Chapter 21 Review: The Statement of Cash Flows Revisited

Short-term, highly liquid investments that can be readily converted to cash, with little risk of loss. - Must have a maturity date of no longer than 3 months from their date of purchase Ex: money market funds, Treasury Bills, commercial paper

Cash Equivalents

Are both inflows and outflows of cash resulting from the external financing of a business .- Includes: 1.) The sale of common and preferred stock 2.) The issuance of bonds and other debt securities 3.) Repayment of dividend and payment of cash dividends to shareholders

Financing

Issuance of bonds

Financing +

Issuance of common stock for cash

Financing +

Issuance of common stock for land

Financing +

Issuance of long-term note payable for cash

Financing +

Issuance of short-term note payable for cash.

Financing +

Payment of cash dividends

Financing -

Payment of note payable

Financing -

Purchase of treasury stock

Financing -

Retirement of preferred stock

Financing -

What are some examples of NonCash Investing and Financing Activities?

- Acquiring an asset by incurring a debt payable to the seller. - Acquiring use of an asset by entering into a lease agreement. - Converting debt into common stock or other equity securities. - Exchanging non-cash assets or liabilities for other non-cash assets or liabilities

No cash effects are reported for what in the operating activities section of the SCF?

- Depreciation and amortization of property, plant, and equipment , and intangibles - Gains and losses from the sale of those assets

What are the 3 primary categories of cash flows?

1.) Operating 2.) Investing 3.) Financing

For the Indirect Method, how are assets and liabilities treated?

Assets (OPPOSITE): - Increases = Decreases - Decreases = Increases Liabilities (SAME) - Increase = Increase - Decrease = Decrease

Are both inflows and outflows of cash caused by the acquisition and disposition of assets. - Includes: 1.) PP&E and other productive assets (except for inventory) 2.) Investments in securities (except cash equivalents and trading securities) 3.) Non-trade Receivables

Cash flows from Investing Activities

The method is named for the fact that the cash effect of each operating activity (i.e. income statement item) is reported directly in the statement of cash flows.

Direct Method

Most companies use what method?

Indirect Method

The net cash increase or decrease from operating activities would be derived indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.

Indirect Method

Why are inventories treated differently from PP&E and intangible assets when classifying their cash effects if they are all acquired for the same purpose of producing revenues?

Inventory is purchased for the purpose of being sold as part of the firm's current operations , while the other assets are purchased as investments to benefit the firm over a long period of time.

Purchase of marketable debt securities ("available for sale")

Investing

Collection of note receivable (principal amount).

Investing +

Lease of equipment

Noncash

Payment of property dividend

Noncash

Purchase of marketable securities (cash equivalents)

Noncash

Repayment of long-term debt by issuing common stock

Noncash

Sale of inventory to customers

Noncash

Investment Revenue such as interest, dividends, or other cash return from these investments is considered what type of activity?

Operating Activity (included in income statement)

The two methods are ONLY used for what section of the SCF?

Operating Section

True or False? Transactions that merely transfer cash to cash equivalents (such as the purchase of a three-month Treasury Bill) or from cash equivalents to cash (such as the sale of a Treasury Bill) should NOT be reported on the statement of cash flows.

TRUE

The statement of cash flows provides information about:

cash flows that is lost when reported only indirectly by the balance sheet and income statement.

On the statement of cash flows:

there is NO distinction between amounts held as cash and amounts held in cash equivalent investments.

Are both inflows and outflows of cash that result from activities reported in the income statement. - Includes the elements of net income, but on a cash basis!

Cash Flows from Operating Activities

Sale of Land

Investing +

Sale of equipment

Investing +

Sale of patent

Investing +

Acquisition of building for cash

Investing -

Acquisition of common stock of another corporation

Investing -

Loan to another company

Investing -

Is a separate reconciliation schedule required for the Indirect Method?

NO (operating section is a reconciliation of net income to net cash flows from operating activities)

Transactions that do not increase or decrease cash, but that result in significant investing and financing activities, must be reported in related disclosures

NonCash Investing and Financing Activities

Cash payment of five-year insurance policy

Noncash

Conversion of bonds payable to common stock.

Noncash

Issuance of note payable for equipment

Noncash

Issuance of stock dividend

Noncash