University:
California State University, Northridge
Course:
ACCT 352 | Intermediate Financial Accounting III
Academic year:

2024
Views:

173

Pages:

18
Author:

Dale French

The Statement of Cash Flows Revisited Part 1 Chapter 21 21-2 Cash Inflows and Outflows Operating Activities Cash received from revenues Cash Inflows Investing Activities Sale of operational assets Sale of investments Collections of loans Financing Activities Issuance of stock Issuance of bonds and notes Business Cash paid for expenses Purchase of operational assets Purchase of investments Loans to others Cash Outflows Payment of dividends Repurchase of stock Repayment of debt 21-3 Role of the Statement of Cash Flows Helps users assess . . .     a firm’s ability to generate cash. a firm’s ability to meet its obligations. the reasons for differences between income and associated cash flows. the effect of cash and noncash investing and financing activities on a firm’s financial position. 21-4 Role of the Statement of Cash Flows Lists all cash inflows and all cash outflows by category: operating, investing, and financing Explains the change in cash during the period Required by GAAP Cash is King! Especially during an economic downturn. 21-5 Cash and Cash Equivalents Resources immediately available to pay obligations.     Short-term, highly liquid investments. Readily converted into cash, with little or no risk of loss. Examples: money market funds Treasury bills Maturity date must not be longer than 3 months from date of purchase. Primary Elements of the Statement of Cash Flows Operating Activities Investing Activities Financing Activities Reconciliation of the Net Increase or Decrease in Cash with the Change in the Balance of the Cash Account Noncash Investing and Financing Activities 21-6 Primary Elements of the Statement of Cash Flows Operating Activities Reports the cash effects of the elements of net income. Investing Activities Reports the cash effects of the acquisition and disposition of assets (other than inventory and cash equivalents). Financing Activities Reports the cash effects of the sale or repurchase of shares, the issuance or repayment of debt securities, and the payment of cash dividends. 21-7 21-8 Cash Flows from Operating Activities Inflows from:   customers. interest and dividends. Outflows to:     suppliers of goods. salaries and wages. interest on debt. income taxes. + _ Cash Flows from Operating Activities Direct Method or Indirect Method of Reporting Cash Flows from Operating Activities 21-9 Two Formats for Reporting Operating Activities Direct Method Indirect Method Reports the cash effects of each operating activity Starts with accrual net income and converts to cash basis Note that no matter which format is used, the same amount of net cash flows from operating activities is generated. 21-10 Direct Method Under the direct method, the cash effect of each operating activity is reported directly in the statement. 21-11 Indirect Method By the indirect method, we arrive at net cash flow from operating activities indirectly by starting with reported net income and working backwards to convert that amount to a cash basis. 21-12 Cash Flows from Investing Activities Inflows from:    Sale of long-term assets used in the business. Sale of investment securities (stocks and bonds). Collection of nontrade receivables. + Outflows to:    Purchase of long-term assets used in the business. Purchase of investment securities (stocks and bonds). Create nontrade receivables. _ Cash Flows from Investing Activities 21-13 Cash Flows from Financing Activities Inflows from:   Sale of shares to owners. Borrowing from creditors through notes, loans, mortgages, and bonds. + Outflows to:    Owners in the form of dividends or other distributions. Owners for the reacquisition of shares previously sold. Creditors as repayment of the principal amounts of debt. _ Cash Flows from Financing Activities Reconciliation with Change in Cash Balance The net amount of cash inflows and outflows reconciles the change in the company’s beginning and ending cash balances. For example, assume that UBC’s net increase in cash is $9 million and the cash beginning balance is $20 million. The cash reconciliation would be as follows: 21-14 21-15 UBC’s Statement of Cash Flows Noncash Investing and Financing Activities Significant investing and financing transactions not involving cash also are reported (usually in a disclosure note). 1. 2. 3. 4. Acquiring an asset by incurring a debt payable to the seller. Acquiring use of an asset by entering into a lease agreement. Converting debt into common stock or other equity securities. Exchanging noncash assets or liabilities for other noncash assets or liabilities. 21-16 21-17 U.S. GAAP and IFRS The FASB and IASB are working together on a project, Financial Statement Presentation, to establish a common standard for presenting information in the financial statements. 21-18 U.S. GAAP and IFRS Based on the joint FASB and IASB Financial Statement Presentation project, the statement of cash flows is slated to change in several ways. •Operating and Investing cash flows would be categorized as “business” activities and some cash flows may switch categories. •The statement would have three additional groupings: income taxes, discontinued operations, and equity (if needed). •Direct method would be required. •The concept of “cash equivalents” would be eliminated in favor of cash only.