intermediate accounting Statement of Cash Flows and Articulation.ppt

1、,Statement of Cash Flows and Articulation,Intermediate Accounting,17E,Stice | Stice | Skousen, 2010 Cengage Learning,PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University,Learning Objectives,Describe the circumstances in which the cash flow statement is a par

2、ticularly important companion of the income statement.,Outline the structure of and information reported in the three main categories of the cash flow statement: operating, investing, and financing.,(continues),Compute cash flow from operations using either the direct or the indirect method.,Prepare

3、 a complete statement of cash flows and provide the required supplemental disclosures.,Assess a firms financial strength by analyzing the relationships among cash flows from operating, investing, and financing activities and by computing financial ratios based on cash flow data.,Learning Objectives,

4、(continues),Demonstrate how the three primary financial statements tie together, or articulate, in a unified framework. Use knowledge of how the three primary financial statements tie together to prepare a forecasted statement of cash flows.,Learning Objectives,Describe the circumstances in which th

5、e cash flow statement is a particularly important companion of the income statement.,OBJECTIVE 1,What Good is a Cash Flow Statement?,It explains the change during the period in cash and cash equivalents.,Sometimes earnings fail. Everything is on one page. It is used as a forecasting tool.,Pro Forma

6、Cash Flow Statement,A pro forma cash flow statement is a prediction of what the actual cash flow statement will look like in future years if the operating, investing, and financing plans are implemented.,Outline the structure of and information reported in the three main categories of the cash flow

7、statement: operating, investing, and financing.,OBJECTIVE 2,Cash Equivalent,A cash equivalent is a short-term, highly liquid investment that can be converted easily into cash.,To qualify as a cash equivalent, an item must be:,Readily convertible into cash,So near to its maturity that there is insign

8、ificant risk of changes in value due to changes in interest rates,Cash Flow Activities,Operating activities include those transactions and events that enter into the determination of net income. Investing activities include those transactions and events that involve the purchase and sale of financia

9、l instruments not intended for trading purposes; property, plant, equipment; and other assets not generally held for resale, as well as the making and collecting of loans.,Financing activities include those transactions and events whereby resources are obtained from or repaid to owners and creditors

10、.,Cash Flow Activities,(continues),(continues),Cash Flow Pattern,The normal pattern of positive inflows or negative outflows of cash reported are as follows: Cash from operating activities, + Cash from investing activities, Cash from financing activities, + or ,Noncash Investing and Financing Activi

11、ties,Noncash investing and financing activities affect an entitys financial position but not the entitys cash flow. Examples include:,Significant transactions should be disclosed separately. These transactions do not appear in the statement of cash flows.,Equipment purchased with a note payable Land

12、 acquired by issuing stock,Cash Flow Categories Under IAS 7,The provisions of IAS 7, Statement of Cash Flows, are more flexible than the U.S. rules contained in SFAS No. 95. A summary of these differences are shown next.,Types of Cash Flow,Compute cash flow from operations using either the direct or

13、 the indirect method.,OBJECTIVE 3,Operating Activities Section,The direct method is essentially a reexamination of each income statement item with the objective of reporting how much cash was received or disbursed in association with the item.,The indirect method begins with net income as reported o

14、n the income statement and adjusts this accrual amount for any items that do not affect cash flow.,Both methods produce identical results.,Operating Activities Section,Indirect Method,The indirect method net income is adjusted for items that do not affect cash flow. There are three basic types.,Reve

15、nues and expenses that do not involve cash inflow or outflow.,Gains and losses associated with investing or financing activities.,Adjustments for changes in current operating assets and liabilities that indicate noncash sources of revenues and expenses.,Orchard Blossom Company,Direct Method,Sales an

16、d Cash Collected from Customers,Beginning accounts receivable$ 40 +Sales 150 =Cash available for collection$190 Ending accounts receivable 60 =Cash collected from customers$130,Direct Method,Cost of Goods Sold and Cash Paid for Inventory,Ending inventory$ 75 +Cost of goods sold 80 =Required inventor

