chapter 12: statement of cash flows
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Chapter 12: Statement of Cash Flows. Pre-Statement of Cash Flows (before 1987) Statement of Cash Flows (1987) Research. Statement of Changes in Financial Position. Reported on changes in assets, liabilities, and owners’ equities account balances - PowerPoint PPT PresentationTRANSCRIPT
Chapter 12: Statement of Cash Flows
Pre-Statement of Cash Flows (before 1987)
Statement of Cash Flows (1987)
Research
Statement of Changes in Financial Position
Reported on changes in assets, liabilities, and owners’ equities account balancesRecommended, but not required for inclusion in the annual report until 1971Objectives
Disclosure of changes in financial positionSummarize financing and investing activityReport funds flow from operations
Statement of Changes in Financial Position
Sources of resourcesTransaction credits
Arise from increases in liabilities and owners’ equity and decreases in assets
Uses of resourcesTransaction debits
Arise from decreases in liabilities and owners’ equity and increases in assets
Standard Format of the Statement of Changes in Financial Position
1. Increases to fund balance accounts
a. From net incomeb. From other sources
2. Other sources of resources
3. Decrease, if any, in the fund balance for the period
1. Decreases to the fund balance accounts
a. From net lossesb. From other sources
2. Other uses of resources
3. Increase, if any, in the fund balance for the period
Sources of Resources Uses of Resources
Early FASB Discussion Memo
1. Provide feedback on actual cash flows
2. Help to identify the relationship between accounting income and cash flows
3. Provide information about the quality of income
4. Improve comparability of information in financial reports
5. Aid in assessing flexibility and liquidity
6. Assist in predicting future cash flows
Statement of Cash Flows
Cash & Cash Equivalents at Beginning of Year
Cash & Cash Equivalents at End of Year
Cash Flows from Operating Activities
Net Change in Cash & Cash Equivalents
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Definition: Cash
Literal cash on hand or on demand deposit plus cash equivalents
Cash equivalents are highly liquid assets that are convertible to known amounts of cash and have short-term maturities
Statement of Cash Flows
Cash & Cash Equivalents at Beginning of Year
Cash & Cash Equivalents at End of Year
Cash Flows from Operating Activities
Net Change in Cash & Cash Equivalents
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Operating Activities Section
Direct method reports literal cash flows related to income statement classifications
FASB appears to favor
Cost to prepare > than with indirect method
Indirect or reconciliation method starts with accrual income and adjusts it for the noncash items in it
In 1996, 98% of American firms use
Nonarticulation problems
Direct vs. Indirect Method
Operating activities section is the only section that differs
The investing and financing activities sections are the same under both methods
Indirect Method: Nonarticulation
Working capital account changes on balance sheet do not equal working capital adjustments in the operating activities section of SCF (75% of the time in sample)
CausesWrite-up/down of working capital items
Depreciation allocations within inventories
Reclassifications of accounts between current and non current categories
Statement of Cash Flows
Cash & Cash Equivalents at Beginning of Year
Cash & Cash Equivalents at End of Year
Cash Flows from Operating Activities
Net Change in Cash & Cash Equivalents
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Investing Activities Section: Examples
Proceeds from sale of facility
Payment received on note for sale of plant
Capital expenditures
Payment for purchase of company X, net of cash acquired
Statement of Cash Flows
Cash & Cash Equivalents at Beginning of Year
Cash & Cash Equivalents at End of Year
Cash Flows from Operating Activities
Net Change in Cash & Cash Equivalents
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Financing Activities Section: Examples
Net borrowings under line-of-credit agreement
Principal payments under capital lease obligation
Proceeds from issuance of long-term debt
Proceeds from issuance of common stock
Dividends paid
SFAS No. 95 Classification Issues
Appearing in operating activities sectionInterest expenseInterest revenueDividend revenue
Related balance sheet items (bonds payable, stock investments, and long-term notes receivable) are either financing or investing elements
Ingram and Lee (1997)
1,000 firms over the period 1974-1992
Use the income statement and the cash flow statement together
Over time growing firms will have higher income and lower cash flows
Reverse occurs for shrinking firms
Improving Accounting Standards
Require the direct method for the Statement of Cash Flows
If the Indirect Method is retainedRequire a schedule showing noncash flow transactions affecting working capital accounts
Segregate current liability accounts into those that do and do not affect net income
Chapter 12: Statement of Cash Flows
Pre-Statement of Cash Flows (before 1987)
Statement of Cash Flows (1987)
Research