ACCT 201 Chapter 12 Statement of Cash Flow

Noncash Expenses and Gains and Losses

Because noncash expenses are deducted in determining net income, they must be added back to the amount of net income when computing net cash flow from operating activities Because gains increase net income and losses decrease net income, but neither represents the amount of cash received from an asset sale, gains must be subtracted from and losses added back to net income to determine net cash flow from operating activities

Financing Activities

Cash flows related to borrowing (short- or long-term) and stockholders' equity are reported in the section of the statement of cash flows 1. Cash receipts (inflows) from borrowing money and issuing stock. 2. Cash payments (outflows) to repay debt, purchase treasury stock, and pay dividends.

Noncash Investing and Financing Activities

Companies sometimes undertake significant noncash investing and financing activities such as acquiring a long-term asset in exchange for common stock. • The FASB requires that all material noncash investing and financing activities be disclosed in a separate schedule to the statement of cash flows.

Investing Activities

For a business, long-term assets are investments. Cash flows related to acquiring or disposing of long-term assets are therefore reported in the investing activities section of the statement of cash flows. 1. Cash receipts (inflows) from selling property, plant, equipment, or marketable securities, as well as collections from credit instruments such as notes or mortgages receivable. 2. Cash payments (outflows) for purchasing property, plant, equipment, or marketable securities, as well as for making loans to borrowers.

LO 12-4:

Prepare the financing activities section of a statement of cash flows.

LO 12-3:

Prepare the investing activities section of a statement of cash flows.

LO 12-2:

Prepare the operating activities section of a statement of cash flows using the direct method.

LO 12-1:

Prepare the operating activities section of a statement of cash flows using the indirect method.

Operating Activities

Routine cash inflows and outflows resulting from running (operating) a business are reported in the operating activities section of the statement of cash flows. Cash flows reported as operating activities include: 1. Cash receipts from revenues, including interest and dividend revenue. 2. Cash payments for expenses, including interest expense. Under generally accepted accounting principles, the operating activities section of the statement of cash flows can be presented using either the direct or the indirect method. The direct method explicitly (directly) identifies the major sources and uses of cash. The indirect method starts with net income as reported on the income statement, followed by the adjustments necessary to convert the accrual-based net income figure to a cash-basis equivalent.

Preparing the Financing Activities Section of a Statement of Cash Flows

The information necessary to identify cash inflows and outflows from financing activities is obtained by reconciling changes in short-term notes payable, long-term liabilities, and stockholders' equity. In general: • Increases in short-term notes payable or long-term debt balances suggest cash inflows occurred from issuing debt instruments (notes or bonds). • Decreases in short-term notes payable or long-term debt balances suggest cash outflows occurred for payment of debt (notes or bonds). • Increases in contributed capital (common stock, preferred stock, or paid-in capital) suggest cash inflows occurred from issuing equity instruments. • Increases or decreases in treasury stock suggest cash outflows or inflows occurred to purchase or sell a company's own stock. • Decreases in retained earnings from cash dividends suggest cash outflows occurred to pay dividends.

Preparing the Investing Activities Section of a Statement of Cash Flows

The information necessary to identify cash inflows and outflows from investing activities is obtained by reconciling changes in a company's long-term assets. In general: • Increases in long-term asset balances suggest cash outflows to purchase assets. • Decreases in long-term asset balances suggest cash inflows from selling assets. It is usually necessary to analyze data from the long-term asset records to determine details about long-term asset purchases and sales.

An Overview of the Statement of Cash Flows

The statement of cash flows provides information about cash coming into and going out of a business during an accounting period. • Cash flows are classified into one of three categories: operating activities, investing activities, or financing activities. • A separate section also displays any significant noncash investing and financing activities.

Reconciliation of Inventory and Accounts Payable

To simplify computing the amount of cash paid for inventory purchases, assume that all inventory purchases are made on account. The computation requires two steps. • First, Inventory must be analyzed to determine the amount of inventory purchased. • Second, Accounts Payable must be analyzed to determine the amount of cash paid to purchase inventory.

The Financial Analyst

• Understanding the cash flows of a business is essential because cash is used to pay the bills. • A company, especially one experiencing rapid growth, can be short of cash in spite of earning substantial net income. • A business cannot survive without managing cash flow carefully. The statement of cash flows frequently provides a picture of business activity that otherwise would be lost in the complexities of accrual accounting.