27 Cash_Flow 2 - 27 StatementofCashFlowsII...

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Statement of Cash Flows II Statement of Cash Flows II Accountancy 301 Spring 2011 Flora Zhou 27
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Today Today ’s agenda ’s agenda • Construct cash flow statements in-class  exercise • Worldcom revisited • Interpret cash flow statements
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The indirect method (5 Steps) The indirect method (5 Steps) 1. Calculate changes (from beginning of the year to  the end of the year) for all non-cash B/S  accounts. 2. Explain or decompose the changes (if necessary). 3. Figure out the direction or sign of the effect on  cash. 4. Classify as Operating (O), Investing (I), or  Financing (F). 5. Adjust net income (operating section) a. Adjust net income for revenues and expenses that do  not affect Operating Assets and Liabilities  b. Adjust net income for changes in operating assets  other than cash and liabilities.
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Assume all $3.8 billion in expense was booked in the first quarter of  2001 and the amount of depreciation expense was 0.8 billion in fiscal  year 2001. What’s the effect on cash flow from operations? Cash flow  from investing activities?  Total cash flows?   WorldCom revisited WorldCom revisited WorldCom Admits $3.8 Billion Error In Its Accounting Firm Ousts Financial Chief And Struggles for Survival; SEC Probe  Likely to Widen  The Wall Street Journal 06/26/2002   NEW YORK -- WorldCom Inc.'s audit committee uncovered what could  be one of the largest accounting frauds in history, with the discovery  of $3.8 billion in expenses improperly booked as capital expenditures,   a gimmick that boosted cash flow and profit over the past five  quarters "This is a matter that has none of the complexities of Enron  . . .  "certain transfers from line cost expenses to capital accounts " weren't  made according to generally accepted accounting principles. The  amount of these transfers totaled $3.8 billion for the four quarters of  2001 and the first quarter of 2002. . . 
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This note was uploaded on 11/08/2011 for the course ACCY 301 taught by Professor Staff during the Fall '08 term at University of Illinois, Urbana Champaign.

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27 Cash_Flow 2 - 27 StatementofCashFlowsII...

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