Handout 04 - Copyright © 2011 1 You may only share these...

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Unformatted text preview: Copyright © 2011 1 You may only share these materials with current term students. I NTRODUCTION TO F INANCIAL A CCOUNTING 33:010:272 S ECTIONS 08 & 09 |FALL 2011 P ROFESSOR J ULIAN Y EO Class Notes 04: The Statement of Cash Flows In this document, we continue what we started in our last topic by examining the relation between net cash flows and net income. We examine the Statement of Cash Flows in details. More specifically, we address the followings: 1. Net Income vs Net Cash Flows (Accrual vs Cash) 2. The Definition of Cash 3. The Structure of the Statement of Cash Flows 4. Direct vs Indirect Approach to Present the Statement of Cash Flows 5. Supplementary Disclosure for the Statement of Cash Flows Upon completion of this topic, you should be able to: Convert ∆cash to net income, we make accrual adjustments (create non-cash assets and liabilities) o NI = ∆Cash + ∆Non-Cash Assets - ∆Liabilities Familiar with GAAP Cash Flow Classifications: Operating, Investing and Financing Distinguish between the direct vs indirect approach to present the Statement of Cash Flows Construct Statement of Cash Flows (both direct and indirect methods) using information from Balance Sheets and Income Statements 1. Net Income vs Net Cash Flows (Accrual vs Cash) The statement of cash flows explains how cash has been provided and used during an accounting period. A business enterprise is required (SFAS 95) to provide this statement for each period for which results of operations are presented. 1 1 Prior to the implementation of SFAS 95, firms could disclose a Statement of Funds, which explained how working capital (rather than cash) was provided and used. Working capital is defined as current assets less current liabilities. Copyright © 2011 2 You may only share these materials with current term students. Changes in a firm's financial position (and liquidity) can be determined by comparing the firm's balance sheet at the beginning and end of the period. An important question that arises is what transactions have caused liquidity to change? The income statement explains some of the changes in financial position (how?), but it does not disclose the effect on liquidity of various other transactions (like?). One way to think about the statement of cash flows is in terms of the accounting equation . Assets = Liabilities + Owner's equity (1) So, ∆ Assets = ∆ Liabilities + ∆ Owner's equity (2) where ∆ means “the change in.” We can explain ∆ Cash by expanding equation (2): ∆ Cash + ∆ Non-cash assets = ∆ Liabilities + ∆ Owner's equity (3) ∆ Cash = ∆ Liabilities + ∆ Owner's equity - ∆ Non-cash assets (4) Let’s simplify equation (4) by assuming that Net Income is the only component that affects ∆ Owner's equity....
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This document was uploaded on 10/25/2011 for the course ACCOUNTING 33:010:272 at Rutgers.

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Handout 04 - Copyright © 2011 1 You may only share these...

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