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74 Cards in this Set

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These activities ivolve the cash effects of transactions that enter the into the determination of net income such cash recipts from sale of goods and services and cash payments to suppliers and employees for acquisitions of inventory expenses
operating activities
These activites generally involve long term assets and include making and collecting loans and acquiring and disposing of investments and productive long lived assets
investing activities
these activities involve liability and stockholders equity items and include obtaining cash from creditors and repaying the amounts borrowed and obtaining capital from owners and providing them iwth a return on their investment
financing activites
These are operating items and they come from the income statement
Cash inflows from sale of goods or services and returns on loans (interest) and on equity securities (dividends)
Cash outflows to suppliers for inventory, employees for services, government for taxes, lenders for interet, others for expenses
These are Investing items and they ususally are long term asset items
Cash inflows from the sale of property plant and equipment, the sale fo debt or equity securities of other entities, the collection of principal on loans to other entities
AND
cash outflows for the purchase of PP&E, the purchase of debt or equity securities and other entities, the making of loans to other entities
These are Financing items and they are generally long term liability and equity items
cash inflows from equity securities and the issuance of bonds and notes
AND
cash outflows to stockholders as dividends and outflows to redeem long term debt or reacquire captial stock
Operating activites involve
income statement items
Investing activies involve
cash flows resulting from changes in investments and long term asset items
financing activites involve cash flows resulting from
changes in long-term liability and stockholders equity items
receipts of investment income and payments of interest to lenders are operating activites when
they are reported on the income statement
Companies report the cash recieved from the sale of PPE at a gain as an ___ activity
investing
Companys report a gain or loss on the payment of debt is generally part of the cash flow erlated to the repqyment of the amount borrowed and is classified as a
financing activity
The order of the Statement of Cash Flows is
Operating
Investing
Financing
Steps in preparation for the SCF
Determine the change in cash
determine the net cash flow from operating activities
Determine the net cash flows from investing and financing activities
The information to prepare the statements comes from three sources
Balance sheets
current income statement
selected transactional data
A company may convert net income to net cash flow from operating activites in two different ways
direct method (income statement method) or the indirect method (reconciliation method)
the direct method
deducts operating cash disburesments from the operating cash reciepts

cash collected from revenues- Cash payments for expenses= IBIT, IBIT - Cash payment for taxes - Net cash provided by operating activities
the indirect method
starts with net income and converts it to net cash flow from operating activites.
In other words it adjusts net income for tiems that affected reported net income but did not affect cash by netting adjustments in accounts receivable and payable and combining that with Net Income
the FASB recommends that the ___ be used when reporting net cash flow from operating activities
direct method
If a company uses the direct method when reporting casf flows from operating activies FASB requires that the comapny provide in a separted schedule
reconcilliation fo net income to net cash flow
Increase in stock indicates a
financing activity cash inflow
the payment of dividends is a
financing activity outflow
the increase in cash reported should agree with teh increase in the
comparative balance sheets as the change in cash accounts
a decrease in accounts receivable indicates

how should it be handled
cash recipts are higher than revenues reported on an accrual basis. Add the decrease to income.
an increase in prepaid expenses indicate

how should it be handled
a decrease in cash during the period

that the company must deduct from net income the increase in prepaid expenses.
a decrease in accounts payable indicates

how should it be handled
that the company incurred a greater amount of expense than the amount of cash it disbursed

add the increase in AP to net income
Depreciation expense should be handled how
add it back to net income to arrive at net cash flow from operating acitivities
An increase in AR means

An increase in accounts receivable is handled how

(indirect method)
cash recipts were lower than revenues,

deduct the increase in AR from net income
Increase in accounts payable means

should be handled how
(indirect method)
becuase business incurred expenses that are not yet paid,

add the increase in AP to net income
An increase in land means

should be handled how
the company purchased land

report as use of cash
increase in building and related accumulated depreciation should be handled how
acquired a building

is an investing cash outflow reported in the investing section

the depreciation expense has no effect on the amount of cash
Increase in equipment and related accumulated depreciation should be handled how
outflow of cash from an investing activity

depreciation expense entry for the period explains the increase in ACC DEP account
Increase in bonds Payable
inflow of cash from a financing activity
increase in retained earnings
The company adjusts net income to net cash provided by operating activities in the opreating activites section

