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Provide information about cash receipts and payments during an accounting period Helps us see how financial position changes during an accounting period Only statement that collects and shows in one statement the causes of changes in cash during a financial reporting period www.AssignmentPoint.com
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Cash includes currency on hand and demand deposits Cash equivalents are short-term, highly liquid investments that are www.AssignmentPoint.com
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Cash includes currency on hand and demand deposits Cash equivalents are short-term, highly liquid investments that are ◦ Readily convertible to known amounts of cash www.AssignmentPoint.com
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Cash includes currency on hand and demand deposits Cash equivalents are short-term, highly liquid investments that are ◦ Readily convertible to known amounts of cash ◦ So near maturity that they are not likely to change in value due to changes in interest rates www.AssignmentPoint.com
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Operating activities Investing activities Financing activities www.AssignmentPoint.com
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Transactions that generally involve producing and delivering goods and providing services Inflows ◦ selling goods and services, interest and dividend revenue Outflows ◦ inventory, salary exp, interest exp www.AssignmentPoint.com
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Buying and selling plant assets and securities, and making loans and collecting on them Inflows ◦ sale of plant assets and investment securities, collecting loans Outflows ◦ purchasing plant assets, investment securities www.AssignmentPoint.com
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Obtaining resources from owners and providing return, and obtaining resources from creditors and repaying principal Inflows ◦ issuing stock, bonds, other short and long-term borrowing Outflows ◦ purchasing treasury stock, repaying principal, cash dividends www.AssignmentPoint.com
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Generally, information on gross receipts and payments more relevant ◦ When issuing long-term debt to retire other debt, show both Noncash investing and financing ◦ Acquiring plant assets by issuing notes payable ◦ Converting bonds payable into common stock www.AssignmentPoint.com
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Overall, how successful has management been in generating and investing cash flows? How does accrual basis net income compare with cash basis? www.AssignmentPoint.com
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What cash uses have been made for investing activities, and to what extent has cash from operations been sufficient to pay for these investments? What sources and uses have been generated from financing activities? www.AssignmentPoint.com
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Direct shows major classes of gross cash receipts and cash payments ◦ Difference is net cash provided by, used in, operating activities Indirect starts with net income (loss) and adjusts for revenues and expenses that did not cause changes in cash FASB encourages use of the direct method www.AssignmentPoint.com
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Goal to convert each income statement item from accrual to cash basis First, identify the balance sheet account(s) that relate to each income statement item Next, combine the change in the balance sheet account with the income statement amount www.AssignmentPoint.com
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Cash receipts from customers relates sales to change in accounts receivable If accounts receivable decreased during the period, we collected more cash than amount reported as sales revenue If accounts receivable increased during the period, we collected less cash that amount reported as sales revenue www.AssignmentPoint.com
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Take sales amount and ◦ Add decrease in accounts receivable ◦ OR ◦ Subtract increase in accounts receivable www.AssignmentPoint.com
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Cash Payments to Suppliers relates cost of goods sold to change in merchandise inventory and change in accounts payable First use cost of goods sold and change in inventory to calculate purchases If inventory increased during the period, we purchased more goods than we sold If inventory decreased during the period, we purchased fewer goods than we sold www.AssignmentPoint.com
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To calculate purchases, take cost of goods sold amount and ◦ Add increase in inventory ◦ OR ◦ Subtract decrease in inventory This gives us accrual purchases www.AssignmentPoint.com
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Second use purchases and change in accounts payable to calculate cash payments to suppliers If accounts payable increased during period, we paid less cash than purchases If accounts payable decreased during period, we paid more cash than purchases www.AssignmentPoint.com
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To calculate cash payments to suppliers, take purchases amount and ◦ Add decrease in accounts payable ◦ OR ◦ Subtract increase in accounts payable www.AssignmentPoint.com
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Cash payments for expenses relate the expense to a change in an accrued expense account or a prepaid expense ◦ Cash payments for wages relates wages expense and change in wages payable ◦ Cash payments for office supplies relates office supplies expense and changes in office supplies www.AssignmentPoint.com
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To calculate cash payments for expenses, take the expense amount and ◦ Add decrease in accrued expense ◦ OR ◦ Subtract increase in accrued expense ◦ OR ◦ Add increase in prepaid expense ◦ OR ◦ Subtract decrease in prepaid expense www.AssignmentPoint.com
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Cash receipts for revenues relate the revenue to a change in an unearned revenue account or accrued revenue ◦ Cash receipts from interest relates interest revenue and change in interest receivable ◦ Cash receipts from subscriptions relates subscriptions revenue and changes in unearned subscriptions www.AssignmentPoint.com
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To calculate cash receipts from revenues, take the revenue amount and ◦ Add decrease in accrued revenue ◦ OR ◦ Subtract increase in accrued revenue ◦ OR ◦ Add increase in unearned revenue ◦ OR ◦ Subtract decrease in unearned revenue www.AssignmentPoint.com
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Starts with net income(loss) from the income statement. Adjusts for revenues and expenses that did not cause a change in cash Results in same total as direct method FASB encourages use of direct Believes that reconciliation of net income to cash provided by operations is useful information www.AssignmentPoint.com
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Net income Add ◦ Expenses that did not use cash and losses on sale of noncurrent assets Subtract ◦ Gains on sales of noncurrent assets www.AssignmentPoint.com
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Add ◦ Decreases in operating current assets ◦ Increases in operating current liabilities Subtract ◦ Increases in operating current assets ◦ Decreases in operating current liabilities www.AssignmentPoint.com
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Analyze changes in nonoperating current assets and noncurrent assets ◦ If equipment increased, there was a purchase of new equipment ◦ If equipment decreased, there was a disposal of old equipment If there was more than one change, analyze each separately Identify the cash flow from each transaction www.AssignmentPoint.com
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Analyze changes in nonoperating current liabilities, noncurrent liabilities, paid-in capital, and nonoperating changes to retained earnings(dividends) ◦ If bonds increased, there was an issuance of bonds ◦ If paid-in capital increased, there was an issuance of stock www.AssignmentPoint.com
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If dividends were declared, combine amount declared with change in dividends payable to get cash dividends If there was more than one change, analyze each separately Identify the cash flow from each transaction www.AssignmentPoint.com
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Compute the net change in cash and cash equivalents Compute the amount of net cash provided by (used in) operating activities by direct method Prepare the reconciliation of net income to net cash provided by (used in) operating activities by indirect method www.AssignmentPoint.com
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Compute the amount of net cash provided by (used in) investing and financing activities Prepare the statement of cash flows www.AssignmentPoint.com
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Overall, how successful has management been in generating and investing cash flows during the period? How does accrual net income compare with cash net income? www.AssignmentPoint.com
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What cash uses have been made for investing activities and to what extent has cash from operations been sufficient to pay for these investments? What sources and uses have been generated from financing activities? www.AssignmentPoint.com
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