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Stock Statement

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					Acct 414                                                                   Prof. Teresa Gordon




                        The Statement of Cash Flows
Purpose of a statement of cash flows:
          To provide information about the cash inflows and outflows of an entity during a
          period.

          To summarize the operating, investing, and financing activities of the business.

                    The cash flow statement helps users to assess a company’s liquidity,
                    financial flexibility, operating capabilities, and risk.
                    The statement of cash flows is useful because it provides answers to
                    the following important questions:
                              Where did cash come from?
                              What was cash used for?
                              What was the change in the cash balance?

          Specifically, the information in a statement of cash flows, if used with
          information in the other financial statements, helps external users to assess:
                              1.        A company’s ability to generate positive future net cash
                                        flows,
                              2.        A company’s ability to meet its obligations and pay
                                        dividends,
                              3.        A company’s need for external financing,
                              4.        The reasons for differences between a company’s net
                                        income and associated cash receipts and payments, and
                              5.        Both the cash and noncash aspects of a company’s
                                        financing and investing transactions.

Review of terms
          Cash and cash equivalents
                    It is a short-term, highly liquid investment.
                    It must be readily convertible to cash and it must be so near to maturity that
                    there is insignificant risks of changes in value due to changes in interest
                    rate.




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Acct 414                                                                          Prof. Teresa Gordon

                                                      Company, Inc.
                                                 Statement of Cash Flows
                                         For the year ended December 31, 20XX

          Cash Flows from Operating Activities
                 Cash received from customers
                 Cash received as interest income *
                 Cash received as dividend income
                 Cash paid for cost of goods sold *
                 Cash paid for selling expenses
                 Cash paid for general & administrative expenses
                 Cash paid for interest (including interest on capital leases)
                 Cash paid for income taxes
                 Cash that would have been paid for taxes except for “excess tax deduction” related to stock
                         based compensation
                            Net cash provided by (or used by) operating activities

          Cash Flows from Investing Activities
                 Cash received from sale of property, plant, & equipment
                 Cash received from sale of investments (other than trading securities)
                 Cash received from repayment of note receivables
                 Cash paid to acquire property, plant, and equipment
                 Cash paid to acquire investments
                 Cash paid out as a loan
                         Net cash provided by (or used by) investing activities

          Cash Flows from Financing Activities
                 Cash received as proceeds from issuance of debt
                 Cash received as proceeds from issuance of stock
                 Cash received as proceeds from reissuance of treasury stock
                 Cash paid to repay debt (principal payment)
                 Cash paid on principal related to capital leases
                 Cash paid to reacquire stock (purchase treasury stock)
                 Cash paid as dividends
                 Cash retained due to “excess tax deduction” related to stock options
                         Net cash provided by (or used by) financing activities

          Net increase (decrease) in cash
          Beginning cash and cash equivalents balance
          =Ending cash and cash equivalents balance

          Schedule of Noncash Investing and Financing Activities
                 Assets for Liabilities &/or Equity
                 Liabilities &/or Equity for Assets
                 Liabilities for Equity and Equity for Liabilities
                 Capital lease (acquisition of asset and obligation for lessee)
          A reconciliation of net income to cash provided by operations

*Brackets indicate items that are normally combined



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Acct 414                                                                  Prof. Teresa Gordon



Noncash revenues and expenses
Net income includes items that were neither cash inflows nor cash outflows:

          Depreciation expense
          Accretion expense on asset retirement obligation
          Amortization of intangibles
          Impairment loss on goodwill and intangibles
          Earnings of affiliated companies accounted for using the equity method
          Impairment losses on other noncurrent assets
          Compensation expense related to stock options

Net income also includes gains and losses from investing and financing activities
       Gain ≠ cash received (unless carrying value was zero)
       Even when there is a loss, cash might have been received

Net income must be adjusted for these items to get the cash provided by operations – part of the
reconciling schedule or “indirect method”

For other items, there are revenues/expenses as well as cash flows but the amounts are different:

          Bond interest expense ≠ bond interest paid (if bonds were sold at premium or discount)
          Sales were not all collected in cash (bad debts, other changes in Accounts Receivable)
          Purchases were not necessarily paid for during period (change in Accounts Payable)
          Income tax expense ≠ income taxes paid due to deferred tax assets/liabilities as well as
                 income taxes refunds receivable or unpaid taxes owed
          Pension expense is not necessarily equal to the cash flow (contribution to plan assets)