17、y$155 Beginning inventory 100 =Inventory purchased this year$ 55,Direct Method,Wages Expense and Cash Paid for Wages,Beginning wages payable$ 7 +Wages expense 25 =Total obligation to employees$32 Ending wages payable 10 =Cash paid for wages$22,Operating Activities Section of the Statement of Cash Fl

18、owsDirect Method,Direct Method,Indirect Method,Sales,The $20 increase in accounts receivable means that cash collected is $20 less than the $150 the sales number indicates. So, the necessary adjustment is to subtract the $20 to show that $130 was collected on account.,Cost of Goods Sold,The $25 decr

19、ease in inventory means that although cost of good sold of $80 is included in the income statement, less cash was used to purchase inventory than suggestedadd $25 to net income.,Indirect Method,Wages Expense,The $3 increase in wages payable indicates that only $22 of the $25 expense was paid in cash

20、. The $3 increase in wages payable is added to net income.,Indirect Method,Depreciation Expense,The $30 depreciation expense is a noncash expense. It must be added back to net income because it was deducted from net income to determine the accrual net income.,Indirect Method,Indirect Method,Importan

21、t Point,Depreciation is not a source of cash. Because you added depreciation back to net income as an adjustment using the indirect method does not mean that there is an inflow of cash. However, depreciation does lower the amount of income taxes paid.,Comparison of Direct and Indirect Methods,Direct

22、 Method,Indirect Method,Comparison of Direct and Indirect Methods,Prepare a complete statement of cash flows and provide the required supplemental disclosures.,OBJECTIVE 4,Step 1,Compute how much the cash balance changed during the year.,(continues),Cash increased $10 during the year.,(continues),St

23、ep 2,Convert the income statement from an accrual-basis to a cash-basis summary of operations. Start with depreciation.,(continues),(continues),(continues),(continues),(continues),(continues),(continues),Step 3,Analyze the long-term assets to identify the cash flow effects of investing activities.,(

24、continues),Investing Activities,Cash Inflow Sale of plant assets Sale of securities, other than trading securities Collection of principal on loans,Cash Outflow Purchase of plant assets Purchase of securities, other than trading securities Making of loans with other entities,Land,Because there is no

25、 indication of a land sale, we conclude that land increased by $15 during the year.,(continues),The building account increased $40. We are told that a building was sold for $32 during the year.,(continues),Building,Building,Cash proceeds (given)$32 Book value ($36 $14) 22 Gain on sale of building$10

26、,(continues),(continues),Building,Building(s) costing $76 must have been purchased during the year.,Building,Step 4,Analyze the long-term debt and stockholders equity accounts to determine the cash flow effects of any financing transactions.,Financing Activities,Cash Inflow Issuance of own stock Bor

27、rowings,Cash Outflow Dividend payments Repaying principal on borrowing Treasury stock purchase,Long-Term Debt,We can infer that Orchard Blossom repaid $21 in long-term loans during the year.,Retained Earnings,Retained earnings decreased by $9. We know there was a $15 net income, so we can use a T-ac

28、count to determine the amount of the dividend.,Long-Term Debt,The $6 debit, or “squeeze” figure, has to be the dividends declared (and we will assume paid) during the year.,Step 5,Prepare a formal statement of cash flows.,Step 6,Prepare supplemental disclosures.,Cash paid for interest and income tax

29、es,Noncash investing and financing activities,Assess a firms financial strength by analyzing the relationships among cash flows from operating, investing, and financing activities and by computing financial ratios based on cash flow data.,OBJECTIVE 5,(continues),(concluded),Cash Flow to Net Income,M

30、easure of earnings quality Tends to be greater than 1 Should remain fairly stable for the years for a specific company,Cash Flow Ratios,Cash Flow to Net Income,Cash Flow Ratios,Cash Flow Adequacy,Measures relationship between investment spending and cash generated by operations Indicate a companys attitude towards reinvestment in long-lived production assets When ratio is small it indicates that cash flows from operations fall short of funding grow