Intermediate accounting 17e stice skousen cengage chapter 05

Pro Forma Cash Flow Statement A pro forma cash flow statement is a prediction of what the actual cash flow statement will look like in future years if the operating, investing, and fin

Statement of Cash Flows

What Good is a Cash

Flow Statement?

• It explains the change during

the period in cash and cash

equivalents.

• Sometimes earnings fail.

• Everything is on one page.

• It is used as a forecasting tool.

Pro Forma Cash Flow

Statement

A pro forma cash flow

statement is a prediction of what

the actual cash flow statement

will look like in future years if the

operating, investing, and

financing plans are implemented

Cash Equivalent

short-term, highly liquid investment

that can be converted easily into

cash

item must be:

 Readily convertible into cash

 So near to its maturity that there is

insignificant risk of changes in value

Cash Flow Activities

• Operating activities include those

transactions and events that enter into the determination of net income.

• Investing activities include those

transactions and events that involve the purchase and sale of financial

instruments not intended for trading

purposes; property, plant, equipment;

and other assets not generally held for resale, as well as the making and

collecting of loans.

• Financing activities include those

transactions and events whereby

resources are obtained from or repaid

to owners and creditors.

Cash Flow Activities

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5-9

Cash Flow Pattern

The normal pattern of positive inflows

or negative outflows of cash reported are as follows:

−

Noncash Investing and

Financing Activities

• Noncash investing and financing

activities affect an entity’s financial

position but not the entity’s cash flow

Examples include:

• Significant transactions should be

disclosed separately.

• These transactions do not appear in

the statement of cash flows.

 Equipment purchased with a note

payable

 Land acquired by issuing stock

Cash Flow Categories

Under IAS 7

than the U.S rules contained in

SFAS No 95 A summary of these

differences are shown next

Types of Cash Flow

Operating Activities Section

The direct method is essentially

a reexamination of each income

statement item with the objective

of reporting how much cash was

received or disbursed in

association with the item

The indirect method begins with net income as reported on the

income statement and adjusts this accrual amount for any items that

do not affect cash flow

Both methods produce

Indirect Method

The indirect method net income is

adjusted for items that do not affect cash flow There are three basic types.

• Revenues and expenses that do not

involve cash inflow or outflow.

• Gains and losses associated with

investing or financing activities.

• Adjustments for changes in current

operating assets and liabilities that

indicate noncash sources of revenues

and expenses.

Orchard Blossom Company

= Cash available for collection $190

− Ending accounts receivable 60

= Cash collected from customers $130

Direct Method

Cost of Goods Sold and Cash

Paid for Inventory

Operating Activities Section

of the Statement of Cash

Flows—Direct Method

Direct Method

Indirect Method

Sales

The $20 increase in accounts

receivable means that cash

collected is $20 less than the $150 the sales number indicates So, the necessary adjustment is to

subtract the $20 to show that $130 was collected on account

Cost of Goods Sold

The $25 decrease in inventory

means that although cost of good

sold of $80 is included in the

income statement, less cash was

used to purchase inventory than

Indirect Method

Wages Expense

The $3 increase in wages payable

indicates that only $22 of the $25

expense was paid in cash The $3

to net income

Indirect Method

Depreciation Expense

The $30 depreciation expense is a

back to net income because it was deducted from net income to

determine the accrual net income

Indirect Method

Note the same net cash from

operating activities as calculated

using the direct method

Indirect Method

Important Point

cash Because you added

depreciation back to net income

as an adjustment using the

indirect method does not mean

that there is an inflow of cash

However, depreciation does lower

Cash increased $10 during the year.

Step 2

Convert the income

statement from an basis to a cash-basis

accrual-summary of operations

Start with depreciation.

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Step 3

Analyze the long-term

assets to identify the cash flow effects of investing

activities.

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Land

Because there is no indication of a

land sale, we conclude that land

increased by $15 during the year

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The building account increased $40

We are told that a building was sold for $32 during the year

Building

Building

Building(s) costing $76 must

have been purchased during the

year

Building

Step 4

Analyze the long-term debt

and stockholders’ equity

accounts to determine the

cash flow effects of any

financing transactions.

• Treasury stock

purchase

Long-Term Debt

We can infer that Orchard

Blossom repaid $21 in long-term

loans during the year

Retained Earnings

Retained earnings decreased by

$9 We know there was a $15 net

income, so we can use a

T-account to determine the amount

of the dividend

Long-Term Debt

The $6 debit, or “squeeze” figure,

has to be the dividends declared

(and we will assume paid) during

Step 5

Prepare a formal statement

of cash flows.

Cash Flow to Net Income

• Measure of earnings quality

• Tends to be greater than 1

• Should remain fairly stable for the

years for a specific company

Cash Flow Ratios

Cash from operations

Net income Cash-flow-to-net-

income ratio =

Cash Flow Adequacy

spending and cash generated by operations

reinvestment in long-lived production assets

flows from operations fall short of funding

growth

Cash Flow Ratios

Cash from operations Capital expenditures and acquisitions Cash flow

adequacy ratio =

Cash Times Interest Earned

• Measures ability to service debt

• Generally, a higher ratio indicates more

solvency

Cash Flow Ratios

Cash from operations + Interest paid + Taxes paid

Interest expense

Cash times

interest earned

ratio =

Articulation

In an accounting context,

articulation means that the

three primary financial

statements are not isolated lists

of numbers but are an integrated

set of reports on a company’s

financial health

1 Compute the change in cash.

from an accrual basis to a cash

basis.

accounts.

flows.

Forecasted Statement

of Cash Flows