Types of cash inflows and outflows for operating activities include __
cash inflows from sale of goods or services, and from interest received and dividends received, and cash outflows to suppliers for inventory, to employees for services, to the government for taxes, to lenders for interest, and to others for expenses.
Types of cash inflows and outflows for investing activities include __
cash inflows from sale of property, plant, and equipment, from sale of investments in debt or equity securities of other entities, and from collection of principal on loans to other entities, and cash outflows to purchase property, plant, and equipment, to purchase investments in debt or equity securities of other entities, and to make loans to other entities.
Types of cash inflows and outflows for financing activities include __
cash inflows from sale of common stock, and from issuance of debt (bonds and notes), and cash outflows to stockholders as dividends, and to redeem long-term debt or reacquire capital stock (treasury stock).
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 either in 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.
What is the product life cycle?
All products go through a series of phases called the product life cycle. The phases (in order of their occurence) are: introductory phase, growth phase, maturity phase, and decline phase.
What do we expect in the introductory phase?
We expect cash from operations and investing to be negative, but cash from financing to be positive.
What do we expect in the growth phase?
We expect cash from operations to continue to be less than than net income, but necessarily negative, and we expect negative cash from investing, and positive cash from financing.
What do we expect in the maturity phase?
We expect cash from operations and net income to be approximately the same, positive cash from investing and negative cash from financing.
What do we expect in the decline phase?
We expect cash from operations to decrease, cash from investing might become positive from selling of excess assets, and cash from financing may be negative from buying back stock and retiring debts.
What are the three major steps in preparing the statement of cash flows?
Step 1: Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. Step 2: Analyze changes in noncurrent asset and liability accounts and record as investing and financing activities, or disclose as noncash transactions. Step 3: Compare the net change in cash on the statement of cash flows with the change in the cash account.
Indirect method v. direct method
The indirect method adjusts net income for items that do not affect cash to determine net cash provided (used) by operating activities, while the direct method shows operating cash receipts and payments. Companies favor the indirect method because it is easier and less costly to prepare and it focuses on the differences between net income and net cash flow from operating activities.
What do we do with noncash charges (indirect method)?
Noncash charges, such as depreciation expense and patent amortization expense should be added to NI.
A company purchases land of $110,000 by exchanging bonds. How is this reported?
When a company exchanges bonds payable for land, it has no effect on cash, but it is a significant noncash investing and financing activity that merits disclosure in a separate schedule.
A company purchases an office building for $120,000 cash. How is this reported?
This is a cash outflow reported in the investing section (PPE = IA).