Kế toán, kiểm toán - Chapter 12: Statement of cash flows

Statement of Cash FlowsChapter 12Statement of Cash FlowsIncome StatementBalance SheetStatement of Cash FlowsThe statement of cash flows highlights the major activities that impact cash flows and ,hence, affect the overall cash balance.Purpose of the Statement of Cash FlowsAre cash flows sufficient to support ongoing operations?Can we pay debts?Can we pay dividends?Why is there a difference between net income and net cash flow?Will the company have to borrow money to make needed investments?A Fundamental Principle Cash Balance =  Noncash Balance Sheet AccountsThis principle ensures that properly analyzing the changes in all noncash balance sheet accounts always quantifies the cash inflows and outflows that explain the change in the cash balance. A Review of Basic EquationsBasic Equation for Asset AccountsBeginning balance + Debits – Credits = Ending balanceBasic Equation for Contra-Asset, Liability, and Stockholders’ Equity AccountsBeginning balance – Debits + Credits = Ending balanceStatement of Cash Flows: Key ConceptsThe term cash on the statement of cash flows refers broadly to both currency and cash equivalents.Currency and Bank AccountsCashTreasury BillsMoney Market FundsCommercial PaperCash EquivalentsOrganizing a Statement of Cash FlowsOperating ActivitiesRevenue and expense transactions that affect net income. Investing ActivitiesAcquiring or disposing of noncurrent assets. Financing ActivitiesBorrowing from and repaying principal to creditors and transactions with stockholders. Organizing a Statement of Cash FlowsOperating Activities: Direct or Indirect Method?Reconstructs the income statement on a cash basis from top to bottomDirect MethodAccrual net income is adjusted to a cash basis; Used by 99%Indirect MethodBoth methods result in the exact same amount of cash provided by operating activities.The Indirect Method: A Three-Step ProcessStep 1Step 2Step 3Add depreciation charges to net income.Analyze net changes in noncash balance sheet accounts.Adjust for gains and losses.Summary of Key ConceptsSummary of Key ConceptsFree Cash FlowsFree cash flow measures a company’s ability to fund its capital expenditures and dividends from its net cash provided by operating activities. Earnings QualityManagers generally perceive that earnings are of higher quality when the earnings: are not unduly influenced by inflation, are computed using conservative accounting principles and estimates, and are correlated with net cash provided by operating activities. Computing Net Cash Provided by Operating ActivitiesThe direct method computes net cash provided by operating activities by reconstructing the income statement on a cash basis from top to bottom.Net cash provided by operating activities under the direct method will always agree with the amount computed using the indirect method.Similarities and Differences in Handling DataAdjustments for accounts that affect revenue are the same in the direct and indirect methods.Adjustments for accounts that affect expenses are handled in opposite ways for the direct and indirect methods.Similarities and Differences in Handling DataUnder the direct method, no adjustments for gains and losses on the sale of assets are needed.Special Rules—Direct and Indirect MethodsRequires a reconciliation between net income and the net cash provided by operating activitiesDirect MethodRequires disclosure of amount of interest and income taxes paid during the yearIndirect MethodEnd of Chapter 12