Chapter 15 Notes

Chapter 15 Notes - Changes in the accounts mentioned on the...

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Changes in the accounts mentioned on the previous slide can be classified as either sources or uses of cash as shown on this slide. Net income is always a source of cash. Net loss is always a use of cash. Decreases in noncash asset accounts are always sources of cash and increases are uses of cash. Increases in liability accounts are always sources of cash and decreases are uses of cash. Contra-assets follow the rules for liabilities. Increases in capital stock accounts are always sources of cash and decreases are uses of cash. Dividends paid to stockholders are always uses of cash. Increases in noncash asset accounts imply uses of cash. For example, if inventory is purchased on credit from a supplier, it is implied that cash was used to acquire the inventory. Increases in liability accounts imply sources of cash. For example, if inventory is purchased on credit from a supplier, it is implied that an increase in a payable has the effect of increasing cash available for other uses. Decreases in noncash asset accounts imply sources of cash. For example, if accounts receivable decreases when a customer pays their bill, the company’s cash balance increases accordingly. Decreases in liability accounts imply uses of cash. For example, if a company makes a payment on a note payable, the company’s cash balance decreases accordingly. Operating activities are those activities that enter into the determination of net income. Generally speaking, this includes: • All transactions affecting current assets. • All transactions affecting current liabilities (except for issuing and repaying a note payable). • All changes in noncurrent balance sheet accounts that directly affect net income, such as the
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Chapter 15 Notes - Changes in the accounts mentioned on the...

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