Payment of dividends is a financing activity that involves cash outflow
Format of the Statement of Cash Flows
Net Income
ADJUSTMENTS
depreciation expense
decrease in accounts receivable
increase in prepaid expense
increase in accounts payable
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of land
purchase of building, equipment
Net cash used by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of bonds
Payment of cash dividends
Net cash provided by financing activities
Increase in accounts receivable should be handled how
deduct the inrease from net income to convert to cash basis
Increase in inventories
represents an operating use of cash, not an expense THEREFORE deduct this amount from net income
Decrease in prepaid expenses
add the decrease back to net income to arrive at net cash flow from operating activities
Decrease in accounts payable
deduct the decrease in accounts payable from net income
Increase in accumulated depreciation
add back to net income the total depreciation charged to the income statement
Loss on sale of equipment
add back to net incoem the loss on the sale of equipment

The loss does not reduce cash but it does reduce net income
Land sale
investing activity, reported as source of cash
equipment purchase
investing activity cash outflow
equipment purchase
investing activity cash inflow
decrease in bonds payable
financing decrease in cash
increase in common stock account
financing increase in cash
increase in retained earnings
from net income (operations)
decrease in retained earnings
payment of dividends (financing activity decrease in cash)
Important points to remember
Comparative balance sheets provide basic information from which to prepare the report

an analysis of the retained earnings account is necessary.

The statement includes all changes that have passed through cash or resulted in an increase or decrease in cash

writedowns, ammortization charges, depreciation are not inflows OR outflows of cash they must be added or subtracted from net income to arrive at cash provided by operating activities
The _______ method is the most widely used
indirect
The indirect method consists of
adding back or deducting from net income those items that had no effect on cash.
Under the direct method the statement of csh flows reports net cash flow from operating activites as major classes
operating cash receipts
cash disbursements
under the direct method companies compute net cash provided by operating activies by adjusting each item in the income statemetn from the __________ to the ______ basis. On
accrual
cash
An efficient way to apply the direct method would be to
analyze the revenues and expense reported in the income statement in the order in which they are listed.
Cash receipts from custoers is calculated by finding the ____ and ___
revenues from sales and deducting the accounts receivable
CASH PAYMENTS TO SUPPLIERS
adjust cost of goods sold for the change in inventory, add the increase in inventory to cost of goods sold to arrive at purchaes, determine the cash payments to suppliers by adjusting purchases for the change in accounts payable.
Cash payments for operating expenses
adjust the operating expenses for any changes in prepaid expenses and accrued expenses payable

deduct from operating expenses the increase in accrued expenses payable, and add to operating expenses a decrease in accrued expenses payable
The principal advantage of the direct method is that it
shows operating cash receipts and payments
The direct method gives useful information because it reveals
the company's ability to generate sufficient cash from operating activities to pay its debts

to reinvest in its opeations

make distributions to its owners
The advantage of the indirect method is that it
focuses on teh differences between net income and net cash flow from operating activites
Companies that use the direct method are required to report the following classes fo operating cash receipts and payments
cash collected from customers
interest and dividends received
other operating cash receipts

cash paid to employees and suppliers
interest paid
income taxes paid
other operating cash payments
Companies using indirect method must disclose separately the
changes in inventory, receivables, and payables, interest paid, and income taxes paid.
Items that must be added back to net income are
ammortization of limited life intangibles
amortization of deferred costs such as bond issue costs
Ammortization of bond discount or premium
Changes in deferred income taxes affect net income but have no effect on cash so it must be
added back to net income
An allowance for doubtful expense results in a change of bad debt expense, and it should be (indirect method)
added back to net income to arrive at net cash flow from opearing activities
Using the direct method a company should handle the allowance for doubtful accounts how
do not net against accounts receivable
THe purchase of short term available for sale securites affects net income_____ and cash ______
does not affect net income
decreases cash
trading securities should be handled how
classify as cash flows from operaing activities
cash dividends payable are reported how
not reported until paid
losses are
noncash charges to the income statement add to net income
gains are
deducted from net income to avoid double counting because it was alredy counted as cash porceeds form the sale
The company must _____ net income by the amount of compensation expense from stock options incomputing net cash flow from operating activies
increase
pension expenses must be recorded
by adjusitng net inome by the differnce between cash paid and the expense recorded
FASB requires tnat all income taxes are classified
operating cash outflows