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Reporting and Analyzing Cash Flows
UAA – ACCT 201 Principles of Financial
Accounting Dr. Fred Barbee
Chap
ter 1
2
Topic LO Read HWCash Flows From Operating Activities
P3538-540
E3, 6, 7
Cash Flows From Investing Activities
P4543-545
E8, E9
Cash Flows From Financing Activities
P4545-548
E8, E9
Decision Analysis A1, A2548-550
QS9
Chapter 12 - Day 2 - Agenda
No Homework Due Today!
Section 1: Net Cash Flows From Operating Activities
ACCT 201 ACCT 201 ACCT 201
Operating Activities
Investing ActivitiesFinancing Activities
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Accrual Accounting . . .
Under GAAP most companies use accrual basis accounting:
Revenue is recorded when earned; and
Expenses are recorded when incurred.
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Accrual Accounting . . .
Under accrual basis accounting net income will include
Revenues not collected in cash
Expenses not paid in cash
Thus, accrual basis net income does not reflect cash flows from operating activities.
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Accrual Accounting and the SCF . . .
To obtain net cash flows from operating activities - we will need to undo the effects of accrual accounting!
That is, we need to go from accrual based accounting to cash based accounting.
#@!#@!Accrual to Cash . .
He’s got to beKidding!
He’s not kidding!!!#@!#@!
#@!#@!Why didn’t we
just do cash thefirst time?
From Accrual to CashObtaining Net Cash Flow From Operating Activities
From Accrual to CashObtaining Net Cash Flow From Operating Activities
NetIncome
NetIncome
IncurredExpensesIncurredExpenses
EarnedRevenuesEarned
Revenues
Net Cash Flows FromOperating Activities
Net Cash Flows FromOperating Activities
Eliminate Noncash Revenues
Eliminate Noncash Expenses
Accrual-BasisAccounting
Accrual-BasisAccounting
A Focus onRevenues Earned
ExpensesIncurred, andNet Income
A Focus onRevenues Earned
ExpensesIncurred, andNet Income
IncomeStatement
IncomeStatement
Cash-BasisAccounting
Cash-BasisAccounting
A Focus onRevenues Rec’d,Expenses Paid, &
Net CashProvided (used)
by Oper. Act.
A Focus onRevenues Rec’d,Expenses Paid, &
Net CashProvided (used)
by Oper. Act.
Statement ofCash Flows
Statement ofCash Flows
Relationship Between Income Statement and Stmt of Cash FlowsRelationship Between Income Statement and Stmt of Cash Flows
Adjustments and Eliminations
That Produce
Well, I guessthat isn’t sobad after all!
How do I go about
doing that?
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Preparing the SCF . . .
There are two ways we can accomplish the conversion from accrual to cash.
The Direct Method, and
The Indirect Method
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Preparing the SCF . . .
The FASB, after a great deal of study, has ruled that both approaches are acceptable.
However, they prefer and encourage use of the direct method.
Direct, Indirecto’mi’gosh herewe go again!
#@!#@! anyway!
Section 1: Net Cash Flows From Operating Activities
ACCT 201 ACCT 201 ACCT 201
Operating Activities
Investing ActivitiesFinancing Activities
The Direct Method
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AccrualBased
Accounting
CashBased
Accounting
ending in a net source or use of funds.
Under the Direct Method, firms provide a list of operating sources and uses of funds,
The Direct Method
Cash Received From Customers $xx,xxx
Less Cash Payments For:
$xx,xxxPurchases of Merchandise
Interest xx,xxx
Selling & Admin. Expenses xx,xxx
Net Cash Provided (Used) by Oper. Activities$xx,xxx
xx,xxxIncome Taxes xx,xxx
The Indirect Method
ACCT 201 ACCT 201 ACCT 201
AccrualBased
Accounting
CashBased
Accounting
Under the Indirect method, firms begin with Net Income
And make a series of adjustments to arrive at the net source or use of funds.
The Indirect MethodNet Income, Accrual Basis $xx,xxx
Add(Deduct) items to convert NI to a Cash Basis: Noncash expenses (e.g. Depr., Amortization)
Gains/Losses related to nonoperating activities
Gains
Losses
Current Assets Related to Operating Activities
Net Cash Provided (Used) by Oper. Activities
Deduct
Add
Increase in Accounts Balance Deduct
Decrease in Accounts Balance Add
Current Liab. Related to Operating Activities
Increase in Accounts Balance
Decrease in Accounts Balance
Add
Deduct
$xx,xxx
Oh, My, Decisions, Decisions.
What should it be?Direct or Indirect
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Direct Vs. Indirect . . .
The direct method is preferred by FASB, and is the more informative of the two formats.
The indirect method is somewhat easier to prepare and is used by the majority of firms.
