Chapter 3

# Chapter 3 - Ch 3/Income Flows vs Cash Flows Cash flows do...

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Ch 3/Income Flows vs. Cash Flows Cash flows do not equal income flows Why not? Accrual accounting used for net income - revenues recognized (recorded) when earned - expenses ‘matched’ with revenues or with period incurred - income measurement not dependent upon cash receipts and payments Financing and Investing activities do not have immediate effect on net income Thus, the Statement of Cash Flows provides information not found on the other financial

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Statement of Cash Flows Explains the reasons for the increase or decrease in cash during a period. The change in cash equals the change in all noncash balance sheet accounts: Assets = Liabilities + SHE Cash + Noncash Assets = Liabilities + SHE Cash + Noncash Assets = Liabilities + SHE Cash = Liabilities + SHE - Noncash Assets [ note - is mathematical symbol for change] What is the effect on cash if liabilities and SHE increase? Cash increases (e.g. borrowing increasing cash and liabilities; issuing stock increases SHE and cash What if noncash assets increase? Cash decreases (e.g. buying equipment increases a noncash asset
Statement of Cash Flows Cash = Liabilities + SHE - Noncash Assets Does this relation hold for Starbucks’ noncash account changes from year 3 to year 4? (see pp 70-72) C a s h = L i a b i l i t i e s + SH E - N o n c a s h Y e a r 4 \$ 2 9 9 .1 \$ 9 1 6 .3 \$ 2 ,4 7 4 .2 \$ 3 ,0 9 1 .4 Y e a r 3 2 0 0 .9 7 0 7 .4 2 ,0 7 1 .1 2 ,5 7 7 .6 \$ 9 8 .2 = \$ 2 0 8 .9 + \$ 4 0 3 .1 - \$ 5 1 3 .8 These changes will be classified as affecting operating, investing, and financing cash flows

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4 Statement of Cash Flows Operating cash flows —result from ongoing, day-to-day, revenue- generating activities of an organization Investing cash flows —result from activities that involve the acquisition or sale of long-term assets Financing cash flows – result from activities that involve the issuance or reacquisition of long-term debt or stock; payment of dividends
Statement of Cash Flows Two formats: (1) Direct – preferred by FASB (2) Indirect – widely used The only difference between the direct and indirect methods is the presentation of the operating section Investing and Financing sections are not affected by the choice of method

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Cash Flows from Operations Indirect Method See Pepsi’s SCF on page 128 for example 2 types of adjustments to Net Income:
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## This note was uploaded on 10/13/2010 for the course ACCT 5993 taught by Professor Gooch during the Fall '10 term at Cameron University.

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Chapter 3 - Ch 3/Income Flows vs Cash Flows Cash flows do...

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