Lecture 7 - Statement of Cash Flows Flashcards
SoCF
reports how entire firm’s ops, investing, & financing activities have affected cash balances during period
“Cash”
= actual cash + marketable securities with maturities of 3 months or less
Why does NI sometimes not equal Cash?
bc NI is calculated w/accrual acct
CF from financing: categories
obtaining debt (acting as a borrower)
paying of principal related to debt
issuing or repurchasing stock
paying dividends
CF from investing: categories
purchasing/selling longer-term productive assets (equip)
purchasing/selling investment securities (stocks & bonds)
lending (providing loans)
Direct method
analyze all transactions affecting cash account; group transactions into common activities and report how these activities affected cash
Indirect method
reconcile NI to CF from ops by accounting for non-cash and/or non-operating items embedded in accounting NI
___ expenses that were taken to NI but didn’t reduce cash balance
ADD (ex. depreciation)
___ decreases in non-cash assets
ADD (ex. inventories, receivables)
___ increases in payables and other related liabilities
ADD
___ losses on sales of assets
ADD
___ increases in non-cash assets
SUBTRACT (ex. inventories, receivables)
___ decreases in payables and other related liabilities
SUBTRACT
___ gains on sales of assets
SUBTRACT
Δ cash =
= NI + Depr - Gain (loss) on Sale of PPE - Δother CA + ΔCL
- Purchase of PPE + Cash from Sale of PPE
+ Δ PIC + Δ LT Debt - DIV
Why add Depr. exp?
NI was reduced, but cash was not
this is a non-cash expense
Why add increases in payables?
+ΔCL
an increase in payables means we hoard cash
this decreases NI, but does not change cash
ex. Salary Exp 1000
Salaries Payable 1000
add $1000
Why subtract decreases in payables?
+ΔCL
a decrease in payables means we expend cash
this does not alter NI, but decreases cash
ex. A/P 1000
Cash 1000
add -$1000
Why subtract increases in non-cash assets?
-Δother CA
ex. A/R 1000
Sales 1000
subtract $1000 (increases NI, but does not change cash)
ex. Inventory 2500
Cash 2500
subtract $2500 (does not alter NI, but decreases cash)
Why add decreases in non-cash assets?
-Δother CA
ex. Cash 1000
A/R 1000
subtract -$1000 (= +$1000) (didn’t change NI, but incr. cash)
ex. Cash 2500
Sales 2500
COGS 2000
Inventory 2000
subtract -$2000 (= +$2000) (NI increases by 500, Cash increases by 2500)
Calculating Gain/Loss
Amount Received - Book Value
Amount Received - (Amount paid - Accumulated Depr.)
Why subtract gain on asset sales?
Subtract gains on asset sales to avoid double counting the transaction in both ops and investing section) and to make sure all CF related to asset sales are in INVESTING section
ex. purchased for 10,000; accum depr of 9200, sold for 1K
Cash 1000
Accum Depr 9200
Gain on Equip sales 200
Equipment 10,000
record 1000 in CF from investing; since NI reports 200 gain, subtract 200 to avoid double counting in ops
Why add losses on asset sales?
Add losses on asset sales to avoid double counting the transaction (in both ops and investing) and to make sure all CF related to asset sales are in INVESTING section
ex. purchased for 10,000; accum depr of 8800, sold for 1K
Cash 1000
Accum Depr 8800
Loss on Equip 200
Equip 10,000
record 1000 in CF from investing; since NI reports 200 loss, add back 200 to avoid double counting in ops
Cash receipts of interest and dividends are reported as ____ activities
Operating
even though lending money & buying securities is investing…
Cash payments of interest are reported as ___ activities
Operating
even though borrowing money is financing…
Cash payments of dividends are reported as ___ activities
Financing
What if you purchase inventory on account?
this would cause incr in non-cash asset, but also increase a payable –> zero net effect
