The Statement of Cash Flows Chapter 4

The Statement of Cash Flows Answers u u How Much Cash Was Provided by Operations u u What Amount of Property and Equipment Was Purchased u u How Much Long Term Debt Was Borrowed

The Statement of Cash Flows Answers u u What Funds Were Raised by the Sale of Capital Stock u u What Amount of Dividends Were Paid u u How Much Was Invested in Long Term Investments

The Statement of Cash Flows u u Required Statement Since 1988 by the FASB u u Replaces the Statement of Changes in Financial Position

The Statement of Cash Flows u u Focused on Cash Changes From è èOperating Activities è èInvesting Activities è èFinancing Activities u u See page

The Statement of Cash Flows u u Cash = Cash + Cash Equivalents – –Equivalents = Short term investments of 90 days or less – –Transfers between cash and equivalents are not listed on SCF – –(See pages )

Use and Purpose of The Statement of Cash Flows u u Assess Ability to Generate Future Cash Flows u u Assess Ability to Meet Current Obligations u u Shows the Difference Between Net Income and Cash Generated

Use and Purpose of The Statement of Cash Flows u u Shows the Effect of Cash and Non Cash Financing and Investing Activities u u Internal and External Users

Use and Purpose of The Statement of Cash Flows Management u u Assess Liquidity u u Assess Financial Flexibility u u Determine Dividend Policy u u Plan Investing and Financing

Use and Purpose of The Statement of Cash Flows Investors and Creditors u u Assess Ability to Pay Bills u u Assess Ability to Pay Dividends u u Assess Need for Financing

Six Steps...   Determine Change in Cash Account - The “Answer”   Summarize Operating Activities Cash in From Sale of Services Cash in From Interest and Dividends Cash Out for Expenses & Taxes Cash Out for Interest on Debt

Six Steps...   Summarize Investing Activities Cash in From Property Sales Cash in From Investment and Security Sales Cash Out for Loans and Purchases of Property and Investments

Six Steps...   Summarize Financing Activities Cash in From Sale of Stock Cash in From Issuing Debt Cash Out for Paying Debt Principal Cash Out for Treasury Stock Cash Out for Dividends

Six Steps...   Schedule of Non-cash Investing and Financing Activities Exchange of Capital Stock for Property and Equipment Capital Lease Obligations Incurred

Six Steps...   Present the Statement of Cash Flows Cash Flows From Operating Activities Cash Flows From Investing Activities Cash Flows From Financing Activities

Six Steps...   Present the Statement of Cash Flows Continued Net Increase (Decrease) in Cash Cash At Beginning of Period Cash At End of Period (given) Supplemental Schedule - Non Cash Transactions

Operating Activities - Direct Method u u Accrual Accounting - Recognize Expenses When Incurred Revenue When Earned. u u Convert Each Item on the Income Statement From Accrual Basis Accounting to Cash Basis Accounting

Operating Activities - Direct Method u u Ignore Non Cash Transactions u u Cash Receipts From Sales Plus Interest and Dividends Received u u Cash Disbursements for Operating Expenses u u FASB Prefers Direct Method

Operating Activities - Indirect Method u u Used in Hospitality Operations u u Start With Net Income u u Adjust for Non Cash Expenses - Such As Depreciation (Add)

Operating Activities - Indirect Method u u Adjust for Gains or Losses on Sale of Noncurrent Assets or Marketable Securities (Add Loss... Deduct Gain) u u Adjust for Changes in Current Assets and Current Liabilities Accounts – –Except for changes in Cash and Dividends Payable

Accounting for Changes in Current Accounts Using Indirect Method u u A Decrease in a Current Asset Is Added to Net Income u u An Increase in a Current Asset Is Deducted From Net Income

Accounting for Changes in Current Accounts Using Indirect Method u u A Decrease in a Current Liability Is Deducted From Net Income u u An Increase in a Current Liability Is Added to Net Income

Net Cash Flows From Investing Activities u u Examine Non Current Asset Accounts for Changes Between the Balance Sheet Dates Investments Property and Equipment

Net Cash Flows From Investing Activities u u Look at Journal Entries u u Read Footnotes to Statements

Net Cash Flows From Financing Activities u u Examine Non Current Liability and Owners’ Equity Accounts for Changes Between the Balance Sheet Dates Look at Journal Entries Read Footnotes to Statements for Non Cash Transactions

Net Cash Flows From Financing Activities u u Analyze Dividends Payable Account for Cash Payments

Cash Used For Expenses u u Expense on Income Statement + Beginning Payables Balance - Ending Payables Balance = Cash used for Expense ============================== u u Expense on Income Statement + Ending Current Assets Balance - Beginning Current Assets Balance = Cash used for Expense

Cash From Sales u u Sales from Income Statement + Beginning Receivables Balance - Ending Receivables Balance = Cash From Sales