Kế toán, kiểm toán - Chapter 14: The statement of cash flows

2Chapter 14:The Statement of Cash Flows3Learning Objective 1Define cash and provide a general description of the statement of cash flows.4The Statement of Cash FlowsSummary of company’s transactions that involve the cash account over a period of time. Transactions are classified as: OperationsInvestmentsFinancing5 Statement of Cash FlowsRequired for financial statements by SFAS 95 (1987).Primary purpose is to provide relevant information about cash receipts and cash disbursements of the company during the period.Serves to complement the other financial statements.Focus is on cash flows, not income.Reconciles the balance sheet and the income statement.6The Definition of CashCash consists of coin, currency, and available funds on deposit at the bank. Negotiable instruments such as money orders, certified checks, cashier’s checks, personal checks, and bank drafts are also considered cash.Also certain cash equivalents, which include commercial paper and other debt investments with maturities of less than three months are included in the statement of cash flows.7A General Description of the Statement of Cash FlowsExplains the change in the cash balance from one balance sheet to the next.Format of SCF includes the following three sections:cash flow from operating activities.cash flow from investing activities.cash flow from financing activities.Like US GAAP, IFRS requires the presentation of a SCF, and the format is largely the same.8General Description of the Statement of Cash Flows9Cash Provided (Used) by Operating ActivitiesCash inflows and outflows associated directly with the acquisition and sale of the company’s inventories and services.Cash flows from operating activities is based on the income statement, and converts income activity to a cash basis.There are two formats for the presentation of CF from operating activity:Direct Method: this technique shows cash received from customers and cash paid to various entities for operating activities. This activity relates directly to the cash T-account.Indirect Method: this technique starts with net income and makes adjustments to net income to convert it to a cash basis from an accrual basis.10Cash Provided (Used) by Operating ActivitiesBoth the direct and indirect method arrive at the same dollar amount.If the direct method is used, the indirect method must be presented in a supplementary schedule.FASB recommends companies use the direct method including the supplementary schedule.The direct method is more straight-forward and provides more information with the supplementary disclosure, but the vast majority of companies present only the indirect method.11Cash Provided (Used) by Investing ActivitiesCash Flows from investing activities explain the changes in cash from the purchase or sale of the company’s noncurrent assets.Examples of investing activity includes:Cash paid for purchase of equipment, land, buildings, marketable securities (available-for-sale and equity), intangible assets, and most other long term assets.Cash received from sale of equipment, land, buildings, marketable securities (available-for-sale and equity), intangible assets, and most other long term assets.Cash inflows and outflows can all be traced directly to entries in the cash account. 12Cash Provided (Used) by Financing ActivitiesCash Flows from financing activities explain the changes in cash from the issue or retirement of the company’s (primarily) long-term liabilities and contributed capital (equity).Examples of financing activity includes:cash received from issue of bonds, mortgages and other long-term debt and cash paid for the retirement of long-term debt,cash received from issue of common stock and preferred stock and cash paid for repurchase of treasury stock, and cash paid for dividends.Cash inflows and outflows can all be traced directly to entries in the cash account. 13Cash Provided (Used) by Financing ActivitiesNote that cash paid for dividends is classified as a financing activity, but cash paid for interest is classified as an operating activity. Note that cash received for dividends and cash received for interest are both classified as operating activities. This treatment is criticized by some as confusing the distinction between financing and operating activities. 14How will a company classify ‘proceeds received from the issuance of long-term bonds’ on its statement of cash flows?a. Cash provided from operationsb. Cash used in operationsc. Cash provided from investing activitiesd. Cash provided from financing activities15How will a company classify money paid for the acquisition of land its statement of cash flows?a. Cash provided from operationsb. Cash used in financing activitiesc. Cash provided from investing activitiesd. Cash used for investing activities16Learning Objective 2Explain how the statement of cash flows can be used.17How the Statement of Cash Flows Can Be UsedThe statement of cash flows is used primarily to assess performance in two basic areas.A company’s ability to generate cash Generate cash from operating activitiesFinancial flexibility (capacity to borrow, issue equity, and sell nonoperating assets)The effectiveness of a companies cash managementSolvency must be maintainedCash must also be invested in productive assets that provide a return 18The Importance of Cash from Operating ActivitiesCash from Operating Activities has special importance to a business and those outside the company:The sale of services and/or inventory is a prerequisite for a successful business. Investing and Financing cash flows can vary greatly year to yearOperating cash flows should be more consistent, and, expected to reoccur making them essential for predicting future outcomes 19The Importance of Significant Noncash TransactionsSignificant non-cash transactions such as issuing stock or a note for an asset must be disclosed in the footnotes of the financial statementsFor example MCI acquired Satellite Business Systems (SBS) for common stock and a note payable and required disclosure20How will a company classify money paid to suppliers on its statement of cash flows?a. Cash provided from operationsb. Cash used in operationsc. Cash provided from investing activitiesd. Cash used in financing activities21How will a company classify the exchange of common stock for land on its statement of cash flows?a. An operating activityb. An investing activityc. A financing activityd. A footnote22Learning Objective 3Provide examples of economic consequences related to how the statement of cash flows is prepared.23The Statement of Cash Flows: Economic ConsequencesInvestors, creditors, and other interested parties use the statement of cash flows to assess investment potential and creditworthinessWindow dressing of the statement of cash flows manipulates the cash of a company in the short-termUsers must be aware of manipulation in the short-term and look at cash flow over a period of years (the FASB requires that at least three previous years be disclosed)Short-term window dressing of cash flows can prove counterproductive for business24Learning Objective 4Prepare a statement of cash flows from the information contained in the income statement for a given period and the beginning and ending balance sheets of that period.25Deriving Cash Flow from Accrual Financial StatementsMost companies derive the statement of cash flows by looking at two year to year balance sheets, the intervening income statement, and the statement of shareholders’ equity. The statement of cash flows prepared this way is the same as that prepared by analyzing the T-accounts directly.This method is much more practical for most companies. 