accounting 3 numba 3
financing activity examples
Borrowing money from a creditor (i) Repaying the principal amount of a debt(o) Collecting cash from the sale of common stock(i) Paying cash to repurchase your own common stock(o) Paying a dividend to stockholders(o)
When a company's net income and net cash provided by operating activities move in tandem with one another (in other words, are correlated with one another), it suggests that earnings result from changes in sales and operating expenses.
Conversely, if a company's net income is steadily increasing and its net cash provided by operating activities is declining, it suggests that net income is being influenced by factors unrelated to operational performance, such as nonrecurring transactions or aggressive accounting principles and estimates.
if net cash flow from operating activities is less than current liabilites, it indicates the company:
Did not generate enough operating cash flow to pay bills at the end of the period
free cash flow
Net cash provided by operating activities−Capital expenditures−Dividends
Net change in cash and cash equivalents
Net cash providedby (used in)operating activities+Net cash providedby (used in)investing activities+Net cash providedby (used in)financing activities
three major financial statements are required for external reports
an income statement, a balance sheet and a statement of cash flows
cash equivalents can be easily
converted into cash
trouble for a company may be indicated when increases in inventory and accounts payable accompanied by
decreasing sales
US Gaap and IFrs require that the investing and financing sections of the statement of cash flows
disclose gross cash flows
recording an increase in depreciation expense . _______ a company's net cash flows from operating activities
does not impact
when preparing the financing activities section of the statement of cash flows:
increases in bonds payable are added and retained earnings requires additional analysis
indirect method of net cash provided by operating activities
net income is adjusted to a cash basis. That is, rather than directly computing cash sales, cash expenses and so forth, these amounts are derived indirectly by removing from net income any items that do not affect cash flow.
if additions to property, plant and equipment are consistently less than depreciation, it suggests that the company is
not investing enough to maintain its noncurrent assets
under the direct method, the operating activities section of the statement of cash flows
reports cash collected from customers instead of revenues and treats cash disbursements as expenses
when preparing the financing activities of the statement of cash flows:
retained earnings requires additional analysis and increases in bonds payable are added
net cash provided by operating activities
the net result of the cash inflows and outflows arising from day-to-day operations using either the direct or indirect method. Both of these methods have the same purpose, which is to translate accrual-based net income to a cash basis.
Basic Equation for Asset Accounts
Beginning balance + Debits - Credits = Ending balance
Basic Equation for Contra-Asset, Liability and Stockholders' Equity Accounting
Beginning balance - Debits + Credits = Ending balance
A company with growing sales would understandably have an increase in its accounts receivable, inventory, and accounts payable balances.
On the other hand, if a company with declining sales has increases in these account balances, it could signal trouble
LTD INC started the year with a 8,000 balance in Retained Earnings. Net income for the year was 1,500 and ending Retained Earning was 9,000 the company:
Will report 1,500 in the operating activities section and paid 500 in dividends (8000+1500-9000)
free cash flow
a measure used by managers to look at the relationship three numbers from the statement of cash flows—net cash provided by operating activities, additions to property, plant, and equipment (also called capital expenditures), and dividends. measures a company's ability to fund its capital expenditures for property, plant, and equipment and its cash dividends from its net cash provided by operating activities.
direct method requires
a supplementary report that uses the indirect method
second step of indirect method:
analyze net changes in noncash balance sheet accounts that impact net income For each account shown in the exhibit, you'll begin by referring to the balance sheet to compute the change in the account balance from the beginning to the end of the period. Then, you will either add each of these amounts to net income or subtract them from net income
losses are added
and gains are subtracted in indirect
broad defintion of cash includes both
cash and cash equivalents
all transactions involving borrowing from creditors or repaying creditors as well as transactions with the companys owners are
financing activities
Financing Activities
generate cash inflows and outflows related to borrowing from and repaying principal to creditors and completing transactions with the company's owners, such as selling or repurchasing shares of common stock and paying dividends.
Operating Activities
generate cash inflows and outflows related to revenue and expense transactions that affect net income
Notice that the plausible interpretations of these changes in account balances depend
on the company's circumstances
changes in non cash balance sheet accounts that directly affect net income are classified as ___________ activities
operating
investing outflow
purchase of investments and it is good!
indirect method: a three step process
1. add depreciation charges to net income. Depreciation account during the period—the sum total of the entries that have increased Accumulated Depreciation. Why do we do this? Because Accumulated Depreciation is a noncash balance sheet account and we must adjust net income for all of the changes in the noncash balance sheet accounts that have occurred during the period. will use basic equation for contra asset account for that.
statement of cash flows answer questions like....
