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What items are included in operating activities on the Statement of Cash Flows?

Cash received from Customers- Interest & Dividends- Trading Securities

Cash paid to Vendors- Suppliers- Interest- Taxes- Trading Securities


What items are included in investing activities on a Statement of Cash Flows? Pg. 25-1

Cash received: Sale of PP&E- Sale of Investments- Loan PrincipleCash paid: Loans- Acquisitions- AFS or HTM (not TRADING) Securities- Taxes- Trading Securities


What items are included in Financing Activities in a Statement of Cash Flows?

Cash received: Issuance of Stock- Issuance of Debt

Cash paid: Dividends


What is the direct method for a Statement of Cash Flows?

Starts with Income from Continuing Operations

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses

If used- the Indirect Method must also be shown


What is the Indirect Method for a Statement of Cash Flows?

Starts with Net Income

Adjusts for changes in accounts like A/R- A/P- Inventory and non-cash revenues- expenses- gains- losses


What period does the balance sheet report in? Pg. 3-1

A point in time


Define Pg. 3-1
a) Current asset
b) Current liabilities
c) Cash
d) Cash Equivalent

a) assets that will be used up or converted into cash within one year or operating cycle; whichever is longer
b) liabilities that will be settled within one year or the operating cycle; whatever is longer
c) most liquid asset
d) easiily converted into cash with an orginal maturity of 90 days or less


What to consider with overdraft protection? (If overdraft)
a) If in same bank
b) If in different banks

a) Net them
b) Show "+" as an asset, and the "-" as a liability

*Not considered CASH!!!


Income Statement Format Pg. 2-4


*O Operating income
+ N Non-operating/other income (transaction)
= Income before tax
- T Provision for Income Tax
I Income from continuing
+ D Gain/loss from operations of
Discountinued component
- E Extraordinary loss
= N Net income
+ O Other comprehensive income
(DENT) (translation)
C Comprehensive income


When is an asset current? Pg. 3-2

When asset expects to realize the asset or to consume or sell it within 12 months; or the entity hold the asset for trading


When is a liability current? Pg. 3-2

Entity expects to settle the liability within operating cycle; the liability will be settled within 12 MONTHS; the entity holds the liability for trading


How to do you do bank reconciliation? Pg. 3-2

*Balance on bank statement (per bank)
*Checkbook balance (per book)

+ Deposits in transit
- Outstanding checks
+- Errors made by bank
= Corrected errors

+ Amounts collected by bank
- Unrecorded bank charges
+- Errors made in recording transactions
= Corrected balance


Name 6 examples that are NOT cash or cash equivalents? Pg. 3-1

*When should they be in included?

1) Compensating balances (current/non-current asset)
2) Postdated checks or Non-sufficient funds (receivables)
3) Overdraft protection
4) Restricted cash (investments)
5) Postage stamps (prepaid expense)
6) Bond sinking fund (investment)

*But they are DISCLOSED in the financial statments


Name 6 examples of current assets Pg. 3-1

Name 6 examples of current liabilities Pg. 3-1

Cash, temporary trading securities, A/R, N/R, inventories, and prepaid expenses

A/P, accured expenses, dividends payable, income taxes payable, current portion of long term debt


Significance of Statement of cash flows? Pg. 25-1

Where do the changes come from? (3)

Report the changes in cash from beginning to ending (inflows and outflows) => where did money come from and what is it used for

*Operating Activities: Inflows and outflows of cash related to the production of income from continuing operations; includes interest received and paid
*Investing Activities: investing in yourself or others (LIP)
L Loans
I Investment acquisition
P PP&E acquisition
*Financing Activities: how to raise money for a company; issuing debt or equity => includes dividends paid to shareholders b/c distribution to owners; a return of investment


What is a cash equivalent? Pg. 25-1

Highly liquid (easily converted to cash) and has an original maturity of 3 months or less


In general, how do you classify operating, investing, and financing activities?

*Operating: current asset or current liability
*Investment: non-current asset
*Financing: non-current liability or stockholder's equity


How do you prepare the operating activity section of the statement of cash flows? (2) Pg. 25-2

1) Direct method: direct cash approach (preferred method) => take each item and convert from accrual to cash
2) Indirect method: reconciliation approach => use "net income"


What are the 3 adjustments for the indirect method?
Pg. 25-6

*How do you add and subtract with indirect method?

1) Non-cash items are adjusted (depreciation and amortization expense "+", equity in earnings "-") => b/c no effect on cash
2) Non-operating items are adjusted (deduct the gain from the sale of an Available-for-sale security since this is an investing activity => ANY GAIN/LOSS from the sale of non-operating activities
3) Changes in the balances of accrual related accounts are adjusted (A/R, inventory, A/P, allowance for uncollectible accounts receivable, amortization of discount, and taxes)

*Increase in liability results in "+"
*Increase in assets results in "-"
(add what is "bad" and subtract what is "good"


How do you prepare a statement of cash flows? 5 Steps
Pg. 25-8

1) Set up the statement of cash flows in a 3-column format
2) Set up T-accounts for each balance sheet account (changes), other than cash => to check net debits and credits are equal to change in cash since there is no T-account => ending
3) Analyze the additional information provided, preparing journal entries for the transactions. Post the debits and credits in the appropriate schedules
4) Any unreconciled differences in the balance sheet T-accounts should be eliminated with the offsetting debit or credit going into the appropriate seection of the statement
5) If the problem calls for the direct method, complete the operating activities section of the statement by using the income statement and the realated balance sheet accounts. In all cases, complete the statement with subtotals for each section


For cash flows, are the following items considered an operating, investing, or financing activity? Pg. 25-1
a) Interest received and paid
b) Dividends received

a) Operating
b) Operating


What is book value regarding plant assets?

Plant assets net of accumulated depreciation


How to account for cash to accrual? Pg. 25-7

How do you account for operating activities via indirect method?

*Decrease in asset "-"
*Decrease in liability "+"

*Increase in asset "-"
*Increase in liability "+"


How to prepare a statement of cash flows with...
a) Income statement
b) Balance sheet

a) Make a journal entry for each and do accrual to cash
b) Account for the changes in T-accounts


What is COGS considered as in a journal entry?

An expense account


What are unearned fees?

Money that is received and not earned; therefore, it is not included in revenues


The cash method of accounting VS accrual method of accounting

Income is not counted until cash is actually received, and expenses are not counted until they are actually paid

Transactions are counted when the order is made, item is delivered, or services occur, regardless of when the money is paid or received


If problem is asking for cash basis or accrual basis of accounting, how do you approach the problem?

Look at the CHANGES!!!


For cash flows...
a) Debit or credit to B/S accounts other than cash go to?
b) Debit or credit to cash go to?
c) Debit or credit to I/S accounts go to?

a) T-accounts
b) Investing or Financing
c) Operating (includes gain, loss, revenue, and expenses)


What is included in the balance sheet? What do you think of?

The equation:
Assets = Liability + Equity

*At a point in time