Handout_03_(APSCW_-_F2009)

Handout_03_(APSCW_-_F2009) - BUSI W3013 Handout 03 | Page 1...

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Unformatted text preview: BUSI W3013 Handout 03 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 03 PROFESSOR ANDREW SCHMIDT 1.0 Introduction …………………………………………………………… 1 2.0 Classification of Cash Flows …………………………………………………………… 2 3.0 SCF: Preparation and Presentation …………………………………………………………… 5 4.0 Practice Exercises and Solutions …………………………………………………………… 17 5.0 Problem Set 03 …………………………………………………………… 30 6.0 Appendix …………………………………………………………… 36 H ANDOUT O BJECTIVES : S TATEMENT OF C ASH F LOWS 1) Identify the major classifications of cash flows and what types of items are reported in these classifications. 2) Differentiate between net income and net cash flows from operating activities. 3) Contrast the direct and indirect methods of calculating net cash flows from operating activities. Understand that in reality, the accrual adjustments in the statement of cash flows often do not match the changes in the corresponding line items in the balance sheet. 4) Calculate net cash flows from operating, investing, and financing activities given appropriate information. 1.0. I NTRODUCTION The statement of cash flows explains how cash has been collected and used during an accounting period. It also distinguishes between cash transactions relating to operating, investing, and financing activities. U.S. companies have provided this information since 1988, as required by Statement of Financial Accounting Standards (SFAS) No. 95. 1 Because assets equal liabilities plus equity, changes in cash (an asset) must be accompanied by either a decrease in another asset or an increase in a liability or equity account. Thus, by providing information about cash transactions, the cash flow statement informs not only on changes in cash but also on changes in other assets, liabilities, and equity accounts. In other words, the cash flow statement provides information about changes in the firm’s financial position. Changes in a firm’s financial position can be determined by comparing the firm’s balance sheets at the beginning and end of the period. But for each balance sheet account, different transactions may explain the change. For example, a change in the book value of property, plant, and equipment 1 Prior to the issuance of SFAS 95, firms could alternatively disclose a Statement of Funds, which explained how working capital (rather than cash) was provided and used during the period. (Working capital is defined as current operating assets minus current operating liabilities.) BUSI W3013 Handout 03 | Page 2 (PP&E) could be due to purchase or sale of PP&E, capital leases, depreciation, impairment, purchase or sale of consolidated subsidiaries, and translation adjustments. The cash flow statement reports the amount of cash paid during the year for PP&E (“capital expenditures”), and the amount of cash...
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This note was uploaded on 02/27/2011 for the course BUSINESS 101 taught by Professor S during the Spring '10 term at Columbia College.

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Handout_03_(APSCW_-_F2009) - BUSI W3013 Handout 03 | Page 1...

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