MGAB02H3 Chapter Notes - Chapter 5: Cash Flow, Retained Earnings, Current Liability

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Published on 12 Apr 2013
School
UTSC
Department
Financial Accounting
Course
MGAB02H3
Professor
lMGTB06 Chapter 5Reporting and Interpreting Cash Flows
Classification of Cash Flows
the statement of cash flows explains how the cash balance at the beginning of the period
changed to another cash balance at the end of the period
cash includes cash and cash equivalents which are short-term, highly liquid investments with
an original maturity of less than three months (little risk that their value will change if interest
rates changes)
Cash Flows from Operating Activities
cash flows from operating activities are cash inflows and outflows directly related to earnings
(revenues and expenses) from normal operations
1. direct method of presenting the operating activities section of CF reports components of
cash flows from operating activities as gross receipts (inflows) and gross payments
(outflows)
2. indirect method of presenting the operating activities section of CF adjusts (non-cash items)
profit to compute cash flows from operating activities
cash flows from operating activities is always the same whether it is computed by using the
direct or indirect method
Cash Flows from Investing Activities
cash flows from investing activities are cash inflows and outflows related to the acquisition or
sale of productive facilities and investments in the securities of other companies
Cash Flows from Financing Activities
cash flows from financing activities are cash inflows and outflows related to external sources of
financing (owners and creditors) for the enterprise
Net Increase (Decrease) in Cash
combination of the net cash flows from operating, investing and financing activities must equal
the net increase (decrease) in cash for the reporting period
Relationship to the Statement of Financial Position and the Income Statement
to prepare cash flows comparative statements of financial position, complete income statement
and additional details are needed (analysis of individual accounts is necessary because often
the net change in an account balance during the year does not reveal the underlying nature of
cash flows)
Assets = Liabilities + Shareholders’ Equity
Δ Cash = Δ Liabilities + Δ Shareholders’ Equity – Δ Non-Cash Assets
any transaction that changes cash must be accompanied by a change in liabilities, shareholders’
equity or non-cash assets
financial position accounts
operating activities are most current assets (other than short-term investments), most
current liabilities (other than amounts owned to investors and financial institutions) and
retained earnings for profit (split between operating and financing)
investing activities are remaining assets on statement of financial position (investments and
capital assets)
financing include all of remaining liability and shareholders’ equity account (share capital,
retained earnings for dividends, bank borrowings)
Reporting and Interpreting Cash Flows from Operating Activities
A Simplified Illustration
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Document Summary

The statement of cash flows explains how the cash balance at the beginning of the period changed to another cash balance at the end of the period. Cash includes cash and cash equivalents which are short-term, highly liquid investments with an original maturity of less than three months (little risk that their value will change if interest rates changes) Cash flows from operating activities is always the same whether it is computed by using the direct or indirect method. Cash flows from investing activities are cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies. Cash flows from financing activities are cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise. Combination of the net cash flows from operating, investing and financing activities must equal the net increase (decrease) in cash for the reporting period.

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