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Lecture 1

COMMERCE 1AA3 Lecture Notes - Lecture 1: Cash Flow Statement, Operating Cash Flow, Cash Flow


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Emad Mohammad
Lecture
1

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COMMERCE 1AA3- September 30, 2018
Chapter 10
The Purpose of the Statement of Cash Flows
The Statement of cash flows (SCF) is needed because other statements are prepared
under the accrual basis
To provide information about cash receipts, cash payments, and the net change in cash
resulting from the operating, investing, and financing activities of a company during a
specific period.
Format
The general format of the cash flow statement is organized around the three activities
of operating, investing, and financing.
OPERATING: related income statement items, current assets, and current
liabilities. *MOST IMPOARTANT- because firms care about the income you
generate from your salary (most sustainable) *
INVESTING: related to long-term assets and investments. (dry up soon)
FINANCING: related to long-term liabilities and owners’ equity.
USURY: extremely high rate
Cash Flow Categories
Preparation

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COMMERCE 1AA3- September 30, 2018
Chapter 10
The cash flow statement is prepared differently from other basic financial statements.
First, because the statement requires detailed information concerning the
changes in account balances that occurred between two periods of time, an
adjusted trial balance does not provide the data necessary for the statement.
Second, the cash flow statement deals with cash receipts and payments. The
accrual concept is not used in the preparation of a cash flow statement
Sources for Preparing the Statement
*You need a balance sheet for two years and an income statement*
Comparative balance sheet
Current income statement
Additional information
Cash from Operating Activities
Cash from operating activities results from converting net income from the accrual basis
to the cash basis.
Cash from operating activities can be calculated using one of two methods:
The INDIRECT METHOD
The DIRECT METHOD
Both methods give the same result
The Indirect Method
*PROF DOESN’T BELIEVE IN THIS- it comes from the textbook*
Most companies prefer this method because it:
is easier to prepare,
focuses on the differences between net earnings and net cash flow from
operating activities, and
reveals less company information to competitors (non sense)

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COMMERCE 1AA3- September 30, 2018
Chapter 10
Indirect Method: Calculations
The indirect method begins with net income, then adjusts that number to calculate
operating cash flows
The idea behind the indirect method is to convert accrual net income to cash flows from
operating activities.
That is accomplished by adding/subtracting certain adjustments to net income
The adjustments income items that have different effect on net income and the
Cash Flows from Operating activities
Accruals and deferrals have a different impact on net income and Cash Flows
from Operating activities
ACCRUALS:
A/R XX
Revenue XX
(increase net income, but no CFO)
Salaries expense XX
Salaries Payable XX
(decrease net income, but not CFO)
DEFFERALS (PAYMENTS):
Cash XX
Unearned Revenue XX
(Increase CFO, but not net income)
Prepaid Rent XX
Cash XX
(Decrease CFO, but not net income)
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