acct 201 acct 201 acct 201 reporting and analyzing cash flows uaa – acct 201 principles of...

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Reporting and Analyzing Cash Flows

UAA – ACCT 201 Principles of Financial

Accounting Dr. Fred Barbee

Chap

ter 1

2

Topic LO Read HWCash Flows From Operating Activities

P3538-540

E3, 6, 7

Cash Flows From Investing Activities

P4543-545

E8, E9

Cash Flows From Financing Activities

P4545-548

E8, E9

Decision Analysis A1, A2548-550

QS9

Chapter 12 - Day 2 - Agenda

No Homework Due Today!

Section 1: Net Cash Flows From Operating Activities

ACCT 201 ACCT 201 ACCT 201

Operating Activities

Investing ActivitiesFinancing Activities

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Accrual Accounting . . .

Under GAAP most companies use accrual basis accounting:

Revenue is recorded when earned; and

Expenses are recorded when incurred.

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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.

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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.

#@!#@!Accrual to Cash . .

He’s got to beKidding!

He’s not kidding!!!#@!#@!

#@!#@!Why didn’t we

just do cash thefirst time?

From Accrual to CashObtaining Net Cash Flow From Operating Activities

From Accrual to CashObtaining Net Cash Flow From Operating Activities

NetIncome

NetIncome

IncurredExpensesIncurredExpenses

EarnedRevenuesEarned

Revenues

Net Cash Flows FromOperating Activities

Net Cash Flows FromOperating Activities

Eliminate Noncash Revenues

Eliminate Noncash Expenses

Accrual-BasisAccounting

Accrual-BasisAccounting

A Focus onRevenues Earned

ExpensesIncurred, andNet Income

A Focus onRevenues Earned

ExpensesIncurred, andNet Income

IncomeStatement

IncomeStatement

Cash-BasisAccounting

Cash-BasisAccounting

A Focus onRevenues Rec’d,Expenses Paid, &

Net CashProvided (used)

by Oper. Act.

A Focus onRevenues Rec’d,Expenses Paid, &

Net CashProvided (used)

by Oper. Act.

Statement ofCash Flows

Statement ofCash Flows

Relationship Between Income Statement and Stmt of Cash FlowsRelationship Between Income Statement and Stmt of Cash Flows

Adjustments and Eliminations

That Produce

Well, I guessthat isn’t sobad after all!

How do I go about

doing that?

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Preparing the SCF . . .

There are two ways we can accomplish the conversion from accrual to cash.

The Direct Method, and

The Indirect Method

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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.

Direct, Indirecto’mi’gosh herewe go again!

#@!#@! anyway!

The Direct Method


AccrualBased

Accounting

CashBased

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,

The Direct Method

Cash Received From Customers $xx,xxx

Less Cash Payments For:

$xx,xxxPurchases of Merchandise

Interest xx,xxx

Selling & Admin. Expenses xx,xxx

Net Cash Provided (Used) by Oper. Activities$xx,xxx

xx,xxxIncome Taxes xx,xxx

The Indirect Method


AccrualBased

Accounting

CashBased

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.

The Indirect MethodNet 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 Balance Deduct

Decrease in Accounts Balance Add

Current Liab. Related to Operating Activities

Increase in Accounts Balance

Decrease in Accounts Balance

Add

Deduct

$xx,xxx

Oh, My, Decisions, Decisions.

What should it be?Direct or Indirect

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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.

The Direct Method

Cash Received From Customers $xx,xxx

Less Cash Payments For:

$xx,xxxPurchases of Merchandise

Interest xx,xxx

Selling & Admin. Expenses xx,xxx

Net Cash Provided (Used) by Oper. Activities$xx,xxx

xx,xxxIncome Taxes xx,xxx

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Under the Direct Method

Depreciation, Amortization and Depletion Expenses do not appear on the SCF

Gains and losses do not appear on the SCF.

The Statement of Cash Flows


Let’s

At the Indirect Method for

preparing the Cash Flows From

Operating Activities Section

97.5% of all companies use the indirect method.

Net Income

Cash Flows from


Changes in current assets and current liabilities.

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

The Indirect Method

Use this table when adjusting Net Income to Operating Cash Flows.

Indirect Method of Reporting Operating Cash Flows

Change in Account Balance During Year

Increase Decrease

Current Assets

Subtract from Net Income

Add to Net Income

Current Liabilities

Add to Net Income


Put on your thinking cap!!!

Remember!

Remember!

Accounts Receivable is increased by credit sales.

Accounts Receivablexx xx

Accounts Receivable is

decreased by cash payments received

from customers.

Think about Accounts

Receivable.

Cash Xxx

Accts. Receivable

xxx

Accts. Receivable xxx

Sales xxx

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

Income Summary

Remember the Closing Process?

xxx SalesxxxExpenses

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.



Current Assets

Current Liabilities

Therefore

Result? Sales is adjusted to the cash receipt amount.

Inventory is increased by purchases of merchandise.

Inventoryxx xx

Inventory is decreased by

Sales of merchandise.

Think about Inventory.

Cost of Goods Sold

xxx

Inventory xxx

Inventory xxx

Accts Payable xxx

Inventory

xxx

So . . . If this balance

decreases during the year – it

means that Purchases of merchandise were smaller than COGS.



Current Assets

Current Liabilities

Therefore

Income Summary



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.

Result? Expenses are adjusted to the cash payment amount.



Current Assets

Current Liabilities

Therefore

Accounts Payable is

decreased by cash payments

made by the firm.

Accounts Payablexx xx

Accounts Payable is increased by purchases of

merchandise on credit.

Think about Accounts Payable.

Inventory xxx

Accts. Payable xxx

Accounts Payable Xxx

Cash xxx

So . . . If this balance decreases during

the year – it means that cash payments to suppliers were

greater than merchandise purchases.



Current Assets

Current Liabilities

Therefore

Accounts Payable

xxx

Income Summary



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.

Result? Purchases are adjusted to the cash payment amount.



Current Assets

Current Liabilities

Therefore

Accounts Payable is

decreased by cash payments

made by the firm.

Accounts Payablexx xx

Accounts Payable is increased by purchases of

merchandise on credit.

Think about Accounts Payable –

Again!

Inventory xxx

Accts. Payable xxx

Accounts Payable Xxx

Cash xxx

So . . . If this balance Increases during the year – it means

that cash payments to suppliers were

less than merchandise purchases.



Current Assets

Current Liabilities

Therefore

Accounts Payable

xxx

Income Summary



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.

Result? Purchases are adjusted to the cash payment amount.



Current Assets

Current Liabilities

Therefore

There you have it!

Change to Net Income


Current Assets

Current Liabilities

Now, like it was originally . . .

Change in Account Balance During Year

Increase Decrease

Current Assets


Add to Net Income

Current Liabilities

Add to Net Income


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Reporting and Analyzing Cash Flows

Decision Analysis

Chap

ter 1

2

Cash Flows on Total Assets

Used, along with income-based ratios, to assess company performance.

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 reporting and analyzing cash flows uaa – acct 201 principles of...

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