Chapter 11: Statement of Cash Flows

Adjustments to reconcile net income to net cash flows from operating activities...

+Depreciation expense +Amortization expense +Loss on sale of assets -Gain on sale of assets -Increase in a current asset +Decrease in a current asset +Increase in a current liability -Decrease in a current liability = Net cash flows from operating activities

What are the steps in preparing the statement of cash flows?

1. Calculate net cash flows from operating activities using info from income statement and changes in current assets and liabilities from balance sheet. 2. Determine net cash flows from investing activities by using changes in long-term asset accounts from balance sheet. 3. Determine net cash flows from financing activities by using changes in long-term liabilities and stockholders' equity accounts from balance sheet. 4. Combine the operating, investing, and financing activities and make sure the total equals the amount of cash reported in the balance sheet this year versus last year (change in cash).

Aspects to direct method when reporting operating activities

Adjust the items in the income statement to directly show the cash inflows and outflows from operations; If used, company must also report the indirect method either with the statement of cash flows or in the notes

Aspects to indirect method when reporting operating activities

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

Which of the following ratios is computed by dividing operating cash flows by net sales? Asset turnover, Profit margin, Cash flow to sales, None of the above

Cash flow to sales; The cash flow to sales ratio is computed by dividing operating cash flows by net sales.

Equations for cash return on assets

Cash return on assets = Cash flow to sales Asset turnover; Operating cash flows/Average total assets=Operating cash flows/Net sales x Net sales/Average total assets

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 generated per dollar of assets

What are reported in the investing activities section of the statement of cash flows?

Cash transactions (inflows and outflows) involving long-term assets and current investments

Explanation of balance sheet for statement of cash flows

Changes in assets, liabilities, and stockholders' equity from the end of the last period help to identify cash flows from operating, investing, and financing activities.

Which of the following would be included as an adjustment to net income in the operating activities section of a statement of cash flows using the indirect method? Depreciation expense, Purchase of a truck, Issuance of common stock, Payment of cash dividends

Depreciation expense; Adjustments to net income in the operating activities section include noncash items such as depreciation expense

What should be looked at when reporting 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)

What are information sources for preparing the statement of cash flows?

Income statement, balance sheet, detailed accounting records

What are the effects of changes in current assets and current liabilities on cash from operating activities?

Increase in a 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

Which of the following items would be added back to net income in the operating activities section of a statement of cash flows? (using indirect method)? Gain on sale of piece of equipment, Decrease in salaries payable, Increase in the balance of accounts payable, Increase in the balance in accounts receivable

Increase in the balance in accounts payable; Increases to current liabilities (such as accounts payable) are added back to net income in the operating activities section of a statement of cash flows to arrive at the net cash flow from operating activities. The other items are subtracted.

Aspects of reporting investing activities using indirect method

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

cash inflows from financing activities

Issuance of bonds or notes payable Issuance of stock Borrowing from bank

What is included when reporting operating activities using the indirect method?

Noncash items (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 collected in cash)

Aspects of 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's survival in the long run

What are the three cash flow activities?

Operating activities, investing activities, and financing activities

Which of the following sections of the statement of cash flows will be different depending on which method (direct or indirect) is chosen to prepare it? Operating activities, investing activities, financing activities, all sections vary depending on the method used

Operating activities; The operating activities section is the only section that will vary depending on which method of preparation is selected (i.e., either the indirect or direct method.) The other two sections are identical under both methods.

Which of the following cash transactions would be included in the financing activities section of a statement of cash flows? Sale of land, Payment of dividends, Purchase of equipment, Payment of salaries

Payment of dividends; Changes in long-term liabilities and equity accounts (like dividends paid) are reported in the financing activities section of a statement of cash flows

Cash outflows for operating activities

Purchase of inventory Payment for operating expenses Payment of interest Payment of income taxes

Cash outflows for investing activities

Purchase of investments Purchase of long-term assets Lending with notes receivable

Examples of significant noncash activities

Purchase of long-term assets by issuing debt Purchase of long-term assets by issuing stock Conversion on bonds payable into common stock Exchange of long-term assets

Which of the following cash transactions would be included in the investing activities section of a statement of cash flows? Purchasing a building, Obtaining a loan at a bank, Issuing common stock, Selling goods to customers

Purchasing a building; Changes in long-term assets (like buildings) would be included in the investing activities section of a statement of cash flows

cash outflows from financing activities

Repayment of bonds or notes payable Acquisition of treasury stock Payment of dividends

Aspects of reporting operating activities using the direct method

Report the 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 not reported

Explanation of income statement for statement of cash flows

Revenues and expenses provide information in determining cash flows from operating activities

Which of the following cash transactions would affect the amount of investing cash flows reported in the statement of cash flows? Sale of equipment, Payment of dividends, Purchase of inventory, Issuance of common stock

Sale of equipment; The sale of equipment would increase investing cash flows. The payment of dividends would decrease financing cash flows, the issuance of stock would increase financing cash flows. The purchase of inventory would decrease operating cash flows.

Cash inflows for operating activities

Sale of goods or services Collection of interest and dividends

Cash inflows for investing actitivies

Sale of investments Sale of long-term assets Collection of notes receivable

Define noncash activities

Significant investing and financing activities that do not affect cash, Reported after the cash flow statement or in the notes to the financial statements

Explanation of detailed accounting records for statement of cash flows

Sometimes additional information from the accounting records is needed to determine specific cash inflows or cash outflows for the period

Process of using the indirect method for operating activities

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.

Define operating activities

cash receipts and cash payments for transactions relating to revenue and expense activities

Define investing activities

cash transactions involving the purchase and sale of long-term assets and current investments

Dividends paid are included in what type of cash flow activity?

financing activities

Define financing activities

inflows and outflows of cash resulting from the external financing of a business (transactions with lenders and with stockholders)

Dividends received are included in what type of cash flow activity?

operating activities