26Deriving Cash Flow from Accrual Financial Statements Operating – Sales and Bad Debt ExpenseCash inflow from sales can be determined by analyzing changes in accounts receivable and the allowance for doubtful accounts.Figure 14-6 Determining cash inflow from sales27Deriving Cash Flow from Accrual Financial Statements Operating – Service RevenueCash inflow related to fees earned can be determined by looking at changes in the advance account.Figure 14-7 Determining cash inflow from fees earned28Deriving Cash Flow from Accrual Financial Statements Operating – Cost of Goods SoldCash outflow associated with goods sold can be determined with changes in inventory and accounts payable. Figure 14-8 Determining cash outflow from inventory purchases29Deriving Cash Flow from Accrual Financial Statements Operating – Miscellaneous ExpensesCash outflow related to miscellaneous expense can be determined by analyzing changes in accrued payables.Figure 14-9 Determining cash outflow from miscellaneous expenses30Deriving Cash Flow from Accrual Financial Statements Operating – Insurance ExpenseCash outflow related to insurance expense can be determined by looking at changes to the prepaid insurance account.Figure 14-10 Determining cash outflow related to insurance expense31Deriving Cash Flow from Accrual Financial Statements Operating – Depreciation, Amortization, and Losses on SalesThere is no operating cash effect with these items .Note : They are a part of net income and therefore the operating section of the statements of cash flows must be adjusted for these items under the indirect method of preparing the statements of cash flows. 32Deriving Cash Flow from Accrual Financial Statements Operating – Interest ExpenseCash outflow related to interest expense can be determined by looking at changes in the discounts on note payable account.Figure 14-11 Determining cash outflow related to interest expense33Deriving Cash Flow from Accrual Financial Statements Operating – Income Tax ExpenseCash outflow related to income tax expense can be determined by looking at changes in the income tax payable account.Figure 14-12Determining cash outflow related to income taxes34Deriving Cash Flow from Accrual Financial Statements InvestingCash inflows and outflows associated with investing activities are analyzed by looking at changes in the long-lived asset accounts. Outflows occur when assets are acquired. Figure 14-13 Determining cash outflow for land purchases35Deriving Cash Flow from Accrual Financial Statements Investing (cont’d)Cash inflows and outflows associated with investing activities are analyzed by looking at changes in the long-lived asset accounts. Inflows occur when assets are sold. Figure 14-14 Determining cash inflow from sale of machinery36Deriving Cash Flow from Accrual Financial Statements Financing – Principal Payment on Notes PayableA pay down on a note payable would be do to the payment of cash unless another transaction is indicated. Figure 14-15 Determining cash outflow from payments on notes37Deriving Cash Flow from Accrual Financial Statements Financing – Issuance of Common Stock and Treasury StockCash inflows from the issuance of common stock and treasury stock can be determined by looking at changes in the common stock, additional paid-in capital and treasury stock accounts. (See Next Slide)38Figure 14-16 Determining cash inflowfrom stockissuances39Deriving Cash Flow from Accrual Financial Statements Financing – Cash DividendsThe cash dividend payment can be determined by looking at changes in the dividend payable account. Figure 14-17 Determining cash outflow from dividend payments40The Complete Statement of Cash Flows - The Direct Method Figure 14-18 Statement of cash flowsfor ABC Enterprises: Direct Method41The Complete Statement of Cash Flows - The Indirect Method To understand the adjustments to get from net income to Cash Flow from Operations, we can classify the adjustments into various categories:Noncash changes to non current accountsChanges in current noncash accounts(See Next Slide for Example)42The Complete Statement of Cash Flows - The Indirect Method Figure 14-19 Statement of cash Flows: Indirect Method43The Complete Statement of Cash Flows - The Indirect Method Figure 14-20 Explaining current adjustments to net income in the calculation of net cash provided (used) by operating activities44Concept Practice 4 45Concept Practice 4 (cont.) 46Learning Objective 5Describe how the statement of cash flows can be analyzed.47Analyzing the Statement of Cash Flows: An ApplicationOperating Activities may provide positive or negative cash flows regardless of net income (see ABC Enterprises Inc. in previous slides). Remember that Operating Activities and the cash in this section are considered more sustainable.Looking at Investing and Financing Transactions helps to further explain the cash management of the organization during a given period. Is the organization acquiring or selling long-term assets? How were activities financed beyond cash from operations - through debt or equity? Noncash transitions in the notes may also provide key additional information about how a company is operating, managing its growth, and/or addressing solvency.48International Perspective: The Statement of Cash FlowsInterpreting the statement of cash flows for large multinational corporations can be tricky for a variety of reasons.Many involve consolidationsDoing business in multiple countries means multiple currenciesExchange gains and losses are noncash, but do affect income49Which one of the following is consistent with a company recording a large operating income but having a net cash outflow from operations? a. A great amount of depreciation expenseb. An increase in accounts receivable and inventoryc. An increase in accounts payabled. Acquisition of new plant assets for cash50Which one of the following is consistent with a company recording a large operating loss but still having healthy cash flows from operations? a. A large amount of depreciation and/or amortization expenseb. An increase in accounts receivable and inventoryc. A decrease in accounts payabled. All sales are on a cash basis51Wiley © 2018