ACC 111 - Chapter 12

adjustments for Income Statement Items Not Affecting Cash?

Expenses and losses with no cash outflows are added back to net income. - Examples are depreciation, amortization, depletion, bad debts expense, loss from an asset sale, and loss from retirement of notes payable. Revenues and gains with no cash inflows are subtracted from net income.

how are financing activities affected by the balance sheet?

Financing activities are affected by changes in long-term liabilities and equity.

cash inflows from investing activities?

From selling intangible assets From selling PPE From selling long-term investments From selling short-term investments From collecting principal on notes receivable From selling (discounting) of notes receivable

Adjustments for Changes in Current liabilities?

Increases in current liabilities are added to net income. Decreases in current liabilities are subtracted from net income.

importance of cash flow?

Information about cash flows influences decisions. Cash flows help users decide whether a company has enough cash to pay its debts. They also help evaluate a company's ability to pursue opportunities. Managers use cash flow information to plan day-to-day operations and make long-term investment decisions.

how are investing activities affected by the balance sheet?

Investing activities are affected by changes in long-term assets.

cash outflows from investing activities?

To buy intangible assets To loan money in return for notes receivable To buy PPE To buy short-term investments To buy long-term investments

To compute cash flows from financing activities?

To compute cash flows from financing activities, we analyze changes in all noncurrent liability accounts (including the current portion of any notes and bonds) and equity accounts. These accounts include long-term debt, notes payable, bonds payable, common stock, and retained earnings. Reporting of financing activities is identical under the direct method and indirect method.

cash outflows from financing activities?

To pay dividends to shareholders To pay withdrawals by owners To pay off its short- and long-term (notes payable and bonds payable) To purchase treasury stock

financing activities?

include transactions and events that affect long-term liabilities and equity. Examples are (1) getting cash from issuing debt and repaying debt and (2) receiving cash from or distributing cash to owners. Borrowing and repaying principal on both short- and long-term debt are financing activities. However, payments of interest are operating activities.

investing activities?

include transactions and events that come from the purchase and sale of long-term assets. They also include (1) the purchase and sale of short-term investments and (2) lending and collecting money for notes receivable. Cash from collecting the principal on notes is an investing activity. However, collecting interest on notes is an operating activity; also, if a note results from sales to customers, it is an operating activity.

Net cash outflow (use)?

occurs when the payments in a category exceed the receipts

net cash inflow (source)?

occurs when the receipts in a category exceed the payments

indirect method?

reports net income and then adjusts it for items that do not affect cash. It does not report individual items of cash inflows and cash outflows from operating activities.

direct method?

separately lists operating cash receipts (such as cash received from customers) and operating cash payments (such as cash paid for inventory). The cash payments are then subtracted from cash receipts.

cash flow classifications?

operating activities investing activities financing activities

Exceptions to these links include?

(1) current assets unrelated to operations—such as short-term notes receivable from noncustomers and from investment securities, which are investing activities, (2) current liabilities unrelated to operations—such as short-term notes payable and dividends payable, which are financing activities.

5 steps for preparing a statement of cash flow?

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

A three-step process to determine cash provided or used by financing activities?

1. identify changes in financing-related accounts, 2. explain these changes using T-accounts and reconstruction entries, and 3. report their cash flow effects.

A three-step process to determine cash provided or used by investing activities?

1. identify changes in investing-related accounts, 2. explain these changes using T-accounts and reconstruction entries, and 3. report their cash flow effects.

Examples of Noncash Investing and Financing Activities?

1.Retirement of debt by issuing equity stock. 2. Conversion of preferred stock to common stock. 3. Lease of assets in a capital lease transaction. 4.Purchase of long-term assets by issuing a note or bond. 5.Exchange of noncash assets for other noncash assets. 6. Purchase of noncash assets by issuing equity or debt.

operating activities?

Activities that involve the production or purchase of merchandise and the sale of goods or services to customers, including expenditures related to administering the business. include transactions and events that determine net income.

summary of adjustments for adjustments for changes in current liabilities and assets?

Adjustments for changes in current assets and current liabilities + Decrease in noncash current operating asset − Increase in noncash current operating asset + Increase in current operating liability − Decrease in current operating liability = Net cash provided (used) by operating activities

Adjustments for Changes in Current Assets?

Decreases in current assets are added to net income. Increases in current assets are subtracted from net income.

cash inflows from operating activities?

From cash sales to customers From collections on credit sales From receipt of dividend revenue From receipt of interest revenue

cash inflows from financing activities?

From issuing its common and preferred stock From reissuing its treasury stock From issuing its short- and long-term debt (notes payable and bonds payable) From contributions by owners

Summary of Adjustments for Adjustments for operating items not providing or using cash?

Net Income (or Loss) Adjustments for operating items not providing or using cash + Noncash expenses and losses Examples: Expenses for depreciation, depletion, and amortization; losses from disposal of long-term assets and from retirement of debt − Noncash revenues and gains Examples: Gains from disposal of long-term assets and from retirement of debt

to compute cash flows from investing activities?

Normally do this by identifying changes in - all long-term asset accounts - the current accounts for notes receivable and investments in securities (excluding trading securities).

how are operating activities affected by the balance sheet?

Operating activities are affected by changes in current assets and current liabilities (and the income statement).

cash equivalents?

Short-term, highly liquid investments that can be readily converted to a specific amount of cash be sufficiently close to its maturity so its market value is unaffected by interest rate changes.

quality of earnings?

The difference between net income and operating cash flows can be large and sometimes reflects on the quality of earnings. Operating cash flows can be either higher or lower than net income. ■

net cash amount under both methods?

The net cash amount provided by operating activities is identical under both the direct and indirect methods.

cash outflows from operating activities?

To pay operating expenses To pay salaries and wages To pay taxes and fines To pay interest owed To pay suppliers for goods and services

what does cash flow include?

cash and cash equivalents

Information to prepare a statement of cash flows?

comparative balance sheets - used to compute changes in noncash accounts from the beginning to the end of the period the current income statement - is used to help compute cash flows from operating activities additional information - includes details that help explain cash flows and noncash activities

Cash flows provided (used) by operating activities are reported by two methods?

indirect method direct method

statement of cash flow?

reports cash receipts (inflows) and cash payments (outflows) for a period. Cash flows are separated into operating, investing, and financing activities. The details of sources and uses of cash make this statement useful.

noncash investing and financing activities?

transactions that do not have direct cash flow effects Such transactions are reported at the bottom of the statement of cash flows or in a note to the statement

analyzing the cash account?

A company's cash receipts and cash payments are recorded in its Cash account. The Cash account is one place to look for information about cash flows. Preparing a statement of cash flows requires classifying each cash inflow or outflow as an operating, investing, or financing activity.

analyzing noncash accounts?

A second approach to preparing the statement of cash flows analyzes noncash accounts and uses double-entry accounting. It shows that we can explain changes in cash, and prepare a statement of cash flows, by analyzing changes in liability accounts, equity accounts, and noncash asset accounts (along with income statement accounts).

two types of adjustments?

Adjustments to income statement items that do not impact cash Adjustments for changes in current assets and current liabilities (linked to operating activities)

what does the statement of cash flows help answer?

What explains the change in the cash balance? Where does a company spend its cash? How does a company receive its cash? Why do income and cash flows differ? How much is paid in dividends? Is there a cash shortage?