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ACC 255 - CHAPTER 12

Terms in this set (13)

The information in a statement of cash flows helps investors, creditors, and others assess the following:
1. The entity's ability to generate future cash flows.

2. The entity's ability to pay dividends and meet obligations.

3. The reasons for the difference between net income and net cash provided (used) by operating activities.

4. The cash investing and financing transactions during the period.
Define: Statement of Cash Flows
A basic financial statement that provides information about the cash receipts and cash payments of an entity during a period, classified as operating, investing, and financing activities, in a format that reconciles the beginning and ending cash balances.
The statement of cash flows classifies cash receipts and cash payments as...?
operating, investing, and financing activities
Transactions and other events characteristic of each kind of activity are:
1. Operating activities include the cash effects of transactions that create revenues and expenses. They thus enter into the determination of net income.

2. Investing activities include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment, and (b) lending money and collecting the loans.

3. Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.
Define: Operating activities
Cash flow activities that include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income.
Define: Investing Activities
Cash flow activities that include (a) cash transactions that involve the purchase or disposal of investments and property, plant, and equipment using cash, and (b) lending money and collecting the loans.
Define: Financing Activities
Cash flow activities that include (a) obtaining cash from issuing debt and repaying the amounts borrowed and (b) obtaining cash from stockholders, repurchasing shares, and paying dividends.
Examples of 4 significant noncash activities are:
1. Direct issuance of common stock to purchase assets.

2. Conversion of bonds into common stock.

3. Direct issuance of debt to purchase assets.

4. Exchanges of plant assets.
Companies do not report in the body of the statement of cash flows significant financing and investing activities that do not affect cash. Instead, they report these activities in either a what or what?
a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements.

** The reporting of these noncash activities in a separate schedule satisfies the full disclosure principle.
The information to prepare the statement of cash flows usually comes from three sources:
1. Comparative balance sheets.

Information in the comparative balance sheets indicates the amount of the changes in asset, liability, and stockholders' equity accounts from the beginning to the end of the period.


2. Current income statement.

Information in this statement helps determine the amount of net cash provided or used by operating activities during the period.


3. Additional information.

Such information includes transaction data that are needed to determine how cash was provided or used during the period.
To determine net cash provided by operating activities under the indirect method, companies do what to net income?
they adjust net income in numerous ways.

A useful starting point is to understand why net income must be converted to net cash provided by operating activities.
Under generally accepted accounting principles, most companies use the___________ basis of accounting.
accrual
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this basis requires that a company record revenue when the performance obligation is satisfied and record expenses when incurred.
Under the indirect method, companies must adjust net income to _______________________________________
convert certain items to the cash basis.
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