financial accounting an introduction to concepts methods and uses 10th edition l.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 10th Edition PowerPoint Presentation
Download Presentation
FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 10th Edition

Loading in 2 Seconds...

play fullscreen
1 / 24

FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 10th Edition - PowerPoint PPT Presentation


  • 233 Views
  • Uploaded on

Chapter 4 -- Statement of Cash Flows: Effects Operating, Investing, Financing Activities on Cash Flows. FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 10th Edition. Clyde P. Stickney and Roman L. Weil. Learning Objectives.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 10th Edition' - adamdaniel


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
financial accounting an introduction to concepts methods and uses 10th edition

Chapter 4 -- Statement of Cash Flows: Effects Operating, Investing, Financing Activities on Cash Flows

FINANCIAL ACCOUNTING

AN INTRODUCTION TO CONCEPTS,

METHODS, AND USES

10th Edition

Clyde P. Stickney and Roman L. Weil

learning objectives
Learning Objectives

1. Understand why using the accrual basis of accounting creates the need for a statement of cash flows.

2. Understand the types of transactions that result in cash flows.

3. Develop an ability to prepare a statement of cash flows from a comparative balance sheet and income statement.

4. Develop an ability to analyze the statement of cash flows.

chapter outline
Chapter Outline

1. Overview of cash flows.

  • Classification of cash flows

2. Preparing the statement of cash flows.

  • Direct and indirect methods.
  • Columnar and t-account approaches.

3. Effects of a sale of a long-term asset.

4. An international perspective.

Chapter Summary

1 overview of the statement of cash flows
1. Overview of the Statement of Cash Flows

The statement of cash flows …

(a) explains the reasons for a change in cash.

(b) classifies the reasons for the change as an operating, investing or financing activity.

(c) reconciles net income with cash flow from operations.

classification of cash flows
Classification of Cash Flows

1. Operations -- cash flows related to selling goods and services; that is, the principle business of the firm.

2. Investing -- cash flows related to the acquisition or sale of noncurrent assets.

3. Financing -- long term and short term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.

components of the statement of cash flows
Components of the Statement of Cash Flows

Cash received from

sale of goods

and services

Cash paid for

operating goods

and services

cash flow

from operations

-

=

Operations

+ -

Cash received from

sales of investments

and PP&E

Cash paid for ac-

quisition of invest-

ments and PP&E

cash flow

from investing

-

=

Investing

+ -

Cash paid for

dividends and

reacquisition of

debt or capital stock

Cash received from

issue of debt or

capital stock

cash flow

from financing

-

=

Financing

=

Net change in cash

for the period

Figure 4.1

2 preparing the statement of cash flows
2. Preparing the Statement of Cash Flows

Firms could prepare the cash flow statement directly from the cash account. Most, however, find it more efficient to prepare the cash flow statement from the balance sheet and income statement.

(a) Direct and indirect methods.

(b) Algebraic formulation will present the underlying concept of the cash flow statement.

(c) Two approaches to producing the cash flow statement: columnar worksheet and t-account worksheet.

2 a direct and indirect methods
2.a. Direct and Indirect Methods
  • Direct method of presentation calculates cash flow from operations by subtracting cash disbursements to supplies, employees, and others from cash receipts from customers.
  • The indirect method calculates cash flow from operations by adjusting net income for noncash revenues and expenses.
  • Most firms present their cash flows using the indirect method.

Copyright 2000 by Harcourt Inc. All rights reserved.

2 b algebraic formulation
2.b. Algebraic Formulation

Recall the basic accounting equation:

Assets = Liabilities + Shareholders’ Equity

or A = L + SE

Assets are either cash (C) or not (N$A), so

C + N$A = L + SE

 C +  N$A =  L +  SE

Where  means the change in the balance,

Rearranging gives the basic equation for the statement of cash flows:

 C =  L +  SE -  N$A

2 b algebraic formulation cont
2.b. Algebraic Formulation (Cont.)

 C =  L +  SE -  N$A

  • The change in cash,  C, is the increase or decrease in the cash account.
  • This amount must equal changes in liabilities plus changes in shareholders’ equity minus changes in assets other than cash.
  • Thus, we can identify the causes in the change in the cash account by studying the changes in non-cash accounts.
2 c two approaches to producing the cash flow statement
2.c. Two Approaches to Producing the Cash Flow Statement

The basic formula can be implemented using either of two approaches:

1. Columnar worksheet-- changes in balance sheet accounts are classified by definition using a multicolumn worksheet.

2. T-Account worksheet -- changes are classified by analysis of the t-accounts.

2 c 1 columnar worksheet
2.c.1. Columnar Worksheet
  • Works well for relatively simple situations involving few transactions.
  • Enhances understanding of the cash flow statement.
  • Does not work as well as the T-account method when the number and complexity of transactions increases.
2 c 1 columnar worksheet cont
2.c.1. Columnar Worksheet (Cont.)

