Financial Accounting Chapter 14 Notes
Financial Accounting Chapter 14 Notes ACC-142
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This 5 page Class Notes was uploaded by bauer47 Notetaker on Thursday March 10, 2016. The Class Notes belongs to ACC-142 at Iowa Central Community College taught by DawnA. Humburg in Fall 2015. Since its upload, it has received 13 views. For similar materials see Financial Accounting in Accounting at Iowa Central Community College.
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Date Created: 03/10/16
Chapter 14 Outline Statement of Cash Flows (SCF); ISREBS (done on the accrual basis); SCF (cash basis) Before we begin with SCF, let’s review the other financial statements: *IS > single step income statement (first 4 chapters; service); revenues – expenses = net income (service business) Multistep income statement (Ch. 5); Sales Rev. (CR) – S. Disc. (DR) – SR&A (DR) = Net Sales – COGS (DR) = Gross Profit – Total op. expenses = Operating income + or – other revenue/expenses = net income *RE > statement of retained earnings; Beg. RE + net income (IS) – dividends = End. RE *BS > classified balance sheet; CA + Plant assets (PPE) = Total assets; CL+ LTL = Tot. liab. + SHE (two main parts are PIC and RE (list End. RE from RE) *note: all of these statement are completed using which basis of accounting? Accrual (revenues are recorded when earned, expenses are recorded when incurred (created)) 1) SCF > this statement must be presented by a publiclytraded corporation whenever they also disclose the income statement (statement of operations) **this is the only statement completed by corporate entities that addresses cash flows **why do we need this statement? To see why cash increased or decreased from year to year a. Classifying cash flows (OIF): a. O > operating; these are activities that a business would normally complete b. I > investing activities involving the purchase and/or sale of longterm assets (building, land, trucks) including investments in other company’s stocks and bonds (financial instruments) c. F > financing; activities that a publiclytraded corporation participates in that aid in financing the company such as paying dividends, securing longterm debt (Bonds Payable or Note Payable); selling our own stocks d. Noncash investing and financing activities > these are basically trades that have no cash implications; disclosed in a separate statement b. Operating activities disclosure (two methods; both I and F will be the same under either method): a. Indirect method > with this method we are starting with our bottom line (also known as net income from the IS and undoing the effects of accrual basis accounting i. Steps to prepare the indirect method of SCF: 1. Compare this year’s and last year’s BS figures (called a comparative BS; page 814); calculate the increase or decrease from the prior year to this year (start with oldest year and – this year’s figures) 2. Analyze the IS (net income) 3. See page 816; start with O: a. Net income from the IS b. Adjustments (undo the effects of these): i. GLAD: 1. G > gain (when MV > BV for a long term asset); these will be subtracted because they were added on the IS 2. L > loss (when BV > MV for a long term asset); these will be added because they were subtracted on the IS 3. A > amortization; these will be added because they were subtracted on the IS 4. D > depreciation; these will be added because they were subtracted on the IS ii. Changes in CA and CL (operating assets and liabilities; we need to look at the comparative BS): 1. Increase in A/R > why? We sold more on account than customers paid us; we did not collect cash; cash is inversely related to all CA’s; if A/R goes up, Cash goes down 2. Decrease in Mer. Inv. > we purchased less than we sold; we sold more than we purchased; cash goes up (inverse) 3. Increase in A/P > we purchased more on account than we paid on account; direct relationship with cash, increase in A/P means an increase in Cash 4. Decrease in accrued liabilities > cash goes down 5. Summary: CA and Cash are inversely related; CL and Cash are directly related c. Net the operating activities > $70,000 in text indicates cash inflows from operating d. Investing activities (note: investing activities are presented exactly the same way under both the indirect and direct methods of disclosing the operating activities section): i. Cash payment for acquisition of plant assets > you paid cash so the amount is listed as a negative amount ii. Cash receipt from disposal of plant assets > cash inflow from selling; note that the outflow and inflow are reported separately iii. Net investing activities > the net is a negative number (260,000) because more cash was paid than received e. Financing activities: (note: financing activities are presented exactly the same way under both the indirect and direct methods of disclosing the operating activities section). i. Issuance of notes payable (also called securing longterm debt; we borrowed money) > cash inflow ii. Cash payment of notes payable > paid off another note payable > cash outflow iii. Cash receipt from issuance of common stock > remember with this that we need to add the change in Common Stock plus the change in PICExcess over par, Common to get the amount of cash iv. Cash payment for the purchase of treasury stock > this is merely the cost to us v. Cash payment of dividends > we are paying dividends to our stockholders (we sell stock as part of our financing activities also) f. Net cash provided by financing activities > indicates a positive number of net cash inflow g. Net OIF > this will be called net increase or decrease in cash and it should match the increase or decrease on the comparative balance sheet h. Cash at beginning of year (or end of last year) from comparative BS i. Cash at end of year (current year); should tie to the comparative BS 4. Net increase or decrease in cash + beginning cash balance = ending cash balance (all these amounts should tie into the comparative BS) 5. In addition, you will need to know pertinent information about investing and financing activities (must be given) b. Direct method > appendix to this chapter > this is a different way to display operating activities only i. Cash collections from customers > you are solving for an unknown in your a/r account; see page 830 ii. Cash receipts of interest > from the IS iii. Cash receipts of dividends > we have invested in other company’s stocks > this amount is the same as the amount listed on the IS (usually) iv. Payments to suppliers > we are solving for a couple of unknowns; see page 832; COGS – Beg. Mer. Inv. + end. Mer. Inv. + beg. a/p – end. a/p = cash paid for merc. Inv.THEN calculate the unknown in a/p c. Free cash flow > cash flow from operating activities – cash paid for planned investments in LT assets – cash dividends; tells us what amount of cash is available for emergencies or reserves.
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