西方财务会计fa ch14

1Chapter

142Statement

of

Cash

FlowsFigure

14-13Definition

of

Cash4 Cash

consists

of

coin,

currency,

and

available

funds

ondeposit

at

the

bank.

Negotiable

instruments

such

asmoney

orders,

certified

checks,

cashier’s

checks,

personalchecks,

and

bank

drafts

are

also

considered

cash. Also

certain

cash

equivalents,

which

include

commercialpaper

and

other

debt

investments

with

maturities

of

lessthan

three

months

are

included

in

the

statement

of

cashflows. Cash

equivalents

areshort-term,

highlyliquidinvestmentsthat

are

both:Readily

convertible

to

known

amounts

of

cash,

andSo

near

their

maturity

that

their

market

value

is

relativelyinsensitive

to

changes

in

interest

rates.Standard

Statement

of

Cash

Flows5Statement

of

Cash

Flows6Required

for

financial

statements

by

SFAS

95(1987).Primary

purpose

is

to

provide

relevantinformation

about

cash

receipts

and

cashdisbursements

of

the

company

during

theperiod.Serves

to

complement

the

other

financialstatements.Focus

is

on

cash

flows,

not

e.Reconciles

the

balance

sheet

andthe

estatement.Cash

Flows

from

Operating

Activities7CF

from

operating

activities

is

based

onthe

e

statement,

and

converts

e

activityto

a

cash

basis.There

are

two

formats

for

thepresentation

of

CF

from

operatingactivity:direct

method:

this

technique

showscash

received

from

customers

and

cashpaid

to

various

entities

for

operatingactivities.indirect

method:

this

technique

startswithnet e

and

makes

adjustments

tonete

to

convert

it

to

a

cash

basis.Cash

Flows

from

Operating

Activities8If

the

direct

method

is

used,

the

indirectmethod

must

be

presented

in

asupplementary

schedule.The

direct

method

is

more

informative,

butthe

vast

majority

of

companies

present

onlythe

indirect

method.FASB

is

considering

a

change

to

requirethedirect

method.Cash

Flows

from

Investing

Activities9CF

from

investing

activities

explain

the

changes

incash

from

the

purchase

or

sale

of

the

company’s(primarily)

long-term

assets.Examples

of

investing

activity

includes:cash

paid

for

purchase

of

equipment,

land, buildings,

marketable

securities

(available-for-sale and

equity),

intangible

assets,

and

most

other

long term

assets.cash

received

from

sale

of

equipment,

land, buildings,

marketable

securities

(available-for-sale and

equity),

intangible

assets,

and

most

other

long term

assets.cash

paid

for

issue

of

non-trade

notes

receivable (both

short-term

and

long-term).cash

received

for

repayment

on

non-trade

notes receivable

(both

short-term

and

long-term).Cash

Flows

from

Investing

Activities10General

rule

for

investing

activity:cash

flows

for

purchase

and

sale

of

long-term

assets.Exceptions

to

the

rule:Short

term

notes

receivable

(non-trade)

are

included

in

theinvesting

section.Long

term

notes

receivable

(trade)

are

not

included

in

theinvesting

section. Because

they

relate

to

trade,

they

aretreated

just

like

accounts

receivable

in

the

operating

section.The

change

in

equity

method

investments

is

classified

inthe

operating

section

of

SCF,

because

the

change

dealswith

e. (Purchase

and

sale

of

equity

investments

areclassified

in

investing.)Note:

Trade

receivables

are

created

when

inventory

is

soldon

account.

Non-trade

receivables

are

created

when

acompany

loans

cash

to

employees

or

others

(no

sale

isinvolved).Cash

Flows

from

Financing

Activities11CF

from

financing

activities

explain

the

changes

in cash

from

the

issue

or

retirement

of

the

company’s (primarily)

long-term

liabilities

and

equity.Examples

of

financing

activityincludes:cash

received

from

issue

of

bonds,

mortgages and

other

long-term

debt,cash

received

from

issue

of

common

stock

and preferred

stock,cash

paid

for

the

retirement

of

long-term

debt,cash

paid

for

the

repurchase

of

treasury

stock,cash

paid

fordividends,cash

received

forissue

of

non-trade

notes payable

(both

short-term

and

long-term),

andcash

paid

forretirement

or

repayment

on

non- trade

notes

payable

(both

short-term

and

long-term).Cash

Flows

from

Financing

Activities12Note

that

cash

paid

for

dividendsisclassified

as

a

financing

activity,

butcashpaid

for

interest

is

classified

as

an

operatingactivity.Note

that

cash

received

for

dividends

andcash

received

for

interest

are

both

classifiedas

operating

activities.Cash

Flows

from

Financing

Activities13General

rule

for

financing

activity:cash

flowsfor

issue

and

retirement

of

long-term liabilities

and

equity.Exceptions

to

the

rule:Short

term

notes

payable

(non-trade)

are included

in

the

financing

section.