1.Is the company generating sufficient positive cash flows from its ongoing operations to remain viable? 2.Will the company be able to repay its debts? 3.Will the company be able to pay its usual dividend? 4.Why do net income and net cash flow differ? 5.To what extent will the company have to borrow money in order to make needed investments?
company a reported net income of 40,000. included in net income was 10,000 if depreciation expense, a gain of 50,000 from the sale of a fixed asset and a 30,000 loss from the sale of an investment. Cash provided by operating activities equals
30,000 (net income) 40,000+10,00 (D)-50,000+30,000 = 30,000
sing co began the year with 190,000 balance in its equipment account. During the year, equipment with an original cost of 25,000 was sold. The ending balance in the equipment account was 210,000. The company purchased equipment costing a total of????
45,000
on an 1 Ajax CO sold a truck for 28,000 cash. The original purchase price was 45,000 and accumulated depreciation at the of sale was 7,000. The beginning balance of the Equipment account was 100,000 and no other equipment transactions occurred during the year. Calculate the ending balance of the account
55,000 100,000-45,000=55,000
JVL co began the year with a 75,000 balance in RE. Net income fo the year was 24,000 and the ending balance in RE was 90,000. Given this info, cash div paid to stockholder equaled
9000 75,000+24,000=99000-90,000=9000
example of managers looking at numbers
As a third example, managers compare the additions to property, plant, and equipment in the investing activities section of the statement of cash flows to the depreciation included in the operating activities section of the statement. If the additions to property, plant, and equipment are consistently less than depreciation, it suggests the company is not investing enough money to maintain its noncurrent assets.
interpreting the statement of cash flows consideration should not be given to a company's specific circumstances
FALSE
investing activity examples
Buying property, plant, and equipment (o) Selling property, plant, and equipment(i) Buying stocks and bonds as a long-term investment(o) Selling stocks and bonds held for long-term investment(i) (not common sticks) Lending money to another entity(o) Collecting the principal on a loan to another entity(i)
operating activity examples
Collecting cash from customers (inflow) Paying suppliers for inventory purchases (outflow) Paying bills to insurers, utility providers, etc (outflow) Paying wages and salaries to employees (o) Paying taxes to governmental bodies (o) Paying interest to lenders(0) interest on notes payable or recievable current liability accounts for amounts owed to employees and noncurrent assets that affect net income
Start-up companies usually are unable to generate positive cash flows from operations; therefore, they rely on issuing stock and taking out loans to fund investing activities. This means that start-up companies often have negative net cash provided by operating activities and large spikes in net cash used for investing activities and net cash provided by financing activities.
However, as a start-up company matures, it should begin generating enough cash to sustain day-to-day operations and maintain its plant and equipment without issuing additional stock or borrowing money. This means the net cash provided by operating activities should swing from a negative to a positive number. The net cash used for investing activities should decline somewhat and stabilize and the net cash provided by financing activities should decrease.
he current liability accounts (Accounts Payable, Accrued Liabilities, and Income Taxes Payable) are handled in the opposite fashion.
If a liability account balance increases, then the amount of the increase is added to net income. If a liability account balance decreases, then the amount of the decrease is subtracted from net income.
If an asset account balance increases during the period, then the amount of the increase is subtracted from net income.
If an asset account balance decreases during the period, then the amount of the decrease is added to net income.
a company cannot increase its net cash provided by operating activities by increasing its depreciation expense.
If it increases its depreciation expense by X dollars, then net income will decline by X dollars and the amount of the adjustment in step one of this process will increase by X dollars. The decline in net income and the increase in the amount of the adjustment in step one exactly offset each other, resulting in zero impact on the net cash provided by operating activities.
While each number in a statement of cash flows provides useful information, managers derive the most meaningful insights by examining the relationships among numbers. some managers study their company's trends in cash flow margins by comparing the net cash provided by operating activities to sales. The goal is to continuously increase the operating cash flows earned per sales dollar.
Managers also compare the net cash provided by operating activities to the ending balance of current liabilities. If the net cash provided by operating activities is greater than (less than) the current liabilities, it indicates the company did (did not) generate enough operating cash flow to pay its bills at the end of the period
Managers and investors often look at the relationship between net income and net cash provided by operating activities to help assess the extent to which a company's earnings truly reflects operational performance.
Managers generally perceive that earnings are of higher quality, or more indicative of operational performance, when the earnings (1) are not unduly influenced by inflation, (2) are computed using conservative accounting principles and estimates, and (3) are correlated with net cash provided by operating activities.
The interpretation of free cash flow is straightforward. A positive number indicates that the company generated enough cash flow from its operating activities to fund its capital expenditures and dividend payments. A negative number suggests that the company needed to obtain cash from other sources, such as borrowing money from lenders or issuing shares of common stock, to fund its investments in property, plant, and equipment and its dividend payments.
