ACCT10002 Lecture Notes - Lecture 9: Retained Earnings, Promissory Note, Cash Flow

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amaranthbadger280

19 Jun 2018

School

University of Melbourne

Department

Accounting

Course

ACCT10002

Professor

Warren McKeown

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Introductory Financial Accounting

Lecture 9- The Statement of Cash Flows

Understanding Cash Flows

1. Helps to identify the economic characteristics of the firm

2. Provides insights into the strategy of the firm

3. Helps to identify profitability and risk

4. Helps prepare forecasts

5. Provides a means of valuation of the firm

Positive cash flows allow a company to

- Pay dividends to owners

- Take advantage of Market opportunities

- Expand its operations

- Replace needed assets

Perhaps the most important measure of a company’s financial health.

Accounting Statements and Concepts

-Cash Flow Statement: A financial statement that provides a reconciliation of opening and closing

‘cash’, including cash on hand and cash equivalents.

-Accrual Accounting: A system of accounting which revenues are recognised when earned and

expenses are recognised when incurred, even in the absence of cash flow.

-Accrual Profit & Loss: The profits and losses that are disclosed as result of applying accrual

accounting techniques.

-The Balance Sheet (Statement of Financial Position) shows the assets, liabilities and owners’ equity

balances at a certain date (the reporting date).

-The Income Statement (The Statement of Comprehensive Income) that has been generated for a

period of time, typically a year, adopting the process of accrual accounting.

-The Cash Flow Statement concentrates on the movements in cash and cash equivalents for a given

period. The Statement of Cash Flows provides a very useful complement to the other statements

typically found in a reporting entity’s financial statements – that is, the balance sheet and the

statement of changes in equity and the income statement.

Interrelationship Between Principal Financial Statements

Significant Non-cash Activities

Significant financing and investing activities that do not affect cash are not reported in the body of the

statement of cash flows, but are reported in the notes. These include:

- Issue of shares to purchase assets

- Conversion of debt into ordinary shares

- Issue of debt to purchase assets

- Exchanges of property, plant & equipment

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Cash Flows

The purpose of the cash flow statement is to provide additional information to assess business

performance and liquidity. To assess ‘…the ability of an entity to generate cash and cash equivalents and

the timing and certainty of their generation…’.

AASB 107 Paragraph 6 defines the following as:

Cash- Cash comprises cash on hand and demand deposits

Cash Equivalents- Cash equivalents are short term, highly liquid investments that are readily convertible to

known amounts of cash and which are subject to an insignificant risk of changes in value.

Cash Flows- Cash flows are inflows and outflows of cash and cash equivalents.

Operating Activities: are the principal revenue-producing activities of the entity and other activities that

are not investing or financing activities.

Investing Activities: are the acquisition (purchase) and disposal (sale) of long–term assets and other

investments not included in cash equivalents.

Financing Activities: are activities that result in changes in the size and composition of the contributed

equity and borrowings of the entity.

Cash Flow Statement

Information provided is useful in assessing the ability of the entity to:

- Generate cash flows

- Meet its financial commitments as they fall due - including the servicing of borrowings and the

payment of dividends

- Fund changes in the scope and / or nature of its activities; and

- Obtain external financing

Does Profit = Cash?

Why does Net Operating Cash Flow ≠ Net Operating Profit?

Some receipts are revenue, BUT

- Not all receipts are revenue (e.g. receipts from debtors)

- Not all revenue are receipts (e.g. credit sales, accrued revenue)

Likewise: Some payments are expenses, BUT

- Not all cash payments are expenses (e.g. payments to creditors & accruals, prepaid expenses)

- Not all expenses are cash payments (e.g. cost of goods sold, bad & doubtful debts, depreciation,

accrued expenses, prepayments used up)

Cash Flows- Liquidity Crisis

If the collection of sales revenue is deferred, the business might not have sufficient funds to meet its

expenses.

It may therefore face a liquidity crisis even though its profit, which is determined on the accrual basis,

might appear to be sound.

The separation of Net Income and Cash Flow from Operating Activities may be a telling indicator of a firm’s

real performance.

Quality of Income Ratio

In general, this ratio measures the portion of income that was generated in cash. All other things equal, a

higher quality of income ratio indicates greater ability to finance operating and other cash needs from

operating cash inflows.

