Class Notes (835,338)
Canada (509,112)
Commerce (1,909)
Lecture 5

Class Notes - WEEK 5 (Oct 7, 8, 10) - COMM 2AA3

5 Pages
Unlock Document

Aadil Merali Juma

LECTURE 5 COMM 2AA3 Chapter 5: Reporting and Interpreting Cash Flows October 6, 2013 Statement of Cash Flows  Purpose – to provide information about cash receipts, cash payments and the next change in cash resulting from the operating, investing and financing activities of a company during a specific period o Cash we received and paid out  Cannot be made from a trial balance; need balance sheet from 2 years and current income statement  Cash is a fact; many other items are opinions (i.e. cost of goods sold, depreciation and salvage value etc)  General Format – organized around the three activities of operating, investing and financing o Operating – mainly related income statement items, current assets and current liabilities  Should always be positive o Investing – mainly related to long-term assets and investments; buying of or selling of  Negative value is a good indicator (should be investing in other businesses); positive value is a bad indicator  If positive – sold long-term assets (not good)  money by liquidating assets is not good for a business  Positive rarely can be good eg/ selling old delivery truck o Financing – mainly related to long-term liabilities and owners equity  Preparation – cash flow statement is prepared differently from other basic financial statements 1. The statement required 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 2. 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 o Comparative balance sheet o Current income statement o Additional information – required to ensure that ending amount in cash flow is what is in the bank  Cash from operating activities – result from converting net income from the accrual basis to the cash basis o Cash from operating activities can be calculated using one of two methods (both give the same result)  Indirect Method  Direct method Indirect Method  Preferred by most companies because: o Easier to prepare o Focuses on the differences between net earnings and net cash flow from operating activities o Reveals less company information to competitors  Eg/ Kijana Inc. sold $5,000 of merchandise on credit and $1,000 of merchandise for cash to Rafiki Inc The goods had cost $3,000 all purchased on credit o I/S (Income Statement)  Rev = $6,000  Expense = $3,000  Net Income = $3,000  Cash = $1,000 o B/S (Balance Sheet)  A/R = 5,000  Cash = 1,000 o C/F  Net Income = 3,000 Less increase in A/R (5,000)  Effect of sales on cash o No access to individual transactions; have statements – cash statement under indirect method starts with net income, makes adjustments to reach net cash o Revenue causes net income to increase, but cash did not go up – A/R increased (because of sale on credit)  make net income meet net cash by subtracting 5,000 from NI o 2 entries associated with sales – record the sale and to record the cost of the sale o Cost of goods sold is an expense, NI decreases  cash did not decrease (because of purchase on credit) o Journal Entry A/R 5,000 Cash 1000 Rev 6000 1 LECTURE 5 COMM 2AA3 Cost of Goods Sold 3000 Inventory 3000 Inventory 3000 A/P 3000 o A/P increases – should see Inventory  no inventory, COGS must have increased  COGS expense, makes NI decrease, but cash did not decrease o C/F  Net Income = 3,000 Less increase in A/R (5,000)  effect of sales on cash Add increase in A/P (3,000)  effect of purchase on cash Net Cash Flow = 1,000  Calculations o Begins with net income, then adjusts that number to calculate operating cash flows  Presentation  Add items that decrease income but do not affect cash o Depreciation and amortization expense o Losses on disposal of assets o Decreases in current assets o Increases in current liabilities  Subtract items that increase net income but do not affect cash o Gains on disposal of assets o Increases in current assets o Decreases in current liabilities  Eg/ Purchased car for $5,000; Lifetime usage 5 years; Salvage value 0; depreciation 1000 per year o After 3 years sell it for 3000 o Cost of car = 5000 o Depreciation expense = 1000 o Accumulated Amortization = 3000 o Book value = 2000 o Investing activities section 3000 o Gain on disposal of long term asset = 1000 o Cash +3000 o Net income +1000 (due to gain)  gain should be subtracted because it did not affect cash  Rationales for Adjustments o Gains and Losses on Disposal of Assets  Book value of an asset = cost (historical) – accumulated depreciation (contra-asset)  Gain (loss) on disposal of an asset = proceeds – book value  Eg/ An asset that cost $50,000 and has an accumulated depreciation of $20,000 is sold for $38,000  Book value = 50,000 – 20,000 = $30,000  Gain (loss) = 38,000 – 30,000 = $8,000  Proceeds = 38,000  Historical cost = 50,000  The proceeds from the sale of the asset are reported under cash flows from investing activities 2 LECTURE 5 COMM 2AA3  Eg/ Cash flow statement, investing activities +38,000  The gain is a “paper” gain – it increases net income, but does not increase cash  Eg/ Net income +8,000; cash +38,000  must decrease net income  Therefore, gains should be subtracted from net income to adjust income from accrual to cash basis  Same logic applies to losses  Eg/ Assume in a given year a company has only 3 transactions 1. Provide services for cash: $30,000 2. Paid $10,000 for all operating expenses 3. Sold an asset with a cost of $70,000 and acc
More Less

Related notes for COMMERCE 1BA3

Log In


Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.