Statement of Cash Flows
Statement of Cash Flows ACCT 2013
Arkansas Tech University
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This 4 page Class Notes was uploaded by Riley Lassiter on Wednesday February 3, 2016. The Class Notes belongs to ACCT 2013 at Arkansas Tech University taught by Mrs. Laura Griffin in Spring 2016. Since its upload, it has received 24 views. For similar materials see Principles of Accounting II in Accounting at Arkansas Tech University.
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Date Created: 02/03/16
Chapter 16: Statement of Cash Flows What is the Statement of Cash Flows? o Statement of Cash Flows Reports on a business’s cash receipts and cash payments for a specific period. Reports on the cash flows. Cash receipts and cash payments Reports why cash increased or decreased Covers a span of time and is dated “Year Ending Month Day, Year” o Purpose of the Statement of Cash Flows Predict future cash flows Evaluate management Predict ability to pay debts and dividends. o Classification of Cash Flows Operating Activities Activities that create revenue or expense in the entity’s business; a section of the statement of cash flows. Daytoday operations Includes cash receipts for interest, dividend income, and cash payments for interest and income tax expense. Investing Activities Activities that increase or decrease longterm assets; a section of the statement of cash flows Includes the loaning (cash outflow) and collecting (cash inflow) of longterm notes receivable. Financing Activities Activities that increase or decrease longterm liabilities and equity; a section of the statement of cash flows. Issuing stock, paying dividends, and buying and selling treasury stock. Notes payable, bonds payable, and mortgages payable. Noncash Investing and Financing Activities Investing and financing activities that do not involve cash Equipment in return for a notes payable o Two Formats for Operating activities Indirect Method A format of the operating activities section of the statement of cash flows; starts with net income and reconciles to net cash provided by operating activities. Direct Method A format of the operating activities section of the statement of cash flows; lists the operating cash receipts and cash payments. How is the Statement of Cash Flows Prepared Using the Indirect Method? o 1. Use net income to and adjust for increases or decreases in current assets and current liabilities. Adjust for gains or losses from longterm assets and noncash expenses. o 2. Review the longterm assets section of the balance sheet. o 3. Review the longterm liabilities and equity sections of the balance sheet. o 4. Compute the net increase or decrease in cash during the year. o 5. Prepare a separate schedule reporting any noncash investing and financing activities. o Cash flows from operating activities Accrued expenses decrease net income, but the company has not paid cash if the expenses are accrued. Adjustments to net income credited “Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities” Depreciation, depletion, and amortization expenses. Added back to net income to reconcile net income to net cash flow from operating activities. Gains and losses on the Disposal of Longterm assets. Gains increase net income, so subtracted from operating activities Losses decrease net income, so added Changes in current assets and current liabilities An increase in a current asset other than cash causes a decrease in cash A decrease in a current asset other than cash causes an increase in cash. An increase in a current liability causes an increase in cash. A decrease in a current liability causes a decrease in cash. Evaluating Cash flows from operating activities Starts with accrual basis net income followed by adjustments to determine the cash basis o Cash Flows from Investing Activities Evaluate T Accounts Determine amount of cash received for disposal of plant assets. o Cash Flows from Financing Activities Longterm liabilities Listed first Common stock and treasury stock Recorded next Computing dividend payments Lastly o Net change in cash and cash balances Net increase or decrease in cash is computed Beginning cash balance Ending cash balance o Noncash Investing and Financing Activities Separate How do we use free cash flow to evaluate business performance? o Free Cash Flow The amount of cash available from operating activities after paying for planned investments in longterm assets and after paying dividends to shareholders. Net cash provided by operating activitiescash payments planned for investments in longterm assetscash dividends. How the Statement of Cash Flows is prepared using the direct method? o Financial accounting standards board (FASB) prefers the direct method. o Cash flows from operating activities Cashbasis income statement Cash collections from customers Sales revenue Payments for interest expense and income tax expense Reported separately from other expenses Noncash expenses and gains or losses on disposal of longterm assets are reported on the income statement but are not included in the operating activities when using the direct method. Company’s Name Statement of Cash Flows For Year Ending Month Day, Year Operating Activities: Net Income Adjustments to Reconcile Net Income to Cash Provided by (used) in Operations: + Depreciation Expense +Amortization Expense/Depletion Expense Gains/+Losses Changes in Current Assets and Current Liabilites ( CA / CA +) ( CL+ / CL) Net Cash Flows Provided (used) by Operations Investing Activities: Cash Paid +Cash Received Net Cash Flows Provided (used) by Investing Activities Financing Activities: Cash Paid +Cash Received Net Cash Flows Provided (used) by Financing Activities Net Increase (Decrease) in Cash (*Combine the 3 Net Cash Flows*) Beginning Cash Flow Ending Cash Flow NonCash Investing and Financing Activities (Things that will affect future cash flows)
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