Begin with a comparative balance sheet.

1. Compute the change in each balance sheet account.

2. Classify each change as operating, investing or financing activity.

2. Make any needed adjustments (for example, for a sale of a long-lived asset).

4. Recast the classified changes in the form of a cash flow statement.

noncash expenses
Noncash Expenses
  • Noncash expenses, such as depreciation expense, are added back.
  • Not truly sources of cash, even though they are associated with cash inflows; rather, a reversal of the accrual process that required the expenses to be recognized without regard for the cash flow.
changes in specific accounts
Changes in Specific Accounts

increase

decrease

If noncash assets

are increased,

then cash was spent,

so cash is an outflow,

so negative sign.

If noncash assets

are decreased,

then they provided cash

so cash is an inflow,

so positive sign.

Non-cash Assets

If liab. or S.E.

increased, then cash

was obtained,

so cash in an inflow,

so positive sign.

If liab. or S.E.

decreased, then cash

was spent,

so cash in an outflow,

so negative sign.

Liabilities

and

Shareholders’

Equity

2 c 2 t account worksheet
2.c.2. T-account Worksheet
  • The columnar works well when the change in each balance sheet account affects only one of the three types of activities. It becomes cumbersome for more complex (and realistic) situations.
  • The T-account approach is a direct extension of T-accounts - facilitates analysis of a transaction which involves more than one activity.
  • For example, the change in Retained Earnings can be due to both net income (operating activity) and dividends (financing activity).
2 c 2 t account worksheet18
2.c.2. T-account Worksheet

1. Obtain beginning and ending balance sheets.

2. Prepare a T-account worksheet with a master account, cash, divided into operating, investing and financing sections.

3. Explain the change in the master cash account by reconstructing the original entries in a summary form.

4. Make any necessary adjustments.

5. Recast the master account in the format of a cash flow statement.

2 c 2 t account worksheet cont
2.c.2. T-account Worksheet (Cont.)

Various Balance Sheet Accounts

beginning

balance

ending

balance

Cash

beginning

balance

Operations

Investing

Financing

ending

balance

nnnnnn

3. this part of the cash account becomes the cash flow statement.

2. these are offset by an opposite entry in the cash account.

nnnnnn

1. adjustments are made to all balance sheet accounts to bring the beginning balance to the ending balance.

3 effects of a sale of a long term assets on cash flows
3. Effects of a Sale of a Long-Term Assets on Cash Flows
  • A few transactions complicate the derivation of a cash flow statement from a comparative balance sheet, for example, the sale of a long-term (or fixed) asset.
  • Recall the journal entry for the sale of an asset:

Cash nnnn

Accumulated Depreciation nnnn

Asset nnnn

Gain (or loss) on sale nnnn

3 sale of an asset cont
3. Sale of an Asset (Cont.)
  • Each of the four parts of the above journal entry require an adjustment in the cash flow statement.
  • The first line, cash, adds a line to the investing section.
  • The second line, a debit to accumulated depreciation, increases the depreciation expense above the change in the change in the accumulated depreciation account.
  • The third line, a credit to the asset, increases the amount of cash invested in long-lived assets above the change in the fixed asset accounts.
  • The fourth line, a gain or loss, is reversed out in the operating sections since this is not a cash flow.
comparison of cash flow to net income
Comparison of Cash Flow to Net Income
  • Net income is an accrual based concept and purports to show the long-term.
  • Cash flows purport to show the short term.
  • Consider the outlook for both short-term and long-term and consider that each is either good or poor.
  • A strong growing firm would show both good long-term and good short-term outlooks.
  • A failing firm would show both poor long-term and poor short term outlooks.
  • What about a firm with good cash flows (short-term) but poor net income (long-term)?
  • What about a firm with poor cash flows (short-term) but good net income (long-term)?
4 an international perspective
4. An International Perspective
  • The International Accounting Standards Board (IAS No. 7) recommends but does not require a statement of cash flows.
  • An approximation to a cash flow statement can be prepared from a comparative balance sheet with some additional information.
chapter summary
Chapter Summary
  • The statement of cash flows is presented. It reports the effects on cash flows of a firm’s operating, investing and financing activities.
  • Information in this statement helps in understanding:

1. How operations affect liquidity,

2. The level of capital expenditures needed to support growth, and

3. The major changes in financing.

  • Two methods are presented to produce a cash flow statement from a comparative balance sheet.