Understanding Cash Flow Statement: Reconciling Net Income to Operating Cash, Apuntes de Contabilidad

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Prepared by

Coby Harmon

University of California, Santa Barbara

Westmont College

Learning Objectives

Statement of Cash Flows

Discuss the usefulness and format of the statement of cash flows. 1 Prepare a statement of cash flows using the indirect method. 2 3 Analyze the statement of cash flows.

Income Statement Items Operating Activities Changes in Investments and Long-Term Assets Investing Activities Changes in Long-Term Liabilities and Stockholders’ Equity Financing Activities Classification of Cash Flows

Operating activities — Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. To employees for wages. To government for taxes. To lenders for interest. To others for expenses. Illustration 12- 1 Typical receipt and payment classifications Classification of Cash Flows

Financing activities — Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock. From issuance of debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock). Illustration 12- 1 Typical receipt and payment classifications Classification of Cash Flows

1. Direct issuance of common stock to purchase assets.
2. Conversion of bonds into common stock.
3. Issuance of debt to purchase assets.
4. Exchanges of plant assets. Companies report noncash activities in either a ◆ separate schedule (bottom of the statement) or ◆ separate note to the financial statements. Significant Noncash Activities

Usefulness and Format LO 3 Explain the impact of the product life cycle on a company’s cash flows. Impact of product life cycle on cash flows. Illustration 12- 3 The Corporate Life Cycle

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12 - (^13) LO 1 Illustration 12- 2 Format of statement of cash flows

Illustration: Classify each of these transactions by type of cash flow activity.

1. Issued 100,000 shares of $5 par value common stock for $800,000 cash.
2. Borrowed $200,000 from Castle Bank, signing a 5-year note bearing 8% interest.
3. Purchased two semi-trailer trucks for $170, cash.
4. Paid employees $12,000 for salaries and wages.
5. Collected $20,000 cash for services performed. Financing Financing Investing Operating Operating DO IT! 1 Classification of Cash Flows

Three Major Steps: Illustration 12- 3 Preparing the Statement of Cash Flows

Illustration 12- 3 Three Major Steps: Preparing the Statement of Cash Flows

Companies favor the indirect method for two reasons:

1. Easier and less costly to prepare.
2. Focuses on differences between net income and net cash flow from operating activities. Indirect and Direct Methods

Illustration 12- 4 Indirect Method