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Accounting 201 Chapter 12
Terms in this set (35)
What is statement of cash flow?
Reports the cash receipts and cash payment from operating, investing, and financing activities during a period
What do investors, creditors and other asses while looking at the statement of cash flow?
1. The entity's ability to generate future cash flow
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 a period
What are the three activities of cash flow?
What does an operating activity consist of?
The cash effect of transactions that create revenue and expense
What are the investing activities?
Cash transactions the involve purchasing or disposal of investments and lending money/collecting loans
What are the Financing activities?
obtaining cash from issuing debt and repaying the amount borrowed; obtaining cash from stockholders, repurchasing shares, paying dividends
What are the cash inflows for operating activities?
Sales of goods or services
interest received and dividends received
What are the Cash outflows of operating activities?
To Suppliers for inventory
To employees for wages
To government for taxes
To lenders for interest
To others for expenses
What are the Cash inflows for Investing activities?
1.Sales of property, plant and equipment
2.Sale of investments in debt or equity securities of other entities
3. Collection of principal on loans to other entities
What are the cash outflows of investing activities?
1.Purchase property, plant and equipment
2.Purchase investments in debt or equity securities of other entities
3. Make loans to other entities
What are the Cash inflows of Financing activities?
sale of common stock
insurance of debt
What are the cash outflows of financing activities?
Stockholders as dividends
Redeem long-term debt or reacquire capital stock
What are examples of companies non-cash activities?
1. Direct insurance of common stock to purchase assets
2. Conversions of bonds into common stock
3. Direct issuance of debt to purchase assets
4. Exchange of plant assets
Where are the non- cash activities reported?
At the bottom of cash flow statement or separate note or supplementary schedule
What are the three sources to determine cash flow?
1.Comparative balance sheet
2. Current Income statement
3. Additional information
What are the three steps to cash flow statement?
1. Determine net cash provided/ used by operating activities
2. Analyze changes in non-current assets and liabilities accounts
3. Compare the net change in cash on the statement of cash flow with the change in the cash accounts reported on the balance sheet to make sure the amounts agree
What adjusts net income for items that do not affect cash to determine net cash provided by operating activities?
What shows the operating cash receipts and payments?
How do you determine the net cash provided/used by operating activities?
Converting net income from an accrual basis to a cash basis
What must happen on the cash flow statement if the cash received from the sale of plant assets is reported in the investing activities section?
Companies must eliminate from net income all gains and losses resulting from investing activities, to arrive at net cash provided by operating activities
What are the three types of adjustments that happen in an indirect method at net cash provided by operating activities?
1. Non- cash charges (depreciation and amortization)
2. Gains and losses from investing and financing transactions (Sale of plant assets)
3. Changes in non- cash current liability account
What happens when a company pays dividends?
It is a cash outflow that the company reports as a financing activity
What is the product life cycle?
A series of phases all products go through
What are the phases of a products life cycle?
Introductory phase, growth phase, maturity phase and decline phase
What does the cash provided by operating activities fail to take into account?
That a company must invest in new fixed assets
To maintain current level of operations a company must at least maintain what?
dividends at current levels
What is free cash flow?
describes the net cash provided by operating activities after adjustment for capital expenditures and dividends
What is the equation for free cash flow?
net cash provided by operating activities- capital expenditures - cash dividends
How do companies compute operating activities through the direct method?
By computing net cash provided by operating activities
What is an efficient way to apply the direct method?
analyze the items reported in the income statement in the oder in which they are listed
Cash receipts from customers= Sales revenue
+decrease in accounts receivable or - increase in accounts receivable
Liabilities + Equity
Cash + non-cash assets=
Liabilities + Equity
Liabilities + Equity - non-cash assets
Change in Cash=
Change in liabilities + change in Equity - Change in non- cash assets
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