STATEMENT OF CASH FLOWS.docx

STATEMENT OF CASH FLOWS.docx

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STATEMENTOFCASHFLOWS

STATEMENTOFCASHFLOWS

Summary:

2

Keywords:

2

Preface:

2

01ClassificationofaFirm’sActivitiesAffectingCash3

02TwoMethodsofComputingCashFlowsfromOperatingActividies4

03TransationsAffectingCashFlowsfromAllSources4

04PreparingaStatementofCashFlowsUsingtheDirectMethod6

05PreparingaStatementofCashFlowsUsingtheIndirectMethod6

06ADetailedExampleoftheDirectMethod7

07SumminguptheAmountofChangeinCash9

08ComputingCashFlowsfromOperatingActivities9

09ComputingtheCashCollectionsfromCustomers9

10ComputingtheCashPaymentstoSuppliers10

11omputingtheCashPaymentstoEmployees11

Referencedocuments:

13

Summary:

1.Toexplaintheconceptofthestatementofcashflows.

2.Toclassifyactivitiesaffectingcashflowsasoperating,investingandfinancialactivities.

3.Tousethedirectmethodtomeasurecashflows.

4.Todeterminecashflowsfromincomestatementandbalancesheetaccounts.

5.Tousetheindirectmethodtocalculatecashflowsfromoperations.

6.Toreviewfinancialstatements.

Keywords:

theBalanceSheet,theIncomeStatement,theStatementofowner’sEquity,theStatementofCashFlows

Preface:

Astatementofcashflowsreportsthecashreceiptsandcashpaymentsofanentityduringaperiod.Itexplainsthecausesforthechangesincashbyprovidinginformationaboutoperating,financingandinvestingactivities.

Astatementofcashflowsisimportantforthefollowingpurposes:

1.Itshowstherelationshipsofnetincometochangesincashbalances.Cashbalancescandeclinedespitepositivenetincomeandviceversa.

2.Itreportspastcashflowsasanaidto:

（1）Predictingfuturecashflows;

（2）Evaluatingmanagement’sgeneratinganduseofcash;and

（3）Determiningacompany’sabilitytopayinterestanddividendsandtopaydebtswhentheyaredue.

3.Itrevealscommitmentstoassetsthatmayrestrictorexpandfuturecoursesofaction.

Thestatementofcashflowsprovidesexplanationsofchangesincashandcashequivalents（moneymarketfunds,treasurybill,etc.）.Itcoverstheperiodoftimebetweentwobalancesheetdatesandexplainswhythebalancesheetitemshavechanged.

01ClassificationofaFirm’sActivitiesAffectingCash

Readersoffinancialstatementswantinformationonafirm’sactivitiesintwoprimaryareas:

a.Operatingmanagementisprimarilyconcernedwithmajorday-to-dayactivitiesthatgeneraterevenuesandexpense（operatingactivities）;and

b.Financialmanagementislargelyconcernedwithwheretogetcash（financingactivities）andhowtousecash（investingactivities）.

1.OperatingActivities（OA）:

Tables01-1

2.InvestingActivities（IA）involve

（1）providingandcollectingcashasalenderorasanownerofsecurities;

（2）acquiringanddisposingofplant,property,equipment,andotherlong-termproductiveassets.Tables01-2

3.FinancingActivities（FA）.

Financingactivitiesinvolveobtainngresourcesasaborrowerorissuerofsecuritiesandrepayingcreditorsandowners.

Tables01-3

02TwoMethodsofComputingCashFlowsfromOperatingActividies

Twoapproachescanbeusedtocomputethenumberreportedascashflowfromoperatingactivities:

（1）Computingitascollectionslessoperatingdisbursementsiscalledthedirectmethod.

（2）Adjustingtheaccrualnetincometoreflectonlycashoutlaysiscalledindirectmethod.

Notethatthedirectmethodispreferredbecauseitshowsoperatingcashreceiptsandpaymentsinawaythatiseasierforinvestorstounderstand.However,theindirectmethodismorecommon..

03TransactionsAffectingCashFlowsfromAllSources

Thefollowingtableshowsthatusedtransactionsaffectingcashflowsfromallsources.

Tables03-4

04PreparingaStatementofCashFlowsUsingtheDirectMethod

1.Rearrangingthebalancesheetequition:

Assets=Liabilities+Stockholders’Equity

Cash+Non-cashAssets=Liabilities+Stockholders’Equity

Cash=Liabilities+Stockholders’Equity–Non-cashAssets

Anychangeincashmustbeaccompaniedbyachangeinoneormoreitemsontherightside:

△Cash=△Liabilities+△Stockholders’Equity–△Non-cashAssets

Therefore:

Changeincash=Cashinallnon-cashAssets

Or:

Whathappenedtocash=Whyithappened

2.Thestatementofcashflowsfocusesonthechangeinthenon-cashaccountsasawaytoexplainhowandwhythelevelofcashchangedduringagivenperiod.

