Kế toán, kiểm toán - Chapter 13: How well am i doing? Statement of cash flows

Chapter13“How Well Am I Doing?”Statement of Cash FlowsPurpose of the Statement of Cash FlowsHelps the reader assess . . .a firm’s ability to generate cash.a firm’s ability to pay dividends and meet its obligations.the reasons for differences between net income and cash provided from operations.the effect of cash and noncash investing and financing activities during the period.Definition of CashThe term cash on the statement of cash flows refers broadly to both currency and cash equivalents.CashTreasury BillsCommercial PaperMoney Market FundsCurrency and Bank AccountsConstructing the Statement of Cash FlowsNet Cash Flows for a PeriodNet IncomeDividends Paid to StockholdersChanges in Noncash AssetsChanges in LiabilitiesChanges in Capital StockAssets = Liabilities + Stockholders’ EquityConstructing the Statement of Cash Flows*Contra asset accounts follow the rules for liabilitiesLet’s prepare a simplified Statement of Cash Flows for Matrix, Inc. based the the information shown on the next slide.Simplified Statement of Cash FlowsFull-Fledged Statement of Cash FlowsThree Sectionsof the StatementOperating ActivitiesIncludes those activities that enter into the determination of net income.Operating activities:Net incomeChanges in current assetsChanges in noncurrent assets that affect net income (depreciation and amortization).Changes in noncurrent liabilities that affect incomeOperating ActivitiesChange in Account Balance during PeriodIncreaseDecreaseCurrentSubtractfromAddtoNoncash Assetsnet incomenet incomeCurrentAddtoSubtractfromLiabilitiesnet incomenet incomeChanges in current assets and current liabilities imply changes in cash, as indicated below.Investing ActivitiesChanges in noncurrent assets that are not included in net income.Acquiring or selling property, plant, and equipment.Acquiring or selling securities held for long-term investment.Lending money to another entity.Financing ActivitiesIncludes transactions involving receipts from or payments to creditors and owners. Changes in the current liabilities that are debts to lenders rather than obligations to suppliers, employees, or the government.Changes in noncurrent liabilities that are not included in net income.Changes in capital stock accounts.Dividends paid.Cash Flows: Gross or Net?For both financing and investing activities, items on the statement of cash flows should be presented in gross amounts.For operating activities, amounts are typically netted.Investing Activity Example:A Company sells an old building for $700,000 and purchases a new building for $1,000,000.The $700,000 inflow of cash and the $1,000,000 outflow of cash must be shown separately.Indirect MethodNet income is reconciled to cash flow from operating activities.No supplemental schedule is required.Used by 98.8% of companies.Direct Method or Indirect Method?Direct MethodNet income is reconstructed on a cash basis.Requires a supplemental reconciliation of net income to cash flow from operating activities.Used by 1.2% of companies.Direct Exchange:A company acquires a building in exchange for 200,000 shares of common stock.This is reported in a separate supplemental schedule attached to the statement of cash flows.Noncurrent balance sheet items are swapped.Such exchanges must be disclosed.Direct Exchange TransactionsLet’s look at the eight basic steps in preparing the Statement of Cash Flows.Setting Up the WorksheetStep  List all the relevant account titles from the company’s balance sheet.Step  Calculate the change in each account balance during the period.Step  Classify each change as a source or a use of cash.Step  Code sources with a positive number and uses with a negative number.Adjustments to Reflect Gross AmountsStep  Losses are treated as a source of cash and gains are treated as a use of cash in the operating activities section of the Statement.Step  Classify each entry in the worksheet as an operating, investing, or financing activity (the change in deferred income taxes is included in the operating activities section).Complete the Statement of Cash FlowsStep  Construct the formal Statement of Cash Flows.Step  Reconcile beginning and ending cash balances.Additional InformationMatrix, Inc. Supplemental Information:A building was purchased for cash during the year.Land was sold at cost for cash.No buildings or equipment were sold during the year.Bonds were issued at the end of the year.Cash dividends of $3,500 were paid during the year.Interpretation of the Statement of Cash FlowsCash flows from operating activities provide a measure of how successful the company is in generating cash on a continuing basis.A positive cash flow permits the company to make substantial additional to its property, building and equipment or to pay off its debt.Depreciation, Depletion, and AmortizationSince depreciation is added back to net income, there is a tendency to think that all you have to do to increase net cash flows is to increase depreciation charges.This is false!The amounts are added back because they are decreases in an asset, not because they generate cash.End of Chapter 13