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ACCT 201 ACCT 201 ACCT 201 Reporting and Analyzing Cash Flows UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 12.

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Presentation on theme: "ACCT 201 ACCT 201 ACCT 201 Reporting and Analyzing Cash Flows UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 12."— Presentation transcript:

1 ACCT 201 ACCT 201 ACCT 201 Reporting and Analyzing Cash Flows UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 12

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3 TopicLOReadHW Cash Flows From Operating Activities P E3, 6, 7 Cash Flows From Investing Activities P E8, E9 Cash Flows From Financing Activities P E8, E9 Decision AnalysisA1, A QS9 Chapter 12 - Day 2 - Agenda No Homework Due Today!

4 Section 1: Net Cash Flows From Operating Activities ACCT 201 ACCT 201 ACCT 201 Operating Activities Investing Activities Financing Activities

5 ACCT 201 ACCT 201 ACCT 201 Accrual Accounting... Under GAAP most companies use accrual basis accounting: Revenue is recorded when earned; and Expenses are recorded when incurred.

6 ACCT 201 ACCT 201 ACCT 201 Accrual Accounting... Under accrual basis accounting net income will include Revenues not collected in cash Expenses not paid in cash Thus, accrual basis net income does not reflect cash flows from operating activities.

7 ACCT 201 ACCT 201 ACCT 201 Accrual Accounting and the SCF... To obtain net cash flows from operating activities - we will need to undo the effects of accrual accounting! That is, we need to go from accrual based accounting to cash based accounting.

8 Accrual to Cash.. He’s got to be Kidding! He’s not kidding!!!

9 Why didn’t we just do cash the first time?

10 From Accrual to Cash Obtaining Net Cash Flow From Operating Activities From Accrual to Cash Obtaining Net Cash Flow From Operating Activities Net Income Net Income Incurred Expenses Incurred Expenses Earned Revenues Earned Revenues Net Cash Flows From Operating Activities Net Cash Flows From Operating Activities Eliminate Noncash Revenues Eliminate Noncash Expenses

11 Accrual-Basis Accounting Accrual-Basis Accounting A Focus on Revenues Earned Expenses Incurred, and Net Income A Focus on Revenues Earned Expenses Incurred, and Net Income Income Statement Income Statement Cash-Basis Accounting Cash-Basis Accounting A Focus on Revenues Rec’d, Expenses Paid, & Net Cash Provided (used) by Oper. Act. A Focus on Revenues Rec’d, Expenses Paid, & Net Cash Provided (used) by Oper. Act. Statement of Cash Flows Statement of Cash Flows Relationship Between Income Statement and Stmt of Cash Flows Adjustments and Eliminations That Produce

12 Well, I guess that isn’t so bad after all!

13 How do I go about doing that?

14 ACCT 201 ACCT 201 ACCT 201 Preparing the SCF... There are two ways we can accomplish the conversion from accrual to cash. The Direct Method, and The Indirect Method

15 ACCT 201 ACCT 201 ACCT 201 Preparing the SCF... The FASB, after a great deal of study, has ruled that both approaches are acceptable. However, they prefer and encourage use of the direct method.

16 Direct, Indirect o’mi’gosh here we go again! anyway!

17 Section 1: Net Cash Flows From Operating Activities ACCT 201 ACCT 201 ACCT 201 Operating Activities Investing Activities Financing Activities

18 The Direct Method ACCT 201 ACCT 201 ACCT 201 Accrual Based Accounting Cash Based Accounting ending in a net source or use of funds. Under the Direct Method, firms provide a list of operating sources and uses of funds,

19 The Direct Method Cash Received From Customers$xx,xxx Less Cash Payments For: $xx,xxxPurchases of Merchandise Interestxx,xxx Selling & Admin. Expensesxx,xxx Net Cash Provided (Used) by Oper. Activities$xx,xxx xx,xxxIncome Taxesxx,xxx

20 The Indirect Method ACCT 201 ACCT 201 ACCT 201 Accrual Based Accounting Cash Based Accounting Under the Indirect method, firms begin with Net Income And make a series of adjustments to arrive at the net source or use of funds.

