Chapter 5 Reporting and Interpreting Cash Flows.docx

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Department
Accounting & Financial Management
Course
AFM 101
Professor
Donna Psutka
Semester
Fall

Description
Chapter 5 Reporting and Interpreting Cash Flows 9/25/2013 12:00:00 PM Cash Flows from Operating Activities - cash inflows and outflows that directly relate to revenues and expenses reported on the income statement - not affected by accruals, deferrals and allocations that result from the timing of revenue and expense recognition - includes current assets (other than short term investments: investing activities), current liabilities (other than amounts owing to investors: financing activities), and retained earnings because it increases by the amount of profit - two methods of presenting it 1. Direct method - reports components of cash flows from operating activities listed as gross receipts and gross payments Inflows: Cash received from - customers - dividends and interest on investments Outflows: Cash paid for - purchased of goods for resale and services - salaries and wages - income taxes - interest on borrowings 2. Indirect method - starts with profit (net income) and then eliminates non-cash items to arrive at net cash inflow/outflow Cash Flows from Investing Activities - related to the purchase and disposal of capital assets and investments Cash Flows from Financing Activities - includes exchanges of cash with external sources to finance the enterprise and its operations Relationship to the Statement of Financial Position & Income Statement - CASH INFLOW: decrease in non-cash assets and increase in liabilities and shareholder’s equity - CASH OUTFLOW: increase in non-cash assets and decrease in liabilities and shareholder’s equity Cash Flows from Operating Activities (Direct Method) - like cash basis of accounting, only record when cash is being paid out or received (except for the above stated sections) - example: Operating Activities Collection from customers xxx Payments: To suppliers Xxx For interest Xxx Total Payments Xxx Net cash inflow from operating activities xxx Operating Activities Collection from customers Payments: To suppliers For interest Etc. etc. Cash Flows from Operating Activities (Indirect Method) - use the change in the balances to figure out whether to add or subtract from profit Account Increase Decrease Current Asset Subtract from profit Add to profit Current Liabilities Add to profit Subtract from profit Expense (Depreciation) Add to profit Subtract from profit - example: Operating Activities Profit from Operations Xxx Adjustments from Noncash accounts (Reconciliation of Net Income/Profit) Decrease in trades receivables Xxx Decrease in prepayments Xxx Decrease in income tax payable (xxx) Net Adjustments xxx Net cash inflow from operating activities xxx Interpreting Cash Flows from Operating Activities - focuses on the firm’s ability to generate cash internally through operations
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