Negative free cash flow does not automatically signal poor performance. As previously discussed, a new company with enormous growth prospects would be expected to have negative free cash flow during its start-up phase. However, even new companies will eventually need to generate positive free cash flow to survive.
cash equivalents
Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes. consist of short-term, highly liquid investments such as Treasury bills, commercial paper, and money market funds that are made solely for the purpose of generating a return on temporarily idle funds. Most companies invest their excess cash reserves in these types of interest-bearing assets that can be easily converted into cash. Because such assets are equivalent to cash, they are included with cash in a statement of cash flows.
to make it easier to compare data from different companies, GAAP and IFRS makes people follow certain rules
One of these rules requires organizing the statement into three sections that report cash flows resulting from operating activities, investing activities, and financing activities.
When a company purchases property, plant, or equipment it debits the Property, Plant, and Equipment account for the amount of the purchase. When it sells or disposes of these kinds of assets, it credits the Property, Plant, and Equipment account for the original cost of the asset.
USE THIS: beg balance= debits-credits = ending balance to compute the cash outflows
the third step in computing the net cash provided by operating activities is:
adjust for gains/losses included in the income statement. the gains and losses pertaining to the sale of noncurrent assets must be removed from net income as reported in the operating activities section of the statement of cash flows. To make this adjustment, subtract gains from net income and add losses to net income in the operating activities section.
when preparing the operating activity section of the statement of cash flows using the indirect method increases in current _________________ are subtracted from and increases in current _______ are added to net operating income.
assets, liabilities
financing and investing activities are reported
at in gross amounts on the statement of cash flows
Basic equation for contra-asset accounts
beginning balance-debits+credits= ending balance
knowhow to !!
calculate gain or loss on disposals!!!
Non current assets (investing activities), do they increase or decrease account balance
screen shot also BIG OVERVIEW SCREEN SHOT IS HELPFUL
when preparing the operating activities section under the direct method
cash receipts are reported instead of income statement revenues and the difference between cash receipts and disbursements is calculated
when preparing the operating activities section using the indirect method, which of the following are added back to net income?
decreases in accounts receivable and increases in wages payable
Investing Activities
generate cash inflows and outflows related to acquiring or disposing of noncurrent assets such as property, plant, and equipment, long-term investments, and loans to another entity.
statement of cash flows
highlights the major activities that impact cash flows and, hence, affect the overall cash balance. summarizes all of a company's cash inflows and outflows during a period explains changes in cash during the period
when calculating net cash flows from operating activities, the change in accounts receivable is subtracted from net income when AR ____________ during the period
increases
indirect v direct, which has the advantage?
indirect method, it shows the reasons or any differences between net income and net cash provided by operating activities. Most people use indirect even if they give the same amount of net cash.
The gross method of reporting cash flows is
not used in the operating activities section of the statement of cash flows, where debits and credits are netted against each other.
to compute gross cash flows for the investing and financing activities sections of the statment of cash flows
ou'll begin by calculating the changes in the balance of each applicable balance sheet account. As with the current assets, when a noncurrent asset account balance (including Property, Plant, and Equipment; Long-Term Investments; and Loans to Other Entities) increases, it signals the need to subtract cash outflows in the investing activities section of the statement of cash flows. If the balance in a noncurrent asset account decreases during the period, then it signals the need to add cash inflows. Page 691The liability and equity accounts (Bonds Payable and Common Stock) are handled in the opposite fashion. If a liability or equity account balance increases, then it signals a need to add cash inflows to the financing activities section of the statement of cash flows. If a liability or equity account balance decreases, then it signals a need to subtract cash outflows.
Managers prepare the statement of cash flows by applying a fundamental principle of double-entry bookkeeping
the change in the cash balance must equal the changes in all other balance sheet accounts besides cash. This principle ensures that properly analyzing the changes in all noncash balance sheet accounts always quantifies the cash inflows and outflows that explain the change in the cash balance.
direct method of net cash provided by operating activities
the income statement is reconstructed on a cash basis from top to bottom (no more cash basis) For example, cash collected from customers is listed instead of sales, and payments to suppliers is listed instead of cost of goods sold.
When a company earns net income it credits the Retained Earnings account and when it pays a dividend it debits the Retained Earnings account. To compute the amount of a cash dividend payment we use the basic equation for stockholders' equity accounts mentioned earlier:
use: Basic equation for stockholder equity accounts beg balance- debits + credits = ending balance retained earnings is decreased by dividends paid
why do managers focus on cash?
without sufficient cash at the right times, a company may miss golden investment opportunities or may even go bankrupt.
