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Lecture 10

MGT120H5 Lecture Notes - Lecture 10: Promissory Note, Current Asset, Arkansas Highway 72

Course Code
Catherine Seguin

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Chapter 12 (lecture 10)!
Short-Term Investment and Receivables!
April 1st, 2014!
Review of chapter 8/9!
-Current liabilities (12 months) and Contingent Liabilities (law suit) Financing with!
-Bonds versus Capital (want to expand operations -issue debt or issues shares)!
-Stock Earnings per share, Interest Coverage & Debt Ratio !
-Issuing Shares!
-Repurchasing shares!
-Cash Dividends (retained earnings and cr dividend payables) and Stock Dividends
(retained earnings and common shares) !
-Return on assets!
-Return on equity !
Chapter 12!
The Statement of Cash Flows!
Objective 1!
Identify the purposes of the statement of cash flows!
-The statement of cash flows reports the entity’s cash flows (cash receipts and cash
payments) during the period!
Eg: !
Cash!!!!!!!17!!!! 63!
-shows cash coming in and flowing out. !
The statement of cash flows serves the following purposes:!
1. Predict future cash flows!
2. Evaluate management decisions!
3. Determine the company’s ability to pay dividends to shareholders and payments to
4. Show the relationship of net income to the business’s cash flows!
What is Cash?!
cash on hand, cash in the bank, cash equivalents (intended to cash within 3 months - to
be treated like cash) !
Cash equivalents are highly liquid, short-term investments that can be converted into
cash with little delay.!
– Money-market investments!
– Canadian government securities!
Objective 2!
Distinguish among operating, investing, and financing cash flows.!
A business engages in three types of business activities:!
-Operating activities!

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-Investing activities!
-Financing activities !
Operating, Investing, and Financing Activities!
Operating activities create revenues, expenses, gains, and losses.!
Investing activities include: !
-long-term assets - anything more than 1 year, investments - short and long and
loaning money (we are the lender).!
Financing activities obtain cash from investors and creditors. A = L + OE (Creditors +
owners) Financing activities !
Income Statement: !
Sales !
Gain on the sale of plant asset/investments etc !
Expenses: !
loss on sale of plant asset , investment, etc. !
= Net income !

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Objective 3!
Prepare a statement of cash flows by the indirect method.!
-Operating activities are related to the transactions that make up net income!
-It begins with net income, taken from the net income, and is followed by adjustments
to reconcile net income to cash!
Operating Activities – Indirect Method!
Adjustments to net income include:!
• Depreciation expense!
• Gains and losses on the sale of long-term assets!
Changes in the current assets and current liabilities account!
Working Capital: current assets, current liabilities !
Net income is adjusted for (indirect method):!
1) Depreciation – is an allocation of a cost; no effect on cash. Since it is deducted as
an expense, it must be added back to net income (to cancel the deduction)!
JE for Depreciation: !
Dep Expense !
!Acc. Depreciation !
- This doesn’t effect cash, however deduct under operating - doesn’t actually cash , from
accrual to cash, we have to add it back to depreciation. !
2) Gains/(Losses) – results from selling long-term assets. Originally, it is added
(deducted) from net income but since it doesn’t represent cash (also, it is an
investing activity), it must be subtracted(added) back!
JE for Sale of asset: !
Selling price - carrying amount (cost - acc. dep) = Gain / loss !
Selling price - Cost = gain / loss (non depreciable) !
-Selling is what should be shown under investing activities, but it is shown on the
income statement, so you must remove the effects, ex. if gain, you have to deduct
from net income. When adjusting net income (deduct gain, add loss to sales on
Operating expenses* memorize this slide* !
Changes in the current assets and current liabilities account:!
Add: Decreases in current assets (not cash) Increases in current liabilities!
Subtract: Increases in current assets (not cash) Decreases in current liabilities!
Eg. Current asset!
!!!!!!AR !
!!!!Sales on credit Collections from customer !
!AR !
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