Operating Cash flows versus Net Profit

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Document Summary

Understanding cash flows: helps to identify the economic characteristics of the firm, provides insights into the strategy of the firm, helps to identify profitability and risk, helps prepare forecasts, provides a means of valuation of the firm. Perhaps the most important measure of a company"s financial health. Cash flow statement: a financial statement that provides a reconciliation of opening and closing. Cash", including cash on hand and cash equivalents. Accrual accounting: a system of accounting which revenues are recognised when earned and expenses are recognised when incurred, even in the absence of cash flow. Accrual profit & loss: the profits and losses that are disclosed as result of applying accrual accounting techniques. The balance sheet (statement of financial position) shows the assets, liabilities and owners" equity balances at a certain date (the reporting date). The income statement (the statement of comprehensive income) that has been generated for a period of time, typically a year, adopting the process of accrual accounting.

Related Questions

Investment and financing decisions, which may beshort-term or long-term decisions are best describedas:

financial decision making.

economic decision making.

accounting decision making.

Mutual funds, pension funds, investment dealers andinsurance companies are best described as examples of:

corporate finance.

market intermediaries.

financial intermediaries.

Farmers and Merchants Bank lends money to Ruth topurchase a car from Steven Toyota. Ruth is going to insure the carwith Allstate Insurance. Which party is best described as thecreditor?

Ruth

Steven Toyota

Allstate Insurance

Farmers and Merchants Bank

Which of the following would not be described as adebenture?

An unsecured loan

A loan secured by collateral

A loan secured by the âfull faith and creditâ of theissuer

Morgan Stanley was the investment banking firm that tookFacebook from being a closely held company to issuing stock to thepublic for the first time. Which of the following terms mostclosely describes this?

money market security.

issuing commercial paper.

initial public offering (IPO).

debt security backed by the general credit of theissuer.

Which of the following transactions does not take placein the primary market? An investor:

buying a newly issued municipal bond.

buying shares of an initial publicoffering.

selling one hundred shares of stock through a stockbroker.

buying a U.S. Treasury bill through the governmentauction.

The majority of home purchases in the U.S. are securedwith a mortgage. A mortgage is:

an unsecured loan.

an equity investment in the property.

a debt obligation secured by a specificproperty.

Which form of business would most likely describe thefollowing, a college student other students, a retired woman whobabysits children, a teenager who mows lawns, and a partyclown?

Partnership

Corporation

Sole proprietorship

Limited liability company

Flow-through taxation is a characteristic for all butthe following forms of business?

Partnership

Corporation

Sole proprietorship

Limited liability company

Your sister wants to start a tee shirt business on e-Baywith you to help pay for college tuition. All of the following areadvantages to partnerships that you should both consider, except____________?

Easy to form

Access to capital

Business income is taxed once, at the individualpartnerâs level

Which of the following takes into account takes intoaccount the opportunity cost of funds?

Net profit

Economic profit

Accounting profit

When we talk about capital structure, this refersto:

the cash, inventory, and accountsreceivable.

mix of debt and equity to finance anenterprise.

the investment in plant, property andequipment.

The uncertainty associated with the use of debt tofinance a business enterprise is best described as:

financial risk.

business risk.

operating risk.

The mix of debt and equity that is used to finance abusiness enterprise is best described as theenterpriseâs:

assets.

working capital.

capital structure.

capital expenditures

Generally accepted accounting principles (GAAP) are bestdescribed as a(n):

organization that establishes the accounting principlesfor U.S. financial reporting.

accounting standards promulgated by the InternationalAccounting Standards Board (IASB.)

set of basic principles and conventions that are appliedin the preparation of financial statements.

organization that establishes the accounting principlesfor business entities in the European EconomicCommunity.

Which reporting convention requires recording revenueand expenses when the transaction occurs, regardless of when cashchanges hands?

Cost basis

Cash basis

Accrual basis

The summary of the companyâs performance over a periodof time, typically a fiscal quarter or fiscal year

Balance sheet

Statement of stockholderâs equity

Income statement

Statement of cash flows

_______ is the cash flow from the day-to-day operationsof the business; the result of subtracting the increase in newworking capital from traditional cash flow.

Cash flow from investing

Cash flow from financing

Simple cash flow

Cash flow from operations

The debt ratio is classified as which type ofratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

Inventory turnover, accountsreceivable turnover, fixed asset turnover, and total asset turnoverare all classified as which type of ratio?

Owner

Liquidity

Efficiency

Productivity

Financial Leverage

ABC Company attempts tomanage its earnings by extending the useful life of all of itsequipment. Which of the following will not be an outcome of thischoice by management?

Income will be higher than it would have been underprior accounting methods.

Equipment values will be higher than they would havebeen without the change.

Depreciation expense will be lower than it would havebeen under prior accounting methods.

Depreciation expense will be higher than it would havebeen under prior accounting methods.

