Accounting - Operating, Investing Activities Notes

Chapter 11 ● ● ● ● ● ● ● Operating activities: cash receipts and cash payments for transactions relating to revenue and expense activities. Ex, collection of cash for inventory, salaries, and rent Investing activities: cash transactions involving the purchase and sale of long-term assets and current investments. Ex. buildings, land, equipment Financing activities: inflows and outflows of cash resulting from the external financing of a business (transactions with lenders and with stockholders). Ex. borrowing money and repaying debt, and with stockholders such as issuing stock, paying dividends, and purchasing treasury stock. Statement of cash flows provides summary of cash inflows and outflows during reporting period Inflow: cash received Outflow:cash paid Non cash activities: significant investing and financing activities that don't affect cash. Reported after the cash flow statement or in a note to the financial statements ○ ○ ○ ○ ● ● ● No investing or financing activities to report in statement of cash flows since cash isnt affected (noncash) Purpose of statement of cash flows is to report the activities that caused the change in cash balances reported in the balance sheets from period to period. Operating activities=Indirect and direct methods: differ in presentation format for operating activities. Report investing, financing, and non cash identically ○ ○ ● ● ● Indirect method: begin with net income. List adjustments to net income to arrive at operating cash flows. Most popular method. Easier and less costly Direct method: adjust the items in the income statement to directly show the cash inflows and outflows from operations. If used, the company must also report the indirect method either with the statement of cash flows or in the notes. Companies choose between indirect and direct methods in reporting operating activities in statements of cash flows. The indirect method begins with net income and then lists adjustments to net income, in order to arrive at operating cash flows. The direct method specifically lists the various cash inflows and outflows from operations. The investing and financing sectors of the statement of cash flows are identical under both methods Total net cash flows from operating activities are identical under both methods Operating activities-indirect method ○ ○ ○ ● Purchase of long term assets by issuing debt Purchase of long term assets by issuing stock Conversion of bonds payable into common stock Exchange of long term assets Non cash items (convert accrual basis to cash): depreciation expense (add back to amount in calculating operating cash flows) Non-operating items: gains and losses on sale of assets Changes in current assets and current liabilities: increase in accounts receivable is the amount of revenue reported in the income statement but not yet collected in cash Adjustments to net income include the following: ○ ○ Income statement items: remove non cash revenues and expenses, such as depreciation and amortization expenses. Remove non operating gains and losses, such as on the sale of land, buildings, and equipment Balance sheet items: adjust for changes in current assets and liabilities. ● ● ● ● ● Loss is like an expense-reduces net income. Treat a loss on the sale of assets like depreciation expense and add back that amount to net income. A gain on the sale of long term assets is opposite of an expense, so we subtract that amount from net income to arrive at net cash flows from operating activities Using the indirect method, we start with net income and adjust this number for (1) revenue and expense items that do not affect cash, (2) gains and losses that do not affect operating cash flows, and (3) changes in current assets and current liabilities. Investing activities: increase or decrease in investments. Increase or decrease in long term assets such as property, plant, equipment, and intangible assets Cash transactions (inflows and outflows) involving long term assets and current investments are reported in the investing activities section of the statement of cash flows. Typical investing activities include buying and selling property, plan, and equipment, as well as making and collecting loans Financing activities: examine changes in long term liabilities and stockholders equity accounts from the balance sheet. Cash transactions with a company’s creditors and shareholders