Vocab Learning

2 limitations to using cash accounts

- First, most companies have many individual cash receipts and payments, making it difficult to review them - Second, the cash account does not usually carry an adequate description of each cash transaction, making assignment of all cash transactions according to activity difficulty

Cash Equivalents

- readily convertible to a known amount of cash - sufficiently close to maturity so its market is unaffected by interest rate changes

noncash investing and financing activities

- retirement of debt by issuing equity stock - conversion of preferred stock to common stock - lease of assets in a capital lease transaction - purchase of long-term assets by issuing a note or bond - exchange of noncash assets for other noncash assets - purchase of noncash assets by issuing equity or debts

Preparing statement of Cash flows

1. compute the net increase or decrease in cash 2. compute and report the net cash provided or used by operating activities 3. compute and report the net cash provided or used by investing activities 4. compute and report the net cash provided or used by financing activities 5. Compute the net flow by combining net cash provided or used by operating, investing, and financing activities, and then prove it by adding it to the beginning cash and balance to show that it equals the ending cash balance

Notes from loans

= investing activities

cash flows

cash + cash equivalents

Cash Inflows

from customers for cash sales, from collections on credit sales , from borrowers for interest, from lawsuit settlement

Cash Inflows

from selling investments in securities, from selling long-term productive assets, from collecting principal on notes receivable, from selling(discounting) notes receivable

Operating Activities

include those transactions or events that determine net income

fact

most companies report operating cash flows using the indirect method - net income is used to report the net cash flows provided(used) by operating activities

Direct Method

presentation of net cash from operating activities for the statement of cash flows that list major operating cash receipts less major operating cash payments - the cash payments are subtracted from cash receipts to determine the net cash provided(used) by operating activities

indirect method

presentation that reports net income and then adjusts it by adding and subtracting items to yield net cash from operating activities on the statement of cash flows

fact

the net cash amount provided by operating activities is always identical under both the direct and indirect method

Cash outflows

to make loans in return for notes receivable, to purchase long-term productive assets, to purchase investments in securities, collections of principal amounts of notes

cash outflows

to salaries and wages, to suppliers for goods and services, to lenders for interest, to charities, to governments for taxes and fines

investing activities

transactions that involve purchasing and selling of long-term assets, includes marking and collecting notes receivable and investments in other than cash equivalents

Financing Activities

transactions with owner creditors that include obtaining cash from issuing debt, repaying amounts borrowed and obtaining cash from distributing cash to owners