21 The Indirect Method Net Income, Accrual Basis$xx,xxx Add(Deduct) items to convert NI to a Cash Basis: Noncash expenses (e.g. Depr., Amortization) Gains/Losses related to nonoperating activities Gains Losses Current Assets Related to Operating Activities Net Cash Provided (Used) by Oper. Activities Deduct Add Increase in Accounts BalanceDeduct Decrease in Accounts BalanceAdd Current Liab. Related to Operating Activities Increase in Accounts Balance Decrease in Accounts Balance Add Deduct $xx,xxx

22 Oh, My, Decisions, Decisions. What should it be? Direct or Indirect

23 ACCT 201 ACCT 201 ACCT 201 Direct Vs. Indirect... The direct method is preferred by FASB, and is the more informative of the two formats. The indirect method is somewhat easier to prepare and is used by the majority of firms.

24 ACCT 201 ACCT 201 ACCT 201 Direct Vs. Indirect... The indirect method... Shows only the net cash provided More informative of the two. It shows the inflows and outflows of cash from operating activities.

25 The Statement of Cash Flows ACCT 201 ACCT 201 ACCT 201 Steps in Preparing the Statement of Cash Flows

26 Steps in Preparation of SCF ACCT 201 ACCT 201 ACCT 201 Analyze the cash account. Determine net cash flows from operating activities. Analyze remaining balance sheet items. Prepare the statement of cash flows.

27 Analyzing Non-Cash Accounts ACCT 201 ACCT 201 ACCT 201  Cash =  Liabilities  Stockholders’ Equity  Noncash Assets Derives from... Assets = Liabilities  Stockholders’ Equity The changes in cash can be determined by analyzing the noncash accounts on the balance sheet.

28 The Statement of Cash Flows ACCT 201 ACCT 201 ACCT 201 Let’s At the Direct Method for preparing the Cash Flows From Operating Activities Section

29 Section 1: Net Cash Flows From Operating Activities ACCT 201 ACCT 201 ACCT 201 Operating Activities Investing Activities Financing Activities

30 The Direct Method Cash Received From Customers$xx,xxx Less Cash Payments For: $xx,xxxPurchases of Merchandise Interestxx,xxx Selling & Admin. Expensesxx,xxx Net Cash Provided (Used) by Oper. Activities$xx,xxx xx,xxxIncome Taxesxx,xxx

31 Cash Received From Customers ACCT 201 ACCT 201 ACCT 201 We can get this information from two places! From the Cash Receipts Journal; or From accrual sales information

32 Cash Received From Customers ACCT 201 ACCT 201 ACCT 201 Let’s At Accrual- Based Sales

33 Cash Received From Customers Accrual Based Sales Decrease in Accounts Receivable Increase in Accounts Receivable Cash Received From Customers ACCT 201 ACCT 201 ACCT 201

34 Cash Paid For Wages & Operating Expenses ACCT 201 ACCT 201 ACCT 201 The cash paid for wages and other operating expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. {{ Cash paid for wages and other operating expenses = Wages and other operating expenses + Increase in prepaid expenses - Decrease in prepaid expenses + Decrease in accrued liabilities - Increase in accrued liabilities

35 Cash Paid For Merchandise ACCT 201 ACCT 201 ACCT 201 Step 1: Purchases = Cost of Goods Sold Increase in Mdse Inventory Decrease in Mdse Inventory Step 2: Cash Paid for Merchandise = Purchases Decrease in Accounts Payable Increase in Accounts Payable

36 Cash Paid for Interest & Taxes ACCT 201 ACCT 201 ACCT 201 Cash paid for interest = Interest Expense +Decrease in interest payable -Increase in interest payable { Cash paid for taxes = Tax Expense +Decrease in taxes payable -Increase in taxes payable {

37 ACCT 201 ACCT 201 ACCT 201 Under the Direct Method Depreciation, Amortization and Depletion Expenses do not appear on the SCF Gains and losses do not appear on the SCF.

