCF � Indirect method Wednesday 2/2 Finish Ch. 23 SCF � Indirect method

3. What is included in �cash�? The cash flow statement provides information for a period of time about: cash receipts (cash inflows) uses of cash (cash outflows) Inflows and outflows are reported for: operating investing financing activities Summing to the net increase/decrease in cash over the period

4. Helps users assess: The entity�s ability to generate future cash flows The entity�s ability to pay dividends and meet obligations The reasons as to why net income and net cash flow from operating activities differ Cash and non-cash investing and financing activities during the year

6. Know where a company is in lifecycle Focus on subtotals Dig into �larger items� Consider if is healthy/unhealthy given lifecycle Examples: Yocream 2009 10K http://www.yocream.com/downloads/YoCream_10-1-09_annual_report.pdf Jones Soda 2008 10K http://www.sec.gov/Archives/edgar/data/1083522/000095013409005380/v51212e10vk.htm How to Read a SCFs

7. Methods of preparing the statement of cash flows: Indirect method: derives cash flows from accrual based statements Used almost exclusively Less preferred Direct method: derives cash flows directly for each source or use of cash NOTE: Method used only affects preparation of �Cash Flows from Operations�. The other 2 sections are prepared the same regardless of the method used.

9. For each event listed below, indicate whether the related cash from the transaction would be operating (op), investing (inv), financing (fin), or not a cash flow (not). 1. Payment on long-term debt 2. Issuance of bonds at a premium 3. Collection of accounts receivable 4. Cash dividends declared 5. Issuance of stock to acquire land 6. Sale of available-for-sale securities (long-term) 7. Payment of employees' wages 8. Issuance of common stock for cash 9. Payment of income taxes payable 10. Purchase of equipment 11. Purchase of treasury stock (common) 12. Sale of real estate held as a long-term investment Classification of Cash Flows

10. Interest Paid: US GAAP: operating activity (cash from the associated debt is financing activity) IFRS: operating or financing activities Interest Received: US GAAP: operating activity (cash from the related asset is investing activity) IFRS: operating or as investing activities Dividends Paid: US GAAP: financing activity, consistent with the placement of proceeds from selling stock. IFRS: financing or operating Dividends Received: US GAAP: operating activities (cash from related outflows was investing activity) IFRS: financing or operating Tax payments/refunds: US GAAP: operating activity, regardless of whether underlying taxable income relates to operations or not (e.g. if a firm has a taxable capital gain on the sale of equipment) IFRS: operating unless specifically associated with financing or investing activities SCF: Interest, Dividends and Taxes Classification

11. Label B/S line items by Operating, Investing, Financing Calculate changes in Operating balance sheet accounts, label increase/decrease Analyze all Investing and Financing line items using T accounts and journal entries. Determine depreciation expense Circle items that affect financing & investing cash flows Start the operating section of Indirect statement with NI Add back non-cash expenses (depreciation, amortization, losses) Subtract non-cash revenues (gains) Subtract increases in current assets Add decreases in current assets Add increases in current liabilities Subtract decreases in current liabilities Reconcile the net change in cash between beginning and ending inventory

16. Jimmy Von Socks SCF Lets walk through preparing the SCF. DO ORCA MANUFACTURING HANDOUT FOR INDIRECT METHODDO ORCA MANUFACTURING HANDOUT FOR INDIRECT METHOD

18. SCF Comments Non-cash transactions are not shown on the face of the SCF � but material non-cash transactions must be disclosed (usually in the notes) E.g. the firm trades $1M of common stock for a warehouse Dividends are shown under financing activities, but these are dividends paid, not necessarily dividends declared So if you see dividends on the R/E Statement, and dividends payable on the B/S, you must determine what was actually paid during the year Changes in ST Investments (Current Trading and AFS Securities) are classified as Investing cash flows even though the underlying asset is current

19. Show cash inflows from revenue and cash outflows from operating payments To get from accrued revenue to cash revenue: (- increases in related current assets; + increases in related current liabilities) Sales + (-) Decrease (Increase) in AR + (-) Increase (Decrease) in Unearned revenue = Cash collected from customers Logic: Net increase in AR happens when credit sales made, no cash received ? subtract from Sales Net decrease in Unearned Revenue when revenue earned but no cash received ? subtract from Sales

20. To get from accrued expenses to cash expenses: (- increases in related current liabilities; + increases in related current assets) COGS + (-) Decrease (Increase) in AP + (-) Increase (Decrease) in Inventory = Cash paid to suppliers Interest Expense + (-) Decrease (Increase) in Interest payable = Cash paid for interest Direct Cash Flow � Operating Section

21. Wage Expense + (-) Decrease (Increase) in Wage payable = Cash paid for wages Other expense + (-) Increase (decrease) in prepaid expenses + (-) Decrease (increase) in Other payable = Cash paid for Other expenses What do we do with Depreciation expense? Direct Cash Flow � Operating Section

24. Direct Cash Flow � Jimmy Von Jimmy Socks

25. Direct Cash Flow � Peach Computer Example

26. Direct Cash Flow � Peach Computers