Reporting Cash Flows - Chapter 12

Overview

• Lecture by Dr. Weishi Jia at Cleveland State University, ACT 221 Financial Accounting.
• Focuses on understanding and reporting cash flows.

Importance of Statement of Cash Flows

• Essential for assessing a company’s ability to generate future cash flows.
• Differentiates between net income and actual cash flows.
• Tracks the flow of cash to evaluate cash availability and shortage.

Key Sections of Cash Flow Statement

1. Operating Activities
   • Transactions affecting net income (revenues, expenses, current assets, and liabilities).
2. Investing Activities
   • Primarily involve long-term assets (purchase/sale of PPE, long-term investments).
3. Financing Activities
   • Transactions involving long-term liabilities and equity (e.g., bonds payable, issuing stocks).

Classification of Cash Flows

• Operating Activities: Day-to-day cash receipts and disbursements.
• Investing Activities: Related to long-term asset purchases/sales.
• Financing Activities: Related to long-term liabilities and equity.

Noncash Investing and Financing Activities

• Significant activities that do not involve cash directly.
• Example: Buying land by issuing a long-term note payable.
• Reported separately in the statement or accompanying notes.

Preparing the Statement of Cash Flows

• Two methods: Direct and Indirect.
  • Direct Method: Focuses on actual cash transactions.
  • Indirect Method: Adjusts net income for non-cash transactions.

Key Steps in Indirect Method

• Adjust net income for:
  • Non-cash expenses (depreciation, amortization).
  • Changes in non-cash current assets and liabilities.

Example Adjustments

• Non-cash Expenses: Added back to net income.
• Revenues and Gains: Subtracted from net income if no cash inflow.
• Changes in Current Assets/Liabilities:
  • Decrease in assets increases cash flow.
  • Increase in liabilities increases cash flow.

Cash Flows from Operating Activities

• Adjustments include changes in accounts like A/R, inventory, A/P.
• Example calculation: Cash Sales = Total Sales - Change in A/R

Cash Flows from Investing Activities

• Analysis of changes in plant assets and depreciation.
• Example: Selling a factory at a loss, purchasing equipment.

Cash Flows from Financing Activities

• Example transactions: Issuing stock, paying dividends, retiring debt.
• Analyzing changes in notes payable, common stock, and retained earnings.

Practical Examples

• Use specific transactions to determine cash flows from investing and financing activities.
• Example scenarios include selling assets at a loss, issuing stock, and paying dividends.

Conclusion

• Understanding cash flows aids in evaluating a company's financial health and operational efficiency.
• Essential for forecasting and financial planning.

End of Chapter 12