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MGT120H5 (67)
Chapter 12

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Department
Management
Course
MGT120H5
Professor
Catherine Seguin
Semester
Winter

Description
Chapter 12 - cash flows • Statement of cash flows reports the entity's cash flows (cash receipts and payments) during the period. • This statement predicts future cash flows, evaluate management decisions, determine the company's ability to pay dividends, and shows the relationship of net income to the business's cash flows. • Three activities are operating activities, investing and financing activities. • Operating activities - create revenues, expenses, gains and losses -- net income. This is the most important of the three categories because it reflects the core of the organization. A successful business must generate most of its cash from operating activities • investing activities - increase and decrease long-term assets, such as computers and software, land, buildings, equipment, and investments in other companies. Purchases and sales of these are investing activities TwoFormatsfor OperatingActivities Indirect Method Net income $XXX Adjustments: Depreciation, etc. XXX Net income provided by operating acti$XXXes Direct Method Collection from customers $XXX Deductions: Payment to suppliers, etc. XXX Net income provided by operating acti$XXXes • financing activities - obtaining cash from investors and creditors. Issuing and repurchasing shares, borrowing money, dividends. • The indirect method reconciles net income to net cash provided by operating activities. • Direct method reports all cash receipts and cash payments from operating activities. • Operating activities are related to the transactions that make up net income. CASH FLOWS beings with net income, and is followed by adjustments to reconcile net income to cash. • These adjustments include: depreciation expense, gains and losses on the sale of long-term assets, changes in the current assets and current liabilities account. • SO BASICALLY, WHATEVER YOU WOULD NORMALLY ADD OR SUBTRACT IS DONE OPPOSITELY ON THE CASH FLOW STATEMENT. LIKE, NORMALLY YOU WOULD SUBTRACT DEPRECIATION, BECAUSE IT'S AN EXPENSE, BUT ON THE CASH FLOW STATEMENT YOU ADD IT, THIS IS ONLY FOR OPERATING ACTIVITIES CATEGORY THOUGH, but this doesn't apply to the current liabilities. We take into account all the current accounts except for cash. OperatingActivities–Indirect Method OperatingActivities –Indirect Method OperatingActivities–Indirect Method Steps • Changesinthecurrent assetsandcurrent • Start withNet income 1. Determinethechangeincashfromlast year liabilitiesaccount: • Add: Depreciationexpense tothisyear. • Lossesfromsalesof assets 2. Determinethechangeinnon-cashworking • Add: Decreasesincurrent assets(not cash) • Deduct:Gainsfromsalesof assets capital itemsusingthebalancesheet LIKEAR. • Add/Dedu:Non-cashchangeinworkingcapital 3. Start withnet incomeandaddback • Increasesincurrent liabilities • Add: Decreasesincurrent assets(not cash) depreciationandlossesanddeduct any • Increasesincurrent liabilities gains. • Subtract: Increasesincurrent assets(not • Deduct:Increasesincurrent assets(not cash) 4. Addor subtract whereapplicable, the cash)LIKEAR. change(increaseordecrease) innon-cash • Decreasesincurrent liabilities • Decreasesincurrent liabilities workingcapitalitems Cash Flows from investing • Investing activities affect long-term asset accounts, such as long-term assets, investments and notes receivables. • Cash increases are sales of assets (investments, land, building, equipment, etc), collections of loans receivables -- cash receipts. • Cash decreases are purchases of assets (investments, land, building, equipment, etc), loans to others -- cash payments Computing acquisitions and sales of PPE assets, for investing • Companies keep separate accounts for each item of PPE. But for computing cash flows, it's easier to just combine all three. • We must subtract the accumulated depreciation from the assets' cost and use the net figure. Cause then we use the net of all three of the assets. EASIER. • EXAMPLE: balance sheet reports beginning PPE, net of depreciation of $219,000. The ending balance is $353,000. Income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of PPE. o So the company's purchases of PPE total $206,000 o So we have to find out the book value of the PPE sold. ACQUISITION MEANS BUYING BTW.  BEGINNING BALANCE + ACQUISITIONS - DEPRECIATION - BOOK VALUE OF ASSETS SOLD
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