MGMT Ch-11: Statement of Cash Flows

Components of Cash Return on Assets

-Cash return on assets: Measures the operating cash flow generated per dollar of assets -Cash flow to sales: Measures the operating cash flows generated for each dollar of sales -Asset turnover: Measures the sales revenue generates per dollar of assets

Cash Flow from Financing Activities

-Examine changes in long-term liabilities and stockholders' equity accounts from the balance sheet Cash transactions with a company's creditors and shareholders

Cash flows from Investing Activities

-Increase or decrease in investments >Increase or decrease in long-term assets, such as: -Property -Plant -Equipment -Intangible assets

Cash Flow Ratios

-Often used to supplement analysis of a company -Substitute cash flow from operations in place of net income -Positive cash flow from operations is important to a company' survival in the long run

Cash Flow Activities

-Operating Activities: cash receipts and cash payments for transactions relating to revenue and expense activities -Investing activities: Cash transactions involving the purchase and sale of long-term assets and current investments -FinancingActivities: Inflows and outflows of cash resulting from the external financing of a business (transactions with lenders and with stockholders) Note: Non cash activities: where you disclose other activities for example: issuing a note payable for equipment We track cash flow continuously. We start with net income, then we make Adjustments to reconcile income to net cash flows

Operating Activities - Direct Method

-Report cash inflows and cash outflows directly -Converts each revenue and expense item to its cash-basis amount -Income statement items that have no cash effect are reported

Noncash Activities

-Significant investing and financing activities that did not directly affect cash (Stock Split or Stock Dividend) -Reported after the cash flow statement or in a note to the financial statement Examples: -Purchase of long-term assets by issuing debt -Purchase of long-term assets by issuing stock -Conversion of bonds payable into common stock -Exchange of long-term assets

Operating Activities - Indirect Method

>Noncash items (convert accural basis to cash) -Depreciation expense >Non-Operating items -Gains and losses on sale of assets >Changes in current assets and current liabilities -Increase in accounts receivable is the amount of revenue reported in the income statement but not yet in cash collected

Effects of Changes in Current Assets

Increase in current asset - Decrease in cash Decrease in a current asset - increase in cash Increase in a current liability - Increase in cash Decrease in a current liability - decrease in cash

Operating Activities- Indirect and Direct Methods

Indirect method: -Begin with net income -List adjustments to net income to arrive at operating cash flows -Most popular method -Easier and less costly

Operating, Investing, and Financing

Operating: -Collection if interest and dividends are part of operating inflows because they are part of net income -Same with interest and income tax expense

Key point

Using the indirect method, we start with net income and adjust this number for (1) revenue and expense items that do not affect cash, (2) gains and losses that do not affect operating cash flows, and (3) changes in current assets and current liabilities

Income Statement

We can identify operating activities from the income statement and changes in current assets and current liabilities