It is important for a companyto know the level of sales at which it covers all its variable andfixed operating costs. This level of sales is best described asthe:

gross profit margin.

contribution margin.

operating break even.

operating profit margin.

The minimum return thatinvestors expect to earn on the investment in stock is bestdescribed as:

growth rate.

risk premium.

capital gains yield.

required rate of return

If a company returns more than the required rate ofreturn on a stock, what happens to the value of thatstock?

The stock price falls.

The stock price rises.

The stock price stays the same.

When market rates are greaterthan the dividend rate, preferred shares will tradeat:

par.

a discount.

a premium.

byzantiummoose662

1) Which of the following items would be reported net of taxesafter income from continuing operations?

Select one:

a. Gain or loss on the sale of property.

b. Loss due to a factory strike.

c. Interest expense.

d. Gain or loss on the sale of a major segment of theentity.

Given the following list of accounts, calculate TotalAssets:

Accounts Receivable	$ 5,000
Capital Stock	20,000
Cash	14,300
Equipment	15,400
Fees Earned	44,400
Miscellaneous Expense	18,200
Rent Expense	4,150
Retained Earnings	6,550
Wages Expense	13,900

Select one:

a. $54,700

b. $26,550

c. $79,100

d. $34,700

Which of the following is NOT associated with accrual basisaccounting?

Select one:

a. Income statement.

b. Matching principle.

c. Statement of cash flows.

d. Revenue recognition principle.

Which of the following is an example of an intangible asset?

Select one:

a. Trademark

b. Timber

c. Equipment

d. Marketable securities

Which of the following would be shown under the financingactivities section on the statement of cash flows?

Select one:

a. Cash received from customers.

b. The payment of cash to retire a long-term note.

c. Depreciation expense.

d. The proceeds from the sale of a building.

A machine was purchased for $32,000 on April 1st. It has auseful life of 5 years and a residual value of $4,000. What is thedepreciation expense for the first fiscal year ending on December31st under the straight-line method?

Select one:

a. $1,400

b. $6,400

c. $4,200

d. $5,600

The entry to record the signing of a contract to receiveinventory and make payment at a future date includes

Select one:

a. No debits or creditsâjust a memorandum.

b. A debit to cost of goods sold.

c. A credit to cash.

d. A debit to inventory.

An inventory cost flow assumption is NOT needed for a productline

Select one:

a. If all of the inventory available for sale was purchased atthe same unit cost.

b. If all of the inventory looks the same.

c. If there is still some inventory on hand at the end of theyear.

d. If there is no beginning inventory carried over from theprevious accounting period.

Fees received this period from customers for services to beperformed in the next accounting period, would be a(n)

Select one:

a. Expense disclosed on the statement of cash flows.

b. Revenue disclosed on the income statement.

c. Liability disclosed on the balance sheet.

d. Item not included on the financial statements until the nextaccounting period.

10)

Which of the following is TRUE of a corporation?

Select one:

a. They are incorporated with a national agency.

b. At least one owner has unlimited liability.

c. They are a separate taxable entity.

d. More than 70% of businesses are organized this way.

11)

The effects on the accounts of recording the cost of merchandisesold for cash using a perpetual inventory system include an

Select one:

a. Increase in Accounts Payable.

b. Increase in Merchandise Inventory.

c. Increase in Sales.

d. Increase in Cost of Goods Sold;

12)

Which of the following is NOT a limitation of externallyreported accounting information?

Select one:

a. The income statement contains atypical data due to the timingof the fiscal year end.

b. Accounting information relies on estimates.

c. Management has some discretion regarding the reportingclassification and choice of accounting measurement methods.

d. There is a hodge-podge of valuation techniques used on thefinancial statements.

13)

Given the following information regarding merchandise inventoryat the end of the fiscal year:

Ending inventory at cost $34,000

Ending inventory at market $33,400

Which of the following is correct?

Select one:

a. No journal entry should be made based upon the informationgiven.

b. Inventory should be reported on the balance sheet at$34,000.

c. Inventory should be reported on the balance sheet at$33,400.

d. A journal entry should be made to recognize a gain of$600.

14)

Which of the following describes the closing process when acompany has net earnings for the period?

Select one:

a. The Dividends account is debited for its balance.

b. The individual asset accounts are credited for theirbalances.

c. The individual expense accounts are debited for theirbalances.

d. The Income Summary account is debited for its balance.

