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Chapter Notes


Chapter Notes ACC 211

Principles of Financial Accounting
Seth Levine

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Principles of Financial Accounting
Seth Levine
Class Notes
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This 5 page Class Notes was uploaded by an elite notetaker on Friday August 28, 2015. The Class Notes belongs to ACC 211 at University of Miami taught by Seth Levine in Fall 2015. Since its upload, it has received 31 views. For similar materials see Principles of Financial Accounting in Accounting at University of Miami.


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Date Created: 08/28/15
Study Guide Exam 3 FINAL Chapter 812 11252013 Croonenberghs Emilie A company may have net income but if it is not receiving payments from its customers it will have a quotliquidity issue and its inability to service its debts may drive to bankruptcy 1 Classi cation of the Statement of Cash Flows Statement of Cash Flow a Statement of Cash Flows explains how the amount of cash in the balance sheet at the beginning of the period has become the amount of cash reported at the end of the period b Cash Equivalents a shortterm highly liquid investment with an original maturity of less than three months Readily convertible to known amounts of cash So near to maturity there is little risk that their value will change if interest rates change 0 Cash Flow from Operating Activities a Cash Flow from Operating Activities cash in ows and out ows directly related to earnings from normal operations Cash in ows and out ows that relate directly to revenues and expenses reported on the income statement These are the major daytoday activities that the company does b The Direct Method of presenting the operating activities section of the cash ow statement reports components of cash ows from operating activities as gross receipts and gross payments It subtracts operating cash disbursements form operating cash collections to arrive at cash ows from operations c The Indirect Method of presenting the operating activities section of cash ow statement adjusts net income to compute cash ows from operating activities It adjusts the previously calculated accrual net income from the income statement to re ect only cash receipts and cash disbursements d IASB amp FASB prefer the direct method because it is straightforward listing of cash in ows and out ows and it easier for investors to understand Most companies use the indirect method 0 Cash Flow from Investing Activities a Cash Flow from Investing Activities are cash in ows and out ows related to the acquisition or sale of productive facilities and investments in the securities of other companies Cash in ows and out ows related to the purchase and disposal of longlived assets and investments in the securities of other companies that are not cashequivalent 0 Cash Flow from Financing Activities a Cash Flow from Financing Activities are cash in ows and out ows related to external sources of nancing owners and creditors for the enterprise Includes exchanges of cash with creditors debtholders and owners stockholders The difference between these cash in ows and out ows is called net cash in ow out ow from nancing activities 0 Net Increase Decrease in Cash a Net Increase or Decrease in Cash the net cash ows from operating activities investing activities and nancing activities must equal the net increase decrease in cash 0 Relationships to the Balance Sheet and Income Statement a Prepare the Statement of Cash Flows to prepare the statement of cash ows you need the following data Comparative balance sheets used in calculating the cash ows for all activities A complete Income Statement used to calculate cash ows from operating activities Additional details for speci c accounts selected accounts where the total change amount in account balance during the year does not reveal the underlying nature of the cash ows 2 IMPORTANT CASH FLOW STATEMENT Cash Flow Statement Reminders a Keep In Mind there are several important things to remember If you purchase property or equipment it is an investing activity If you purchase inventory it is an operating activity Interest payments on funds borrowed are operating activity while the actual borrowing is a nancing activity Dividends paid on the company s stock is a nancing activity If an asset increases it is a USE of funds If a liability increases it is a SOURCE of funds Operating Activities Operating Activities Collections from customers Cash payments to suppliers Interest and dividends collected Cash payments to employees Other operating receipts Interest and taxes paid Other operating cash payments Investing Activities Investing Activities VVV VVVV gt Sale of property plant and gt Purchase of property plant and equipment equipment gt Sales of securities that are NOT gt Purchase of securities that are NOT cash cash equivalent equivalents gt Receipt of loan payments gt Making loans Financing Activities Financing Activities gt Borrowing cash from creditors gt Repayment of amounts borrowed gt Issuing equity stock securities gt Repurchase of equity shares treasury gt Issuing debt liability securities stock gt Payment of dividends 3 Reporting and lnterpreting Cash Flows from Operation Activities 0 Reporting Cash Flows from Operating Activities Indirect Method a Using the Indirect Method this required two steps Step 1 Adjust net income for depreciation and amortization expense and gains and losses on sale of investing assets such as property plant and equipment and investments oz Since depreciation and amortization expense are subtracted in computing net income but not affect cash we always add back oz Gains on sales of property plant and equipment are subtracted and losses on such sales are added Step 2 Adjust net income for changes in assets and liabilities marked as operating 0 When converting always follow oz Add the change when an operating asset decreases or an operating liability increases oz Subtract the change when an operating asset increases or an operating liability decrease 0 Quality of Income Ratio a Quality of Income Ratio measures the portion of income that was 39 In Qua ity of DashI bw from Operating Activitl Net Income A quality of income ratio higher than 1 usually indicates higher quality earnings If it the ratio is lower than 1 it is considered to indicate low quality earnings 4 Reporting and lnterpreting Cash Flows from Investing Activities 0 Reporting Cash Flows from Investing Activities a Reporting Cash Flows from Investing Activities requires analysis of the accounts related to property plant and equipment intangible assets and investments in the securities of other companies Only purchases paid for with cash or cash equivalents are included The amount of cash that is received from the sale of assets is included regardless of whether the assets are sold at a gain or loss 0 Capital Acquisitions Ratio a Capital Acquisitions Ratio re ects the portion of purchases of property plant and equipment nanced from operating activities without the need for outside debt or equity nancing or the sale of other investments or xed assets Capital Acc a39slti nw from Operating ActiviI Cash Paid for Property Plant and Equi A high ratio indicates less need for outside nancing for current and future expansion 5 Reporting and Interpreting Cash Flows from Financing Activities 0 Reporting Cash Flows from Financing Activities a Reporting Cash Flows from Financing Activities re ects changes in two current liabilities Notes Payable to Financial Institutions and Current Maturities of LongTerm Debt These are the relationships that come up the most Cash repayments of principal are cash ows from nancing activities Interest payments are cash ows from operating activities Dividend payments are cash ows from nancing activities If debt or stock is issued for other than cash it is not included in this section 5 Completing the Statement and Additional Disclosures Statement Structure a Statement Structure when the net increase or decrease in cash and cash equivalents is added to the cash and equivalents taken from the beginning of the period balance sheet Noncash Investment and Financing Activities a Noncash Investing and Financing Activities are transactions that do not have direct cash ow effects they are reported as a supplement to the statement of cash ows in narrative or schedule form


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