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Acct 414                                                                         Prof. Teresa Gordon


Operating Activities
          (Usually associated with working capital accounts like Accounts receivable,
          inventory, salaries payable, etc.)
                    Inflows:
                              From sale of goods and services
                              From receiving dividends investments
                              From receiving interest from investments or loans
                              From sale of trading securities**
                              From reduced income taxes due to “excess tax deduction” related to stock
                                     options

                    Outflows:
                              To suppliers for inventory and other materials
                              To employees for services
                              To other entities for services (insurance, etc.)
                              To government for taxes
                              To lenders for interest
                              To purchase trading securities**

Interest expense is an operating item! Investment earnings (dividends & interest) is an operating
item! Buying and selling trading securities is an operating activity! These things may not make
sense to you – so “memorize.”
Investing Activities
          (Usually associated with long-term assets)
                    Inflows:
                              From sale of property, plant and equipment
                              From sale of debt or equity investments of other entities*
                              From collections of principal on loans to other entities
                    Outflows:
                              To purchase property, plant and equipment
                              To purchase debt or equity securities of other entities
                              To make loans to other entities


*except investments classified as trading securities which have been defined as operating activities
(until FAS159)
** FAS159 (para. C5c) permits trading securities to be classified as operating or investing “based
on the purpose for which the securities were acquired.” This standard becomes effective for 2009
financial statements.


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Acct 414                                                                      Prof. Teresa Gordon



Financing Activities
          (Usually associated with long-term liability and equity items)
                    Inflows:

                              From issuance of debt (bonds and notes)
                              From issuance of equity securities
                                        Common stock
                                        Preferred stock
                                        Re-issuance of treasury stock
                    Outflows:

                              To stockholders as dividends
                              To repay or retire long-term debt, including capital leases for lessee
                              (interest on leases is classified as operating)
                              To reacquire capital stock (treasury stock)

          CLASSIFICATION – CONFUSING ITEMS TO WATCH OUT FOR
          Dividends are paid to stockholders and interest is paid to bondholders.

          Dividends paid are shown as outflows under financing activities

          However, FASB defined interest expense to be an operating activity

          Interest & dividend revenue are defined to be operating activities, too.




Direct versus Indirect Presentations
          FASB Statement No. 95 allows two ways to calculate and report a
          company’s net cash flow from operating activities on its statement of cash
          flows.

The Indirect Method
          Under the indirect method, net income is adjusted for noncash items related to
          operations to compute the net cash flow from operating activities.
                    If you choose to use the indirect method, you must also disclose interest paid and income
                    taxes paid during the year.




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Acct 414                                                                        Prof. Teresa Gordon



The Direct Method
          Under the direct method, operating cash outflows are deducted from operating
          cash inflows to determine the net cash flow from operating activities.
                    If you choose the direct method, a reconciliation of cash provided by operations to net
                    income is a required disclosure.

                    This is the same schedule that appears in a statement prepared using the indirect method


The required information items on a direct method statement of cash flow (per FASB)

          Operating Inflows
                    Cash collected from customers (including lessees, tenants, licensees, and
                    the like)
                    Interest and dividends received
                    Other operating cash receipts, if any
          Operating outflows
                    Cash paid to employees and other suppliers of goods or services (including
                    insurance, advertising and the like)
                    Interest paid
                    Income taxes paid
                    Other operating cash payments, if any




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Acct 414                                                                    Prof. Teresa Gordon


Other disclosures
          Under both methods (direct & indirect), you must disclose noncash financing and
          investing activities
                    This can be on face of the statement or in the notes to the financial statements.

                    Examples:

                              Trade common stock for land
                              Convertible bonds converted to common stock
                              Issue bonds in exchange for a building
                              Convertible bonds converted to common stock
          Significant transactions should be disclosed separately.

          The disclosure of significant noncash financing and investing activities are required under
          both methods (direct & indirect)

          The disclosure can be on face of the statement or in the notes to the financial statements.

Disclosure added by FASB 123R effective for periods beginning after June
15, 2005
The amount of cash received from exercise of share options (employee stock-based compensation
plans) and the tax benefit realized from stock options exercised during the annual period.




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