IntermediateAccounting19CashFlowReporting.doc

Intermediate Accounting 19 Cash Flow ReportingCash Flow ReportingChapter 19Statement of Cash FlowsPreparation of the StatementSpecial Problems in Statement PreparationUse of a WorksheetUsefulnessClassification of cash flowsFormat of statementSteps in preparationExamplesSources of informationIndirect vs. direct methodAdjustments similar to depreciationAccounts receivable (net)Other working capital changesNet lossesGainsStock optionsPostretirement benefit costsExtraordinary itemsSignificant noncash transactionsPreparation of worksheetAnalysis of transactionsPreparation of final statementLO 1 Describe the purpose of the statement of cash flows.Primary purpose: To provide information about a company’s cash receipts and cash payments during a period.Secondary objective: To provide cash-basis information about the company’s operating, investing, and financing activities.Section 1 - Preparation of the Statement of Cash FlowsLO 1 Describe the purpose of the statement of cash flows.Usefulness of the Statement of Cash FlowsProvides information to help assess:Entity’s ability to generate future cash flows.Entity’s ability to pay dividends and obligations.Reasons for difference between net income and net cash flow from operating activities.Cash and noncash investing and financing transactions.LO 2 Identify the major classifications of cash flows.Classification of Cash FlowsIncome Statement ItemsOperating ActivitiesGenerally Long-Term Asset ItemsInvesting ActivitiesGenerally Long-Term Liability and Equity ItemsFinancing ActivitiesThe term “Cash” = Cash and cash equivalents.3 The basis recommended by the FASB for the statement of cash flows is actually “cash and cash equivalents.” Cash equivalents are short-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under this definition. Examples of cash equivalents are Treasury bills, commercial paper, and money market funds purchased with cash that is in excess of immediate needs.Cash and Cash Equivalent Text Footnote 3LO 2 Identify the major classifications of cash flows.Classification of Cash FlowsClassification of Typical Inflows and Outflows LO 2 Identify the major classifications of cash flows.Classification of Cash FlowsIllustration 23-1Income Statement ItemsClassification of Typical Inflows and Outflows LO 2 Identify the major classifications of cash flows.Classification of Cash FlowsGenerally Long-Term Asset ItemsIllustration 23-1Classification of Typical Inflows and Outflows LO 2 Identify the major classifications of cash flows.Classification of Cash FlowsIllustration 23-1Generally Long-Term Liability and Equity ItemsLO 2 Identify the major classifications of cash flows.Format of the Statement of Cash FlowsOrder of Presentation:Operating activities. Investing activities.Financing activities.Report inflows and outflows from investing and financing activities separately.Direct MethodIndirect MethodThree Sources of Information:Comparative balance sheetsCurrent income statementSelected transaction dataLO 2 Identify the major classifications of cash flows.Steps in PreparationThree Major Steps:Step 1. Determine change in cash.Step 2. Determine net cash flow from operating activities.Step 3. Determine net cash flows from investing and financing activities.A company must determine revenues and expenses on a cash basis. Eliminate the effects of income statement transactions that do not result in an increase or decrease in cash.Convert net income to net cash flow from operating activities through either a direct method or an indirect method.LO 3 Differentiate between net income and net cash flows from operating activities.Step 2: Determine Net Cash Flow from Operating ActivitiesIndirect Method Adjusts net income for items not affecting cash.LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.Example – Operating SectionIllustration 23-8Common adjustments to Net Income (Loss):Depreciation and amortization expense.Gain or loss on disposition of long-term assets.Change in current assets and current liabilities.Krauss Company’s financial statements for the year ended December 31, 2007, contained the following condensed information.E23-6 (Operating Activities—Indirect Method)LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities.Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2).E23-6 (Operating Activities—Indirect Method)LO 4 Contras。