of Statement Cash Flows
Chapter 4
Ch 4 -Statement of Cash Flows
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Introduction
The Financial Accounting Standards Board (FASB), the current accounting rule-making body, has mandated that the SCF be included with other financial statements issued to external users since 1988.
Ch 4 -Statement of Cash Flows
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Introduction
The SCF answers questions such as:
a. b. c. d.
How much cash was provided from operations? What amount of property and equipment was purchased during the year What amount of funds was raised through sale of capital stock? What amount of dividends was paid during the year?
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Purpose of the Statement of Cash Flows
Shows the effects on cash of a businesss operating, investing and financing activities for the accounting period.
Ch 4 -Statement of Cash Flows
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Purpose of the Statement of Cash Flows
Cash is defined as both cash and cash equivalents. Cash equivalent are short-term, high liquid investments such as U.S. Treasury bills, and money market accounts
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Purpose of the Statement of Cash Flows
The major purpose of the SCF to provide relevant information regarding the cash receipts and disbursements of a hospitality business to help users:
1.
Assess ability to generate positive future net cash flows
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Purpose of the Statement of Cash Flows
2. Assess the firms ability to meet its obligations. 3. Assess the difference between the operations net income and cash receipts and disbursements. 4. Assess the effect of both cash and noncash investing and financing during the accounting period.
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Statement of Cash Flows Relationship to other Financial Statements
See Exhibit 1, page 161 text. Net income from income statement is transferred to retained earnings account at the end of each accounting period.
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Classification of Cash Flows
SCF classifies cash receipts and disbursements as: Operating Investing Financing activities
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Classification of Cash Flows
Operating Activities: Cash transactions related to revenues and expenses. Investing Activities: Related primarily to cash flows from the acquisition and disposal of all non-current assets property, equipment and investments.
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Classification of Cash Flows
Financing Activities: Relates to cash flows from the issuance and retirement of debt and the issuance and re-purchase of capital stock. Supplementary Schedules: Used to show non-cash transactions
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Format of Statement of Cash Flows
See Exhibit 4, page 163 text. Cash flows from operations shown first. Cash flows from investing and financing shown next. Cash at beginning of period Cash at end of period Schedule of noncash investing
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Converting Accrual Income to Net Cash Flows
A major purpose of the SCF is to show net cash flows from operations. The Income Statement is prepared on an accrual basis revenues are recorded when earned, not when cash is received or not when cash is disbursed. Thus, there may be little correlation between net income and cash flow.
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Methods of Net Converting Income to Net Cash Flow
Direct Method shows cash receipts from sales and cash disbursement for expenses. Requires that each item on the income statement be converted from an accrual basis to a cash basis. The FASB prefers the direct approach, but most hospitality operations prefer to use the indirect approach.
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Methods of Converting Net Income to Net Cash Flow
Indirect Method This method starts with net income. It is then adjusted for noncash items included on the income statement. The most common noncash expense deducted to determine net income is depreciation. Other items on the income statement that must be added or subtracted include amortization expense and gains and losses on the sale of noncurrent assts and marketable securities.
Ch 4 -Statement of Cash Flows
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Preparing the SCF
Primary sources of information for preparing the SCF are: Income statement Statement of retained earnings Two successive balance sheets from the beginning and end of the accounting period Details of transactions affecting any change in noncurrent balance sheet accounts
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Preparing the SCF
Four steps in preparing the SCF:
1. 2. 3. 4.
Determine net cash flows from operating activities. Determine net cash flows from investing activities. Determine net cash flows from financing activities Present cash flows by activity on the SCF
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Preparing the SCF
Rules for accounting for changes in current accounts in determining net cash flows provided by operating activities: Decrease is current asset is added to net income Increase in current asset is deducted from net income Decrease in current liability is deducted from net income Increase in current liability is added to net income
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Preparing the SCF
See Exhibit 8, page 174 text for sample Statement of Cash Flows after all adjustments.
Ch 4 -State...