(Short

term

bank notes

are

very

common

examples.)Long

term

notes

payable

(trade)

arenot

included inthe

financingsection. Because

they

relateto trade,

they

are

treated

just

like

accounts

payable

in

the

operating

section.

(LTtrade

N/P

are

rare.)Note:

trade

payables

are

created

when

inventory

ispurchased

on

a

note.

Non-trade

payables

arecreated

when

a

company

or

borrows

cash

from

abank

or

others

(no

inventory

purchase

is

involved).Cash

Flows

from

Operations

(Indirect

Method)14To

understand

the

adjustments

to

get

from

net e

to

CFfrom

operations,

we

willclassify

the

adjustments

into

3categories:noncash

items.gains

and

losses

from

investing.Changes

in

related

(accrual

basis)

assets

andliabilities

from:Revenues

recognized

before

cash

isreceived.Expenses

recognized

after

cashis

paid.Revenues

recognized

after

cashisreceived.Expenses

recognized

before

cash

is

paid.Remember:

net e

includes

many

activities

that

arenoncash,

or

only

partly

cash.15Indirect

Method

-

Noncash

ItemsNoncash

activitiesinclude-Depreciation

expense. For

example:Depreciation

Expense

xxAccumulated

Depreciationxx-Amortization

expense

on

intangible

assets

suchaspatents

and

goodwill.Amortization

Expense

xxGoodwillxx-Bad

debt

expense

on

the

estimation

of

uncollectibles:Bad

Debt

Expense

xxAllowance

for

Doubtful

Accts.xxSince

these

expenses

originally

reduced

net e,

theamount

ofthese

expenses

wouldneed

to

be

added

backFigure

14-316Indirect

Method

-

Double

Counted

Items17The

double

counted

items

come

from

gains

andlosses

on

investing

and

financing

activity.For

example,

assume

that

land

is

sold

for

$10,000cash,

and

the

original

cost

was

$9,000:Cash

10,000

LandGain

on

Sale

of

Land9,0001,000

In

this

case,

the

$10,000

cash

received

wouldbe

shown

in

Investing. However,

if

the

gain

is

notadjusted

out

of

net e,

we

would

be

“doublecounting”

that

effect.Indirect

Method

-

Double

Counted

Items18Therefore,

any

gains

or

losses

from

sale

ofinvesting

assets

(equipment,

land,

buildings,

AFSand

equity

investments,

intangibles).

Theadjustment

to

reverse

out

the

effects

would

be:add

the

amount

of

loss

to

net

e.subtract

the

amount

of

the

gain

from

net

e.The

same

holds

true

for

gains

and

losses

from

the early

extinguishment

of

debt

(like

the

gains/losses from

the

retirement

of

bonds).add

the

amount

of

loss

to

net

e.subtract

the

amount

of

the

gain

from

net

e.Indirect

Method

-Change

in

Related

Assets

and

Liabilities19The

third

category

examines

the

change

inthe

assets

and

liabilities

that

relate

to

theremaining e

statement

items,

after

the

itemsin

(1)

and

(2)

have

been

removed.The

adjustment

for

the

effect

of

thesechanges

is

to

effectively

“squeeze”

the

estatement

item

from

the

accrual

basis

ofaccounting

to

the

cash

basis

of

accounting.Indirect

Method

-Change

in

Related

Assets

and

Liabilities20For

example,

assume

that

total

sales

revenuerecognized

for

the

year

is

$100,000. At

thebeginning

of

the

year,

A/R

were

$2,000;

at

the

end

of

the

year,

A/R

were

$3,000.What

amount

of

cash

was

collected

fromcustomers?To

analyze

this

effect,

we

must

analyzetheA/R

account,

and

how

it

is

increased

anddecreased.Indirect

Method

-Change

in

Related

Assets

and

Liabilities21A/RB

+

Sales

-

A/RE =

Cash

Collections2,000

+

100,000

-

3,000

=

Cash

Collections99,000

=

Cash

CollectionsNote

that,

to

convert

from

accrual

basis

salesrevenues

to

cash

basis

sales

revenues,

anincrease

in

A/R

should

be

subtracted

from

net e

toconvert

net e

to

a

cash

basis.Correspondingly,

a

decrease

in

A/R

should

be

addedto

net e

to

convert

net e

to

a

cash

basis.Indirect

Method

-Change

in

Related

Assets

and

Liabilities22This

pair

of

rules

can

be

expanded

to

a

general

set

ofrules

to

convert

NI

from

accrual

to

cash

basis:Subtract

increases

in

related

assets.Add

decreases

in

related

assets.Add

increases

in

related

liabilities.Subtract

decreases

in

related

liabilities.The

types

of

assets

that

relate

to

the e

statement

areprimarily

current

assets,

but

not

always. Todecide,you

must

look

at

each

asset

and

itsrelated

estatement

component. Also,

remember

that

we

arelooking

at

the