STATEMENT OF CASH FLOWS.docx

1、STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS Summary: 2Key words: 2Preface: 201 Classification of a Firms Activities Affecting Cash 302 Two Methods of Computing Cash Flows from Operating Actividies 403 Transations Affecting Cash Flows from All Sources 404 Preparing a Statement of Cash Flows Using

2、the Direct Method 605 Preparing a Statement of Cash Flows Using the Indirect Method 606 A Detailed Example of the Direct Method 707 Summing up the Amount of Change in Cash 908 Computing Cash Flows from Operating Activities 909 Computing the Cash Collections from Customers 910 Computing the Cash Paym

3、ents to Suppliers 1011 omputing the Cash Payments to Employees 11Reference documents: 13Summary:1. To explain the concept of the statement of cash flows.2. To classify activities affecting cash flows as operating , investing and financial activities.3. To use the direct method to measure cash flows.

4、4. To determine cash flows from income statement and balance sheet accounts.5. To use the indirect method to calculate cash flows from operations.6. To review financial statements.Key words:the Balance Sheet, the Income Statement, the Statement of owners Equity, the Statement of Cash FlowsPreface:A

5、statement of cash flows reports the cash receipts and cash payments of an entity during a period. It explains the causes for the changes in cash by providing information about operating , financing and investing activities.A statement of cash flows is important for the following purposes:1.It shows

6、the relationships of net income to changes in cash balances. Cash balances can decline despite positive net income and vice versa.2.It reports past cash flows as an aid to:(1)Predicting future cash flows;(2)Evaluating managements generating and use of cash ;and(3)Determining a companys ability to pa

7、y interest and dividends and to pay debts when they are due.3.It reveals commitments to assets that may restrict or expand future courses of action.The statement of cash flows provides explanations of changes in cash and cash equivalents (money market funds, treasury bill, etc.).It covers the period

8、 of time between two balance sheet dates and explains why the balance sheet items have changed.01 Classification of a Firms Activities Affecting CashReaders of financial statements want information on a firms activities in two primary areas:a. Operating management is primarily concerned with major d

9、ay-to-day activities that generate revenues and expense(operating activities);andb. Financial management is largely concerned with where to get cash (financing activities)and how to use cash (investing activities).1. Operating Activities(OA):Tables01-12. Investing Activities(IA)involve(1) providing

10、and collecting cash as a lender or as an owner of securities;(2) acquiring and disposing of plant, property ,equipment, and other long-term productive assets. Tables01-2 3. Financing Activities(FA).Financing activities involve obtainng resources as a borrower or issuer of securities and repaying cre

11、ditors and owners.Tables01-302 Two Methods of Computing Cash Flows from Operating Actividies Two approaches can be used to compute the number reported as cash flow from operating activities: (1)Computing it as collections less operating disbursements is called the direct method. (2)Adjusting the acc

12、rual net income to reflect only cash outlays is called indirect method. Note that the direct method is preferred because it shows operating cash receipts and payments in a way that is easier for investors to understand. However, the indirect method is more common.03 Transactions Affecting Cash Flows

13、 from All SourcesThe following table shows that used transactions affecting cash flows from all sources.Tables03-404 Preparing a Statement of Cash Flows Using the Direct Method 1.Rearranging the balance sheet equition:Assets=Liabilities +Stockholders EquityCash+Non-cash Assets=Liabilities +Stockhold

14、ers EquityCash=Liabilities +Stockholders Equity Non-cash Assets Any change in cash must be accompanied by a change in one or more items on the right side:Cash=Liabilities+Stockholders EquityNon-cash AssetsTherefore:Change in cash =Cash in all non-cash AssetsOr:What happened to cash =Why it happened

15、2.The statement of cash flows focuses on the change in the non-cash accounts as a way to explain how and why the level of cash changed during a given period. 3.Cash flows from operating activities: (1)Collections from sales to customers are almost always the major operating activity that increase ca

16、sh. (2)Disbursements for purchases of goods to be sold and operating expenses are almost always the major operating cash outflows. (3)The excess of collection over disbursements is net cash provided by operating activities. 4.To obtain cash flows from investing and financing activities ,it is necess

17、ary ,if the information regarding these cash flows is not directly available ,for accountants to analyze change in all balance sheet items except cash. (1)Increases in cash (cash inflows)-increases in liabilities or stockholders equity; (2)Decreases in cash(cash outflows)-decreases in liabilities or

18、 stockholders;increases in non-cash assets.05 Preparing a Statement of Cash Flows Using the Indirect Method The indirect method of computing cash flows from operating activities reconciles net income to the net cash provided by operating activities.(1) Depreciation is added back to net income becaus

19、e it is a non-cash item.(2) Add decreases in non-cash current assets.(3) Add increases in current liabilities.(4) Deduct increases in non-cash current assets.(5) Deduct decreases in current liabilities.06 A Detailed Example of the Direct MethodTable06-5MIKE COMPANYBalance Sheet(in thousands)December

20、 31,203Table06-6MIKE COMPANYIncome Statement (in thousands)For the Year Ended December 31,203Table06-7MIKE COMPANYStatement of Cash Flows (in thousands)For the Year Ended December 31,20307 Summing up the Amount of Change in Cash The first step in preparing the statement of cash flows is to compute t

21、he amount of the change in cash from the beginning to the end of the period .This calculation is often included at the bottom of the statement. The net change is added to the beginning balance to compute the ending balance. In this example ,cash decrease by $18000.Operating activities contribute $13

22、8000 cash during the period .Investing activities use $554000 cash during the period. Financing activities contribute $398000 cash during the period. The example shows how a firm may have positive net income but still have a decline in cash.08 Computing Cash Flows from Operating Activities Collectio

23、ns from sales to customers are usually the largest source of operating cash inflows. Disbursements for purchases of goods to be sold and operating expense are usually the largest sources of operating cash outflows .Operating cash inflows minus operating cash outflows equals the net cash provided by

24、(or used by )operating activities. Accountants often compute collections and other operating cash flow items from figures in the income statement. Many accountants use the balance sheet along with additional information and familiarity with causes of certain changes in balance sheet amounts to compu

25、te the cash flow items. However, many accounting systems are not capable of providing detailed information needed for that method.09 Computing the Cash Collections from Customers In our example , $36000 was collected from customers . That amount is determined as follow:Table09-8 Note that the increa

26、se in A/R means that sales collections.10 Computing the Cash Payments to Suppliers The difference between cost of goods sold and cash payments to suppliers can be determined by looking at inventory and accounts payable.Table10-10Table10-11The effects of inventory and accounts payable on Table10-10 a

27、nd Table10-11 can be combined into one calculation as follows:Table10-1211 Computing the Cash Payments to EmployeesCash payments to employees can be determined by examining wages and salaries payable.Table11-13OrNotice in this example that both interest payable and income taxes payable were zero at

28、the beginning and end of the period.This means that the entire amounts of interest expense and income tax expense were incurred and paid during the period, so the cash flows are the amounts of the expense ,$8000 and $40000 ,respectively.Reference documents:1. ACCOUNTING ENGLISH.Chang Xun 立信出版社2. ACCOUNTING ENGLISG Jiuhong Yu 中国人民大学出版社3. INTERNATIONAL ACCOUNTING ENGLISG. Roger Pegum 英国JUM大学