Kế toán, kiểm toán - Chapter 6: Statement of cash flows

CHAPTER 6STATEMENT OF CASH FLOWSINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Indicate the primary purpose of the statement of cash flows.Distinguish among operating, investing, and financing activities. Identify sources of information for preparing the statement of cash flows. Differentiate between net income and net cash provided by operating activities. Determine net cash from investing and financing activities. Prepare a statement of cash flows. Analyze the statement of cash flows.Learning ObjectivesStatement PreparationUsing Cash Flows to Evaluate a CompanyPurpose ClassificationsSignificant noncash activities Format Preparation Indirect and direct methodsFirst year of operations Second year of operations Summary of indirect methodFree cash flow Assessing liquidity and solvency LimitationsStatement of Cash FlowsPurpose and FormatLO 1 Indicate the usefulness of the statement of cash flows.Primary purpose: To provide information about cash receipts, cash payments, and the net change in cash resulting fromoperating, investing, and financing activities of a company during the period.Purpose of the Statement of Cash FlowsProvides answers to the following:Where did the cash come from during the period?What was the cash used for during the period?What was the change in the cash balance during the period?LO 1 Indicate the usefulness of the statement of cash flows.Purpose of the Statement of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Classification of Cash FlowsIncome Statement ItemsOperating ActivitiesGenerally Long-Term Asset ItemsInvesting ActivitiesGenerally Long-Term Liability and Equity ItemsFinancing ActivitiesThe term “Cash” = Cash and cash equivalents.2 The basis recommended by the FASB for the statement of cash flows is actually “cash and cash equivalents.” Cash equivalents are short-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under this definition. Examples of cash equivalents are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs.Cash and Cash Equivalent Text Footnote 2Classification of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Classification of Typical Inflows and Outflows Illustration 6-1Income Statement ItemsClassification of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Classification of Typical Inflows and Outflows Generally Long-Term Asset ItemsIllustration 6-1Classification of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Classification of Typical Inflows and Outflows Illustration 6-1Generally Long-Term Liability and Equity ItemsClassification of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Examples:Issuance of common stock to purchase assets.Conversion of bonds into common stock.Issuance of debt to purchase assets.Exchanges of plant assets.Reported at the bottom of the statement of cash flows or in a separate note to the financial statements.Significant Noncash TransactionsLO 2 Distinguish among operating, investing, and financing activities.Format of the Statement of Cash FlowsOrder of Presentation:Operating activities. Investing activities.Financing activities.Report inflows and outflows from investing and financing activities separately.Direct MethodIndirect MethodLO 2 Distinguish among operating, investing, and financing activities.Review: The FASB encourages the use of the indirect method over the direct method. FalseTrueFalseFormat of the Statement of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Format of the Statement of Cash FlowsLO 2 Distinguish among operating, investing, and financing activities.Illustration 6-2Three Sources of Information:Comparative balance sheetsCurrent income statementAdditional informationLO 3 Identify sources of information for preparing the statement of cash flows. Preparing the Statement of Cash FlowsThree Major Steps:Step 1. Determine the net increase/decrease in cash.Step 2. Determine net cash provided/used by operating activities.Step 3. Determine net cash provided/used by investing and financing activities.Convert net income from an accrual basis to a cash basis. Use either indirect or direct format. Both methods arrive at same totals.Investing and financing activities are the same for both methods.LO 3 Identify sources of information for preparing the statement of cash flows. Indirect and Direct MethodsDetermining the Net Increase/Decrease In Cash (Step 1)Preparation of Statement of Cash FlowsLO 3 Identify sources of information for preparing the statement of cash flows. Indirect Method Illustration 6-4Determining Net Cash Provided/Used byOperating Activities (Step 2)Indirect Method Preparation of Statement of Cash FlowsLO 4 Differentiate between net income and net cash provided by operating activities.Illustration 6-6Indirect Method Adjusts net income for items not affecting cash.Common adjustments to Net Income (Loss):Depreciation and amortization expense.Gain or loss on disposition of long-term assets.Change in current assets and current liabilities.Preparation of Statement of Cash FlowsIllustration 6-9LO 4 Differentiate between net income and net cash provided by operating activities.Review: The net increase (decrease) in cash reported on the statement of cash flows should reconcile the beginning and ending cash balances reported in the comparative balance sheets. FalseTrueTruePreparation of Statement of Cash FlowsLO 4 Differentiate between net income and net cash provided by operating activities.Exercise: Krauss Company’s financial statements for the year ended December 31, 2007, contained the following condensed information.Operating Activities—Indirect MethodLO 4 Differentiate between net income and net cash provided by operating activities.Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2).Operating Activities—Indirect MethodLO 4 Differentiate between net income and net cash provided by operating activities.Review: Under the accrual basis of accounting, net income is usually the same as net cash flow from operating activities.FalseTrueFalseLO 4 Differentiate between net income and net cash provided by operating activities.Operating Activities—Indirect MethodReview: When accounts receivable decrease during a period, cash-basis revenues are higher than revenues reported on an accrual basis.FalseTrueTrueLO 4 Differentiate between net income and net cash provided by operating activities.Operating Activities—Indirect MethodExercise (a): Plant assets that had cost $20,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300.LO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsDetermining Net Cash Flow from Investing and Financing Activities (Step 3)OIFLO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsExercise (b): During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $43 a share.LO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsOIFLO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsExercise (c): The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash.LO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsOIFLO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsExercise (d): During the year, treasury stock costing $47,000 was purchased.LO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsOIFLO 5 Determine net cash from investing and financing activities.Preparation of Statement of Cash FlowsLO 6 Prepare a statement of cash flows.Statement of Cash FlowsOIFSummary of Conversion to Net Cash Provided by Operating Activities—Indirect MethodIllustration 6-18 & 19LO 6 Prepare a statement of cash flows.Amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or adding to its liquidity.LO 7 Analyze the statement of cash flows.Free Cash FlowUsing Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a CompanyRatio indicates whether the company can pay off its current liabilities from its operations. A ratio near 1:1 is good.LiquidityCash Provided by Operating ActivitiesAverage Current Liabilities Current Cash Debt Coverage Ratio =LO 7 Analyze the statement of cash flows.Using Cash Flows to Evaluate a CompanyLiquidityLO 7 Analyze the statement of cash flows.Illustration 6-23Ratio indicates a company’s ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations.SolvencyCash Provided by Operating ActivitiesAverage Total Liabilities Cash Debt Coverage Ratio =Using Cash Flows to Evaluate a CompanyLO 7 Analyze the statement of cash flows.Using Cash Flows to Evaluate a CompanySolvencyLO 7 Analyze the statement of cash flows.Illustration 6-24ReviewThe current cash debt coverage ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.Using Cash Flows to Evaluate a CompanyLO 7 Analyze the statement of cash flows.Typical Company Product Life CycleUsing Cash Flows to Evaluate a CompanyLO 7 Analyze the statement of cash flows.Cash flow from operations is not accrual net income.Cash flow from operations can be misleading (Worldcom fraud).Limitations of the Statement of Cash FlowsLO 7 Analyze the statement of cash flows.Copyright © 2008 John Wiley & Sons, Inc. 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