GOOGLE: MorningstarÂ® Document Research FORM 10-K GENERAL MILLS INC - GIS Filed: June 29, 2017 (period: May 28, 2017) Annual report with a comprehensive overview of the companyâ FOR THE ANNUAL REPORT

Instructions: Use the financial statements from the annual report for the year ended 5/28/2017 for General Mills. The Annual Report is on MOODLE. Answer the questions after each question. Use a different font to distinguish your answer from the question. All answers should be in your own words. Do not cut and paste from the annual report. Answers will be graded for content and written communication skills. Use complete sentences.

*****MAKE A NOTATION HERE IF THE DOLLAR AMOUNTS ARE STATED IN MILLIONS.

1. Who are the external auditors for General Mills? What does their Report of Independent Registered Public Accounting firm indicate about the amounts represented in the companyâs financial statements?

2. What specific title does General Mills use for its income statement? What type of income
statement does General Mills issue? (multi-step, singleâstep, or condensed multi-step)
Explain.

3. Did they disclose EPS as discussed in class? Explain. What about the EPS presentation
did we not discuss in ACC 3100?

4. How does General Mills define Cash Equivalents? Is this consistent with the textbook?

5. What is the amount of cash and cash equivalents reported for the year ended at May 28, 2017 and for the year ended at May 29, 2016. By how much has cash and cash equivalents increased/decreased? Show calculations.

6. Create a table illustrating the amount General Mills reports for net cash flows from operating, investing, and financing activities in its statement of cash flow for the year ended May 28, 2017. (Note: Include any effect of exchange rates on cash.) Show calculations. Compare your answers to question 5.

7. What amount is the balance in the Allowance for Doubtful Accounts at 5/28/2017? How is the estimate for Allowance for Doubtful Accounts determined?

8. What was the gross balance of trade receivables at 5/28/2017? What was the dollar amount of bad debt expense for the year ended 5/28/2017? How many accounts were written off (Dollar amount)?

9. What inventory method is used to value inventory in and out of the US?

10. What is the balance of their LIFO reserve account 5/28/2017?

11. What impact (dollar amount and increase or decrease) did the LIFO Reserve adjustment have on Cost of Goods Sold?

12. Which depreciation method(s) is used for PP& E? What estimates are made for the useful life of the different categories of assets?

13. What was total depreciation and amortization expense fiscal year ended 5/28/2017? Where were these amounts reported in the financial statements?

14. What was the major component of total PP&E? What was its amount and what percentage was it of the total for the year ended 5/28/2017?

15. What percentage of total PP&E has been depreciated as of 5/28/2017?

16. Did General Mills capitalize any interest in the fiscal year ended 5/28/2017? If so, what was the amount?

17. Did General Mills dispose of any property and equipment during the year ended 5/28/2017? If so, what was the cash proceeds?

18. Did General Mills issue more new long term debt than they paid in long term debt payments for the year ended 5/28/2017? Explain, show amounts.

19. Create a table to show the components of Comprehensive Income that was attributable to General Mills for the year ending 5/28/2107?

20. Create a table to show the components and amounts of General Millsâ Accumulated Other Comprehensive income(loss) for the year ending 5/28/2017 and 5/29/2016?

21. When does General Mills review impairment for long-lived assets? What is their measurement of an impairment loss based on for long-lived assets?

22. What is the amount of General Mills goodwill? Did General Mills have an impairment loss on Goodwill during fiscal year ended 5/28/2017? What are the standards for testing goodwill(How often and how is it tested)?

23. List any other indefinite life intangibles? How much was the impairment loss General Mills recorded for fiscal year ending 5/31/2015 and why was impairment indicated?

24. The Financial Accounting Standards Board (FASB) issued two new accounting requirements in 2017 that were mentioned in General Millsâ annual report? What are the standards and what is the expected impact of these new standards to the financial statements?

25. General Mills uses the three-level fair value hierarchy for disclosure. What level are the majority of their assets and liabilities measured at 5/28/2017? According to your textbook, how is this level defined?

26. When does General Mills recognize revenue? Do they handle consistently with the material presented in ACC 3100?

27. What was General Millsâ current ratio and working capital as of 5/28/2017? Show calculations.

28. Is the Statement of Changes in Stockholderâs Equity (Consolidated Statements of Total Equity, and Redeemable Interest) consistent with what we learned in class? Explain-indicate similarities and differences.

29. According to the MD&A (begins on p. 15) did General Millsâ Selling, general, and
administration expenses increase or decrease in fiscal year ended 5/28/2017? What was
the primary reason for the change?

30. In two detailed paragraphs, indicate a couple of interesting items you learned while
reading this annual report.

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ACCT10002 Lecture Notes - Lecture 9: Retained Earnings, Promissory Note, Cash Flow

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