Receipt of interest from an investment in bonds_____________. Payment of dividends__________________. of merchandise for cash________________. Cash collected on an accounts receivable_________________. Paid an accounts payable_____________________. Converting bonds into common stock________________. Purchased equipment issuing a long-term note_____________. D. SIGNIFICANT NONCASH ACTIVITIES—Not all of a company’s significant activities involve cash. Examples of significant noncash activities are: Direct issuance of common stock to purchase assets. Conversion of bonds into common stock. Direct issuance of debt to purchase assets. Exchange of plant assets. Significant financing and investing activities that do not affect cash are NOT reported in the body of the SCF. Such activities are reported in either: a separate schedule at the bottom of the SCF or in a separate note or supplementary schedule to the financial statements. The reporting of these noncash activities in a separate schedule or the notes satisfies the disclosure principle and materiality concept (see chapter 6 in textbook). E. FORMAT OF THE STATEMENT OF CASH FLOWS The general format of the SCF is the 3 activities previously discussed – operating, investing, and financing – plus the significant noncash investing and financing activities. To help remember, use the acronym, OIF, “O, IF I could just remember the three sections of the SCF.” FORMAT OF THE STATEMENT OF CASH FLOWS to see the following sections: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increase (decrease in cash) Noncash investing and financing activities SAMPLE STATEMENT OF CASH FLOWS that: The individual inflows and outflows from investing, and financing activities are always reported separately so that the investing and financing activities of the enterprise will not be obscured. The operating section also the inflows and outflows separately. But the operating depends on the method used (Direct or Indirect) to prepare the statement as discussed later.
Increase in equipment: An example of two transactions from the purchase and sale of equipment show on two line on the Statement of Cash Flows. Increase in Bonds Payable: An example of additional information that the land purchase was through the issuance of bonds payable that does NOT affect cash but is a significant noncash investing and financing activity that must be disclosed in a separate schedule. Increase in Common Stock: An example of additional information that the issuance of common stock for cash and would be shown in the financing section. Increase in Retained Earnings: The following factors account for this increase. Net income increases Retained Earnings. Additional information may indicate that the company declared and paid a cash dividend. The increase due to net income is reported in the operating activities section. The cash dividend paid is reported in the financing activities section. This analysis can also be made directly from the Retained Earnings account. STATEMENT OF CASH FLOWS: Operating activities with positive amount uses the words, “provided by” to give the total amount of “Net cash flows provided by operating activities.” In the investing and financing activities sections, positive numbers indicate cash inflows (receipts), and negative numbers indicate cash outflows (payments). Investing activities with a total negative has the words, “used by” to give the total amount of “Net cash flows used by investing activities.” Financing activities with a negative uses the words, “used by” to give the total amount of “Net cash flows used by financing activities. Prepare a Statement of Cash Flows using the Direct Method: Step 1: Operating Activities—DETERMINE NET CASH PROVIDED/USED BY OPERATING ACTIVITIES BY CONVERTING NET INCOME FROM AN ACCRUAL TO A CASH BASIS: Under the DIRECT METHOD, net cash provided by operating activities is computed by: Adjust each item on the income statement from the accrual basis to the cash basis Major classes of operating cash receipts and cash payments are reported.
To simplify and condense the operating activities section, only classes (suppliers, employees, operating expenses, interest, and taxes) of operating cash receipts and cash payments are reported. The difference between cash receipts and cash payments is the net cash provided by operating activities. Cash Receipts from Customers: The income statement reports revenues from customers. To determine the amount of cash receipts, the decrease in accounts receivable is to sales revenues. Conversely, an increase in accounts receivable is deducted from sales revenues, since cash receipts from customers is less than sales revenues. The formula to calculate the cash receipts from customers Revenues from sales + Decrease accounts receivable or = Cash receipts from customers - Increase accounts receivable For an example, accounts receivable decreased $3,000, so that cash receipts from customers were $978,000, calculated as follows: Revenues from + Increase in A/R = Cash receipts from customers $975,000 + $3,000 = $978,000 Cash receipts from customers may also be determined from an analysis of Accounts. The formula to calculate the cash payments to suppliers the major expenditure is for the purchase of merchandise inventory: Cost of Sold + Increase in inventories = Cash Payment to Suppliers or - Decrease in inventories AND + Decrease in accounts payable or - Increase in accounts payable An example of a company reported cost of sold on its income statement of $660,000. To determine purchases, cost of goods sold must be adjusted for the change in inventory. An increase (decrease) in inventory is added to (deducted from) cost of goods sold to arrive at purchases. The company’s inventory increased $10,000. Cash payments to suppliers are then determined by adjusting purchases for the change in accounts payable. An accounts payable increase (decrease) is deducted from (added to) purchases. Thus to combine the two adjustments calculated with the formula as shown as follows: COGS + Inc. in Inventory + Dec. in A/P = Cash Payments to Suppliers