Chapter 11: Statement of Cash Flows - Accounting Final

Fourth step in preparing the statement of cash flows

- combine the operating, investing, and financing activities - make sure the total of these three categories equals the net increase/ decrease in cash in the balance sheet

preparing the statement of cash flows - dividends paid

- financing activities section - subtracted adjustment from net income

preparing the statement of cash flows - decrease in common stocks?

- financing activities section - subtracted adjustment from net income?

preparing the statement of cash flows - increase in common stocks

- financing activities section of the statement of cash flows - added adjustment to net income

preparing the statement of cash flows - decrease in notes payable

- financing activities section of the statement of cash flows - subtracted adjustment from net income

changes in current assets and current liabilities include...

- increase in accounts receivable - decrease in accounts receivable - increase in inventory - decrease in inventory - increase in prepaid rent - decrease in prepaid rent - increase in accounts payable - decrease in accounts payable - increase in interest payable - decrease in interest payable - increase in income tax payable - decrease in income tax payable

preparing the statement of cash flows - increase in equipment (purchased with cash)

- investing activities section of cash flows - recorded as an outflow (subtracted)

preparing the statement of cash flows - increase in equipment (purchased with note payable)

- investing activities section of cash flows - recorded as an inflow (added)

preparing the statement of cash flows - decrease in investments

- investing activities section of the statement of cash flows - recorded as an inflow (added)

preparing the statement of cash flows - increase in investments

- investing activities section of the statement of cash flows - recorded as an outflow (subtracted)

preparing the statement of cash flows - decrease in land (sale of land)

- investing section of the statement of cash flows - recorded as an inflow (added)

preparing the statement of cash flows - increase in land (purchase of land)

- investing section of the statement of cash flows - recorded as an outflow (subtracted)

preparing the statement of cash flows - increase in notes payable

- may be recorded in other sections of the statement of cash flows in cases where notes payable only increased because of purchasing assets. - financing activities section of the statement fo cash flows - added adjustment to net income

preparing the statement of cash flows - decrease in inventory

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - added adjustment to net income

preparing the statement of cash flows - decrease in prepaid rent

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - added adjustment to net income

preparing the statement of cash flows - increase in accounts payable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - added adjustment to net income

preparing the statement of cash flows - increase in interest payable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - added adjustment to net income

preparing the statement of cash flows - decrease in interest payable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - subtracted adjustment from net income

preparing the statement of cash flows - increase in inventory

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - subtracted adjustment from net income

preparing the statement of cash flows - increase in prepaid rent

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - subtracted adjustment from net income

preparing the statement of cash flows - decrease in income tax payable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - subtracted adjustment to net income

preparing the statement of cash flows - decrease in accounts payable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - subtracted adjustment to net income.

preparing the statement of cash flows - increase in income tax payable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities -added adjustment to net income

preparing the statement of cash flows - decrease in accounts receivable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - added adjustment to net income

preparing the statement of cash flows - increase in accounts receivable

- operating activities section of statement of cash flows - classified as changes in current assets/liabilities - subtracted adjustment from net income

preparing the statement of cash flows - amortization expense

- operating activities section of the statement of cash flow - classified as a non cash item - added adjustment to net income

preparing the statement of cash flows - depreciation expense

- operating activities section of the statement of cash flow - classified as a non cash item. - added adjustment to net income

preparing the statement of cash flows - loss on sale of assets (land, buildings, equipment)

- operating activities section of the statement of cash flow - classified as non operating items - added adjustment to net income

preparing the statement of cash flows - gain on the sale of assets (land, buildings, equipment)

- operating activities section of the statement of cash flow - classified as non operating items. - subtracted adjustment to net income

accounts included in the financing activities section

-increase/ decrease in notes payable - increase/ decrease in common stock - increase/ decrease in retained earnings

cash outflows from operating activities

-purchase of inventory -payment of operating expenses - payment for interest -payment for income taxes

The steps to preparing the statement of cash flow are...

1. calculate the net cash flows from operating activities 2. determine the net cash flows from investing activities 3. determine the net cash flows from financing activities 4. combine the operating, investing, and financing activities.

Indirect method

A method of preparing a statement of cash flows in which net income is adjusted for items that do not affect cash, to determine net cash provided by operating activities.

Operating Activities

Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.

Financing Activities

Cash flow activities that include transactions with creditors and investors

Investing Activities

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

Nonoperating activities

Various revenues, expenses, gains, and losses that are unrelated to a company's main line of operations.

Direct Method

adjusts the items on the income statement to directly show the cash inflows and outflows from operations, such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes

examples of non operating items

gains and losses on the sale of long-term assets like land, buildings, and equipment

cash inflows from financing activities

issuance of bonds or notes payable, issuance of stock

the third step in preparing the statement of cash flows

prepare the financing activities section by analyzing changes in long-term liabilities and stockholder's equity accounts

Second step of preparing the statement of cash flows

preparing the investing activities section by analyzing changes in long-term asset accounts from the balance sheet

First step of preparing the statement of cash flows

preparing the operation activities section by analyzing noncash activities, nonoperation activities, and changes in current assets/liabilities

cash outflows from investing activities

purchase of investments, purchase of long-term assets, lending with notes receivable

examples of noncash activities

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

cash outflows from financing activities

repayment of bonds or notes payable, acquisition of treasury stock, payment of dividends

retained earnings

retained earnings = net income - dividends (the balance of retained earnings increases with net income and decreases with dividends declared)

cash inflows from operating activities

sale of goods or services and collection of interest and dividends

cash inflows from investing activities

sale of investments, sale of long-term assets, collection of notes receivable

noncash activities

transactions that do not increase or decrease cash but that result in significant investing and financing activities.