Download Cash flows

STUDY OUTLINE – STATEMENT OF CASH FLOWS
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___________________________________________________________________
 Statement of Cash Flows Required
o As part of a full set of general-purpose financial
statements
o For all business enterprises and not-for-profits
 Some limited exclusions from requirement to
provide
o Provide for each period results of operations (income
statement) provided
 SEC Rules differ in some respects
 Cash & cash equivalents (C&C)
 Cash
 Cash on hand
 Demand deposits
 Cash equivalents
 Short-term, highly liquid investments that
are
o Readily convertible to amounts of
cash, and
o So near maturity (THREE months or
less) that the risk of changes in value
because of changes in interest rates is
not significant
 Examples
o Treasury bills
o Commercial paper
o Money market funds
o Federal funds sold
 Company can elect to treat a by definition
“cash equivalent” as something else
o Accounting policy election (see
disclosures below)
STUDY OUTLINE – STATEMENT OF CASH FLOWS
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o Any change in policy is a change in
accounting principle
 Restate financial statements for
earlier years presented
 Gross vs. net reporting
 Gross amounts of cash receipts and
payments more relevant
 Qualify for net reporting
o Turnover is quick
o Amounts are large
o Maturities are short
o Specific items that qualify
 Investments
 Loans receivable
 Debt (3 months or less)
 Purpose of Statement of Cash Flows
o Provide information on cash receipts (sources of cash)
and cash disbursements (uses of cash) during a period
o Provide liquidity or cash information to interested
parties, should help these parties assess:
 Ability to generate positive future net cash flows
 Ability to meet obligations, pay dividends
 Need for external financing
 Reasons for differences between net income and
associated cash receipts and cash payments
 Effects on financial position of both cash and
noncash investing and financing transactions
o Reconciles C&C of:
 Balance of C&C presented on balance sheet at
BEGINNING of period, with
 Balance of C&C presented on balance sheet at
END of period
STUDY OUTLINE – STATEMENT OF CASH FLOWS
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___________________________________________________________________
 Statement of Cash Flows shows the change
between these two amounts
 Classification of cash flows (three, based on nature of
activity):
o Operating
 Items that get to net income (activities involved in
producing goods and delivering services to
customers)
 Transactions involving trading securities under
115
 Residual category – item not classified as
investing or financing, goes here
 Differences how shown based on two methods
(see below)
o Investing
 Noncurrent asset transactions
 Fixed assets
 Investments
 Lending to others
 Uses
 Making loans to other entities
 Purchasing available for sale and held to
maturity investment securities of other
entities (remember trading securities are
operating)
 Acquiring PPE
 Sources
 Collecting on previous loans you made
 Disposing of available for sale and held to
maturity investments (not trading)
 Disposing of PPE
o Financing
 Sources
STUDY OUTLINE – STATEMENT OF CASH FLOWS
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___________________________________________________________________
 Obtaining resources from owners
 Borrowing debt
 Uses
 Repurchasing stock
 Repayment of debt (principal, not interest)
 Paying dividends
 Non-cash investing and financing activities
o Material, must be supplemental disclosure
o Portion is cash, include that in cash flow statement
 Fixed asset for stock
 Convert bonds to equity
 Acquire assets through capital lease obligation
 Exchange of non-cash assets
 Two methods of presenting statement of cash flows(only
operating different)
o Direct method
 Recommended
 Shows major classes of operating cash receipts
and cash disbursements
 Sources
o Cash received from customers
o Interest received
o Dividends received
o Other operating cash receipts
(insurance proceeds, lawsuit
settlements)
o Cash from sale of securities classified
as trading securities under 115
 Uses
o Cash paid to suppliers or employees
o Interest paid
o Income taxes paid
STUDY OUTLINE – STATEMENT OF CASH FLOWS
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___________________________________________________________________
o Cash paid to acquire securities
classified as trading securities under
115
o Other operating cash payments
 If use, also required to provide (in separate
schedule) indirect – net income to net cash flows
from operating activities
 Cash collections
 Sales to customers –
 increase in receivables+
 decrease in receivables+
 increase in unearned revenue decrease in unearned revenue
 Cash paid to suppliers/employees
 COGS+
 Increase in inventory Decrease in inventory+
 Expenses+
 Increase in prepaid Decrease in prepaid
 -increase in AP/other liab+
 Decrease in AP/other liab
o Indirect method
 Reconciles net income to net cash flows from
operating activities
 Supplemental disclosure of cash paid for interest
and income taxes is required
 Adjustments to NI (remove the effects on NI for
these items which don’t impact cash)
 Non-cash items, such as amortization,
depreciation, gains/losses on sales
 Rules
o Increase in asset or debit balance
STUDY OUTLINE – STATEMENT OF CASH FLOWS
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___________________________________________________________________
o
o
o
o
o
o
 decrease or use of cash
decrease in asset or debit balance
 increase or source of cash
increase in liability, equity or credit
balance
 increase or source of cash
Decrease in liability, equity or credit
balance
 Decrease in source of cash
Gains
 adjust out of operating – negative
to net income – other side
investing
losses
 adjust out of operating – positive
in net income – other side
investing
CLAD
 Current assets and liabilities
 Losses and gains
 Amortization and depreciation
 Deferred items
 Disclosures
o Accounting policy on classification of items as C&C
 Which items are treated as C&C
 Change to policy would be disclosed and is a
change in accounting principle (restate prior
periods)
o Investing and financing noncash transactions
o If direct method used, a reconciliation of net income to
net cash flow from operating activities in separate
schedule (indirect method)
o Cash flow per share (similar to EPS)
 Is not permitted
STUDY OUTLINE – STATEMENT OF CASH FLOWS
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___________________________________________________________________
 May fall into the SEC’s rules on “Non-GAAP”
financial measures if presented