Review Notes

Review Notes - Chapter 13 The Statement of Cash Flows...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 13 – The Statement of Cash Flows: Usefulness and Format The statement of cash flows reports the cash receipts, cash payments, and net change in cash resulting from operating, investing, and financing activities during a period. It helps assess the following: 1. The entity’s ability to generate future cash flows 2. The entity’s ability to pay dividends and meet obligations 3. The reasons for the difference between net income and net cash provided (used) by operating activities 4. The cash investing and financing transactions during the period Classifications of Cash Flows 1. Operating activities include the cash effects of transactions that create revenues and expenses. They are used to determine net income a. Cash inflows: - From sale of goods or services - From interest received and dividends received b. Cash outflows: - To suppliers for inventory - To employees for services - To government for taxes - To lenders for interest - To others for expenses 2. Investing activities include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans a. Cash inflows: - From sale of property, plant and equipment - From sale of investments in debt or equity securities of other entities - From collection of principal on loans to other entities b. Cash outflows: - To purchase property, plant, and equipment - To purchase investments in debt or equity securities of other entities - To make loans to other entities 3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends a. Cash inflows: - From sale of common stock - From issuance of long-term debt (bonds and notes) b. Cash outflows: - To stockholders as dividends - To redeem long-term debt or reacquire capital stock (treasury stock) Significant Noncash Activities (reported on a separate schedule, note or supplementary schedule)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
1. Direct issuance of common stock to purchase assets 2. Conversion of bonds into common stock 3. Direct issuance of debt to purchase assets 4. Exchanges of plant assets *Preparing a cash flow statement (indirect method vs. direct method) Using Cash Flows to Evaluate a Company Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends. Free Cash Flow = Cash Obtained by Operating Activities - Capital Expenditures (Purchase of PPE) - Cash Dividends Indirect Method - Add back noncash expenses (depreciation and amortization) - Add back loss on sale - Deduct any gain on sale Current Assets Increase: Deduct from Net Income Decrease: Add to Net Income Current Liabilities Increase: Add to Net Income Decrease: Deduct from Net Income Chapter 12: Why Corporations Invest 1. Have excess cash that’s not needed immediately 2. To generate earnings from investment income 3. Strategic reasons *Investment entries always include the brokerage fees Accounting for Debt Investments
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 9

Review Notes - Chapter 13 The Statement of Cash Flows...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online