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Ch13 - Cash Flow Statement

Ch13 - Cash Flow Statement - Chapter 13 Statement of Cash...

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Chapter 13 Statement of Cash Flows (CFS) Overview Indirect vs. direct method of preparing the Statement of Cash Flows Example 13-1
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Purpose of the CFS The Statement of Cash Flows shows where cash came from and how it was spent: it explains the changes in the cash balance for the year. “Cash is King” Cash includes short-term, highly liquid investments that are: Readily convertible into cash. Little risk of price change (e.g. treasury bills) Original maturity less than three months. 13-2
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Usefulness of the CFS Users of financial statements can assess the following: The investing and financing transactions during the period (not reported in the income statement). Difference between net income (accrual basis) and cash flow from operating activities. Ability to pay dividends and meet future obligations. 13-3
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13-4 Statement of Cash Flows for Wal-Mart Not reported in the income statement Converts accrual net income to cash flow
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Format of the CFS Operating Operating Activities Investing Investing Activities Financing Financing Activities 13-5 Statement of Financial Accounting Standards # 95 requires three sections to be presented in the following order:
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+ _ Outflows to: Purchase goods to resell and services Salaries & wages Income taxes Interest on liabilities Inflows from: Sales to customers Interest and dividends received Cash Flows from Operating Activities Cash Flows from Operating Activities 13-6
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Cash Flows – Investing Activities 13-7 Cash Inflows Cash Outflows PPE Receive cash from sales Spend cash for purchases Invest- ments Receive cash from sales of investments Spend cash to buy investments
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Cash Flows – Financing Activities * Interest payments on debt are an operating cash outflow. 13-8 Cash Inflows Cash Outflows LT Debt Borrow cash Repay principal * Equity Issue stock Purchase treasury stock; pay dividends
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Two Formats for Operating Activities 1. Indirect Method 1. Indirect Method Reconciles net income to net cash provided by operating activities Two acceptable formats for presenting the operating activities section: 2. Direct Method 2. Direct Method Reports all cash receipts and cash payments from operating activities 13-9 (Which method does the FASB prefer?)
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Example: Wal-Mart ($mil) 13-10 Indirect Method Net income $ 13,400 Adjustments: Depreciation, etc. 9,747 Net cash provided by operating activities $ 23,147 Direct Method Collections from customers * $ 400,000 Less: Payments to suppliers, etc. * 376,853 Net cash provided by operating activities $ 23,147 * Estimated amounts.
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Preparing the CFS – Information Sources Balance Sheet Income Statement Additional details for selected accounts 13-11
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Steps in Preparing the CFS 1. Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis.
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