38 The Statement of Cash Flows ACCT 201 ACCT 201 ACCT 201 Let’s At the Indirect Method for preparing the Cash Flows From Operating Activities Section

39 97.5% of all companies use the indirect method. Net Income Cash Flows from Operating Activities Changes in current assets and current liabilities. + Losses and - Gains + Noncash expenses such as depreciation and amortization. The Indirect Method

40 Use this table when adjusting Net Income to Operating Cash Flows. Indirect Method of Reporting Operating Cash Flows Change in Account Balance During Year IncreaseDecrease Current Assets Subtract from Net Income Add to Net Income Current Liabilities Add to Net Income Subtract from Net Income

41 Put on your thinking cap!!!

42 Remember! Remember!

43 Accounts Receivable is increased by credit sales. Accounts Receivable xx Accounts Receivable is decreased by cash payments received from customers. Think about Accounts Receivable. CashXxx Accts. Receivablexxx Accts. Receivablexxx Salesxxx

44 Accounts Receivable xxx So... If this balance increases during the year – it means that sales were greater than cash collected from customers. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore

45 Income Summary Remember the Closing Process? xxx Sales xxx Expenses These accrual- based Sales now reside here, in net income. Since, accrual- based Sales are greater than cash collections. We need to subtract this amount from Net Income.

46 Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore Result?Sales is adjusted to the cash receipt amount.

47 Inventory is increased by purchases of merchandise. Inventory xx Inventory is decreased by Sales of merchandise. Think about Inventory. Cost of Goods Soldxxx Inventoryxxx Inventoryxxx Accts Payablexxx

48 Inventory xxx So... If this balance decreases during the year – it means that Purchases of merchandise were smaller than COGS. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore

49 Income Summary Remember the Closing Process? xxx Sales xxx Expenses These accrual- based Cost of Goods Sold now reside here, in net income. Since accrual- based cost of goods sold is greater than cash purchases. We need to add this amount to Net Income.

50 Result?Expenses are adjusted to the cash payment amount. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore

51 Accounts Payable is decreased by cash payments made by the firm. Accounts Payable xx Accounts Payable is increased by purchases of merchandise on credit. Think about Accounts Payable. Inventoryxxx Accts. Payablexxx Accounts PayableXxx Cashxxx

52 So... If this balance decreases during the year – it means that cash payments to suppliers were greater than merchandise purchases. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore Accounts Payable xxx

53 Income Summary Remember the Closing Process? xxx Sales xxx Expenses These accrual- based Purchases now reside here, in net income. Since accrual- based Purchases are less than cash purchases. We need to subtract this amount from Net Income.

54 Result?Purchases are adjusted to the cash payment amount. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore

55 Accounts Payable is decreased by cash payments made by the firm. Accounts Payable xx Accounts Payable is increased by purchases of merchandise on credit. Think about Accounts Payable – Again! Inventoryxxx Accts. Payablexxx Accounts PayableXxx Cashxxx

56 So... If this balance Increases during the year – it means that cash payments to suppliers were less than merchandise purchases. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore Accounts Payable xxx

57 Income Summary Remember the Closing Process? xxx Sales xxx Expenses These accrual- based Purchases now reside here, in net income. Since accrual- based Purchases are greater than cash purchases. We need to add this amount to Net Income.

58 Result?Purchases are adjusted to the cash payment amount. Change (+/-) to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities Therefore

59 There you have it! Change to Net Income Balance IncreasesBalance Decreases Current Assets Current Liabilities

60 Now, like it was originally... Change in Account Balance During Year IncreaseDecrease Current Assets Subtract from Net Income Add to Net Income Current Liabilities Add to Net Income Subtract from Net Income

61 ACCT 201 ACCT 201 ACCT 201 Reporting and Analyzing Cash Flows Decision Analysis Chapter 12

62 Cash Flows on Total Assets Used, along with income-based ratios, to assess company performance. Cash Flow on Total Assets = Operating cash flows Average total assets ACCT 201 ACCT 201 ACCT 201


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