Chapter 12 Flashcards
Statement of cash flows
Reports the cash receipts and cash pyaments from operating, investing, and financing activities during a period, in a format that reconciles the beginning and ending cash balances
Statement of Cash Flows helps assess
- 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 by operating activities
- The cash investing and financing transactions during the period
Financing activities
Cash flow activities that include:
a. obtaining cash from issuing debt and repaying the amounts borrowed
b. obtaining cash from stockholders, repurchasing shares, and paying dividends
Investing activities
Cash flow activities that include
a. cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash
b. lending money and collecting the loans
Operating activities
Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income
Why is operating activities considered the most important?
It shows the cash provided by company operations
This source of cash is generally considered to be the best measure of a company’s ability to generate sufficient cash to continue as a going concern
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
Why are interest, dividends, and payments of interest to lenders considered operating activities?
Because companies report these items in the income statement, where results of operations are shown
Comparing cash from operations to net income can reveal what?
Information about the “quality” of reported net income
It can reveal the extent to which net income provides a good measure of actual performance
Examples of significant non cash activities
- Direct issuance of common stock to purchase assets
- Conversion of bonds into common stock
- Direct issuance of debt to purchase assets
- Exchanges of plant assets
Difference of the statement of cash flows betwen IFRS and GAAP
Noncash investing and financing activities are reported in the notes to the financial statements under IFRS
Operating activities-Income statement items
Cash inflows
From sale of goods or services
From interest received and dividends received
Operating activities-Income statement items
Cash outflows:
To suppliers for inventory
To employees for services
To government for taxes
To lenders for interest
To others for expenses
Investing activities-Changes in investments and long-term assets
Cash inflows
From sale of property, plant, and equipment
From sale of investments in debt of equity securities of other entities
From collection of principal on loans to other entities
Investing activities-Changes in investments and long-term assets
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
Financing activities-Changes in long-term liabilities and stockholder’s equity
Cash inflows
From sale of common stock
From issuance of debt (bonds and notes)
Financing activities - Changes in long-term liabilities and stockholders’ equity
Cash outflows
To stockholders as dividends
To redeem long-term debt or reacquire capital stock (treasury stock)
Where do companies report significant financing and investing activities that do not affect cash?
In either a seperate schedule at the bottom of the statement of cash flows or in a seperate note or supplementary schedule to the financial statements
*fulfills the full disclosure principle
Product life cycle
A series of phases in a product’s sales and cash flows over time
These phases, in order of occurrence, are:
- Introductory
- Growth
- Maturity
- Decline
Cash in all the stages during the introductory phase
Cash form operations - negative
Cash from investing - negative
Cash from financing - positive
Growth phase
Negative cash from investing
Positive cash from financing
Maturity phase
Cash from operations and net income are approximately the same
Cash generated from operations exceeds investing needs
Company can start to pay dividends, retire debt, or buy back stock