Section 1: Net Cash Flows From Operating Activities
ACCT 201 ACCT 201 ACCT 201
Operating Activities
Investing ActivitiesFinancing Activities
The Direct Method
Cash Received From Customers $xx,xxx
Less Cash Payments For:
$xx,xxxPurchases of Merchandise
Interest xx,xxx
Selling & Admin. Expenses xx,xxx
Net Cash Provided (Used) by Oper. Activities$xx,xxx
xx,xxxIncome Taxes xx,xxx
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Under the Direct Method
Depreciation, Amortization and Depletion Expenses do not appear on the SCF
Gains and losses do not appear on the SCF.
The Statement of Cash Flows
ACCT 201 ACCT 201 ACCT 201
Let’s
At the Indirect Method for
preparing the Cash Flows From
Operating Activities Section
97.5% of all companies use the indirect method.
Net Income
Cash Flows from
Operating Activities
Changes in current assets and current liabilities.
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization.
The Indirect Method
Use this table when adjusting Net Income to Operating Cash Flows.
Indirect Method of Reporting Operating Cash Flows
Change in Account Balance During Year
Increase Decrease
Current Assets
Subtract from Net Income
Add to Net Income
Current Liabilities
Add to Net Income
Subtract from Net Income
Put on your thinking cap!!!
Remember!
Remember!
Accounts Receivable is increased by credit sales.
Accounts Receivablexx xx
Accounts Receivable is
decreased by cash payments received
from customers.
Think about Accounts
Receivable.
Cash Xxx
Accts. Receivable
xxx
Accts. Receivable xxx
Sales xxx
Accounts Receivable
xxx
So . . . If this balance
increases during the year – it means that sales
were greater than cash
collected from customers.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Income Summary
Remember the Closing Process?
xxx SalesxxxExpenses
These accrual-
based Sales now reside here, in net
income.
Since, accrual-
based Sales are greater than cash
collections.
We need to subtract this amount from Net Income.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Result? Sales is adjusted to the cash receipt amount.
Inventory is increased by purchases of merchandise.
Inventoryxx xx
Inventory is decreased by
Sales of merchandise.
Think about Inventory.
Cost of Goods Sold
xxx
Inventory xxx
Inventory xxx
Accts Payable xxx
Inventory
xxx
So . . . If this balance
decreases during the year – it
means that Purchases of merchandise were smaller than COGS.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Income Summary
Remember the Closing Process?
xxx SalesxxxExpenses
These accrual-
based Cost of Goods Sold now
reside here, in net
income.
Since accrual-
based cost of goods sold is greater
than cash purchases.
We need to add this amount to Net Income.
Result? Expenses are adjusted to the cash payment amount.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Accounts Payable is
decreased by cash payments
made by the firm.
Accounts Payablexx xx
Accounts Payable is increased by purchases of
merchandise on credit.
Think about Accounts Payable.
Inventory xxx
Accts. Payable xxx
Accounts Payable Xxx
Cash xxx
So . . . If this balance decreases during
the year – it means that cash payments to suppliers were
greater than merchandise purchases.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Accounts Payable
xxx
Income Summary
Remember the Closing Process?
xxx SalesxxxExpenses
These accrual-based
Purchases now reside here, in net
income.
Since accrual-based
Purchases are less
than cash purchases.
We need to subtract this amount from Net Income.
Result? Purchases are adjusted to the cash payment amount.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Accounts Payable is
decreased by cash payments
made by the firm.
Accounts Payablexx xx
Accounts Payable is increased by purchases of
merchandise on credit.
Think about Accounts Payable –
Again!
Inventory xxx
Accts. Payable xxx
Accounts Payable Xxx
Cash xxx
So . . . If this balance Increases during the year – it means
that cash payments to suppliers were
less than merchandise purchases.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
Accounts Payable
xxx
Income Summary
Remember the Closing Process?
xxx SalesxxxExpenses
These accrual-based
Purchases now reside here, in net
income.
Since accrual-based
Purchases are
greater than cash purchases.
We need to add this amount to Net Income.
Result? Purchases are adjusted to the cash payment amount.
Change (+/-) to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Therefore
There you have it!
Change to Net Income
Balance IncreasesBalance Decreases
Current Assets
Current Liabilities
Now, like it was originally . . .
Change in Account Balance During Year
Increase Decrease
Current Assets
Subtract from Net Income
Add to Net Income
Current Liabilities
Add to Net Income
Subtract from Net Income
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Reporting and Analyzing Cash Flows
Decision Analysis
Chap
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2
Cash Flows on Total Assets
Used, along with income-based ratios, to assess company performance.
Used, along with income-based ratios, to assess company performance.
Cash Flow on Total Assets =
Operating cash flows Average total assets
ACCT 201 ACCT 201 ACCT 201
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