3.Cashflowsfromoperatingactivities:

（1）Collectionsfromsalestocustomersarealmostalwaysthemajoroperatingactivitythatincreasecash.

（2）Disbursementsforpurchasesofgoodstobesoldandoperatingexpensesarealmostalwaysthemajoroperatingcashoutflows.

（3）Theexcessofcollectionoverdisbursementsisnetcashprovidedbyoperatingactivities.

4.Toobtaincashflowsfrominvestingandfinancingactivities,itisnecessary,iftheinformationregardingthesecashflowsisnotdirectlyavailable,foraccountantstoanalyzechangeinallbalancesheetitemsexceptcash.

（1）Increasesincash（cashinflows）-increasesinliabilitiesorstockholders’equity;

（2）Decreasesincash（cashoutflows）-decreasesinliabilitiesorstockholders’;increasesinnon-cashassets.

05PreparingaStatementofCashFlowsUsingtheIndirectMethod

Theindirectmethodofcomputingcashflowsfromoperatingactivitiesreconcilesnetincometothenetcashprovidedbyoperatingactivities.

（1）Depreciationisaddedbacktonetincomebecauseitisanon-cashitem.

（2）Adddecreasesinnon-cashcurrentassets.

（3）Addincreasesincurrentliabilities.

（4）Deductincreasesinnon-cashcurrentassets.

（5）Deductdecreasesincurrentliabilities.

06ADetailedExampleoftheDirectMethod

Table06-5

MIKECOMPANY

BalanceSheet（inthousands）

December31,20×3

Table06-6

MIKECOMPANY

IncomeStatement（inthousands）

FortheYearEndedDecember31,20×3

Table06-7

MIKECOMPANY

StatementofCashFlows（inthousands）

FortheYearEndedDecember31,20×3

07SumminguptheAmountofChangeinCash

Thefirststepinpreparingthestatementofcashflowsistocomputetheamountofthechangeincashfromthebeginningtotheendoftheperiod.Thiscalculationisoftenincludedatthebottomofthestatement.Thenetchangeisaddedtothebeginningbalancetocomputetheendingbalance.

Inthisexample,cashdecreaseby$18000.Operatingactivitiescontribute$138000cashduringtheperiod.Investingactivitiesuse$554000cashduringtheperiod.Financingactivitiescontribute$398000cashduringtheperiod.

Theexampleshowshowafirmmayhavepositivenetincomebutstillhaveadeclineincash.

08ComputingCashFlowsfromOperatingActivities

Collectionsfromsalestocustomersareusuallythelargestsourceofoperatingcashinflows.Disbursementsforpurchasesofgoodstobesoldandoperatingexpenseareusuallythelargestsourcesofoperatingcashoutflows.Operatingcashinflowsminusoperatingcashoutflowsequalsthenetcashprovidedby（orusedby）operatingactivities.

Accountantsoftencomputecollectionsandotheroperatingcashflowitemsfromfiguresintheincomestatement.

Manyaccountantsusethebalancesheetalongwithadditionalinformationandfamiliaritywithcausesofcertainchangesinbalancesheetamountstocomputethecashflowitems.

However,manyaccountingsystemsarenotcapableofprovidingdetailedinformationneededforthatmethod.

09ComputingtheCashCollectionsfromCustomers

Inourexample,$36000wascollectedfromcustomers.Thatamountisdeterminedasfollow:

Table09-8

NotethattheincreaseinA/Rmeansthatsales>collections.

10ComputingtheCashPaymentstoSuppliers

Thedifferencebetweencostofgoodssoldandcashpaymentstosupplierscanbedeterminedbylookingatinventoryandaccountspayable.

Table10-10

Table10-11

TheeffectsofinventoryandaccountspayableonTable10-10andTable10-11canbecombinedintoonecalculationasfollows:

Table10-12

11ComputingtheCashPaymentstoEmployees

Cashpaymentstoemployeescanbedeterminedbyexaminingwagesandsalariespayable.

Table11-13

Or

Noticeinthisexamplethatbothinterestpayableandincometaxespayablewerezeroatthebeginningandendoftheperiod.

Thismeansthattheentireamountsofinterestexpenseandincometaxexpensewereincurredandpaidduringtheperiod,sothecashflowsaretheamountsoftheexpense,$8000and$40000,respectively.

Referencedocuments:

1.ACCOUNTINGENGLISH.ChangXun立信出版社

2.ACCOUNTINGENGLISGJiuhongYu中国人民大学出版社

3.INTERNATIONALACCOUNTINGENGLISG.RogerPegum英国JUM大学