PRINCIPLES OF MANAGERIAL ACCOUNTING CHAPTER 17 (THE LAST ONE!!)

Statement of Cash Flows Purpose Highlights the major activities that directly and indirectly affect cash flows Includes Cash & Cash equivalents Investments that will be turned into cash within 90 days—includes T-bills, CD’s, money market funds. Includes implicit sources of cash. Eg. Increases to accounts payable and other borrowings

Accounting Equation Assets = Liabilities + Owners’ equity Cash = Noncash Assets +Liabilities + Capital Stock + Retained Earnings Cash = Noncash Assets + Liabilities + Capital Stock + Net Income - Dividends

Three divisions of the Statement of Cash Flows Operating Activities Net Income Changes in current assets Changes in Noncurrent assets that affect net income, such as depreciation and accrued interest earned. Changes in current liabilities (excluding lenders who are not suppliers and dividends payable) Changes in noncurrent liabilities that affect net income, eg. Interest accrued.

Three divisions (cont.) Investing Activities Transactions that involve acquiring or disposing of noncurrent assets Selling or acquiring Property Plant & Equipment Selling or acquiring long-term investments

Three Divisions (cont) Financing Activities Transactions (other than the payment of interest) that involve borrowing from creditors Transactions (except stock dividends and stock splits) involving the owners of the company

Indirect method Start with Net income then adjusted to cash basis Major Adjustments Depreciation, depletion, and amortization Depreciation must be added back to net income since it does not require the use of cash Changes in current asset and current liability accounts Increases in current assets and decreases in current liabilities are deducted from net income Decreases in current assets and increases in current liabilities are deducted from net income

Indirect method (cont) Major adjustments (cont) Gains and losses on sales of assets To avoid double accounting for the gain or loss it must be removed. Deferred income taxes Increases in the liability account are added to net income, decreases are subtracted.

Eight steps to preparation Enter each balance sheet account on a worksheet, except cash and cash equivalents. (List Accum. Depr. And other contra assets with the liabilities) Compute the change in each balance sheet account. Break the change in Retained Earnings down into net income and dividends.

Eight Steps (cont) Use Exhibit 17-2 page 794 as a guide for each entry as a source or use Write the sources as positive numbers and uses as negative numbers Make necessary adjustments (eg. Gains and losses) to reflect gross, rather than net changes in noncurrent assets due to financing and investing activities.

Eight steps (cont.) Categorize each entry on the worksheet as an operating, investing, or financing activity. Copy the data from the worksheet to the statement of cash flows section by section. Prepare a reconciliation of the cash account.