chapter 12 Flashcards
cash flows report…
Cash receipts, Cash payments, and Net change in cash resulting from Operating, Investing, and Financing activities during the period.
why cash flows?
The entity’s ability to generate future cash flows.
The entity’s ability to pay dividends and meet obligations.
The reasons for the difference between net income and net cash provided (used) by operating activities.
The cash investing and financing transactions during the period.
what activities would you include on a cash flow statement?
Operating activities include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income.
Investing activities include
a) acquiring and disposing of investments and property, plant, and equipment, and
b) lending money and collecting the loans.
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.
operatng activities guidelines
Note the following general guidelines:
Operating activities involve income statement items,
Investing activities involve cash flows resulting from changes in investments and long-term asset items.
Financing activities involve cash flows resulting from changes in long-term liability and stockholders’ equity items.
these are NOT included on cash flows but at the bottom if necessary
Issuance of common stock to purchase assets.
Conversion of bonds into common stock.
Issuance of debt to purchase assets.
Exchange of plant assets.
indirect method of preparing cash flows
The indirect method is used extensively in practice, as shown below.
The indirect is favored by companies for 2 reasons:
1)it is easier to prepare and
2)it focuses on the differences between net income and net cash flow from operating activities.
indirect method uses which of the following statements:
Comparative balance sheets
current income statement
indirect method uses which of the following statements:
Comparative balance sheets
current income statement
additional information
net income vs net cash
depreciation does not affect net cash, only net income.
The adjustments required for changes in noncash current asset and current liability accounts are as follows:
Increases in current assets are deducted from net income
Decreases in current assets are added to net income
Increases in current liabilities are added to net income
Decreases in current liabilities are deducted from net income
Adjustment Required to Convert Net Income to Net Cash Provided by Operating Activities
Add:
Depreciation expense
Noncash Charges Patent amortization expense
Add Depletion expense
Gains and Losses:
Add: Loss on sale of plant asset
Deduct: Gain on sale of plant asset
Changes in current assets and current liabilities
Add:
Decrease in current asset account Increase in current liability account
Decrease: increase in asset, decrease in liability
which transactions will add or deduct or have no effect on cash flows?
?
free cash flow formula
cash provided by operations - capital expenditures - cash dividends
current ratio
current assets / current liabilties
current cash debt ratio
cash provided by operations / average current liabilities
