Академический Документы
Профессиональный Документы
Культура Документы
End
1,000
1,100
1000
Return of
Investment
Dollar Return =
Rate of Return =
100
Return on
Investment
1,100
(1,000) =
Dollar Return
Original Investment
100
100 =
1,000
10%
B)
Risk
1) A chance of Loss
a) Receive a lower return than expected
b) Receive a return that eats into your initial investment
2) All individuals have different attitudes towards risk
a) Risk seekers
b) Risk avoiders
3) Different Types of Risk
a) Risk-free rate - rate of return on a virtually riskless investment
1) (Short-Term US Government bond)
b) Inflation Risk - a decline in purchasing power due to rising prices
1) as prices increase - more money is needed to purchase the same item
c) Business Risk - Risk associated with a specific business
1) Example - Walmart vs. Kmart- more business risk associated with Kmart
d) Liquidity Risk - Risk an investment cannot easily be converted into cash
1) Example - Selling a house vs. selling 100 shares of IBM
a) selling a house can take months, selling IBM share (seconds)
4) Risk and Return are related
a) As the risk of an investment increases, the require return by the market place increase
1) contrast GAP stock with a short-term US treasury bond
1 Year
Today
1 Year
1
Which would you rather have????
Dollar today
Dollar 1 year from now
2 years
10%
1,000
2 X .10 X 1,000 =
2 years
10%
1,000
1,000 X .10 X 1 year =
1,100 X .10 X 1 year =
Total
100
110
210 <== Interest Earned
1,000 + 100
< = Answer
< = Answer
2) Example
Start
15,000.00
????
2) Present Value
a) Define - What is the value of a future deposit worth today?
b) Example - Use Packet
1) Spend time on the rate per period and the rate per year.
2) Example
Start
????
35,000
100
100
100
Deposits
????
c) Real-Life Example - 401K deposits, creating a "nest egg" for the future
d) Example - Use Packet
1) Spend time on the rate per period and the rate per year.
100
100
100
Payment
????
b) Real-Life Examples - CAR LOAN, HOUSE LOAN
c) Example - Use Packet
1) Spend time on the rate per period and the rate per year.
2)
0.25
0.75
Start
100
100
100
PV
- Net Investment Cost
NPV
What is the present value of the above cash inflows?
Compare the cash inflows to the cost of the asset.
C) NPV steps
1) Identify both the timing and amount of both cash
inflows and cash outflows.
2)
3)
4)
: Reject Investment
100,000
3)
100,000
NO CASH OUTFLOW
4)
5)
Corp. B
200,000
(200,000)
30%
-
300
200
100
110
10
30%
3
After-Tax Cash Flows =>
11
2)
300
200
100
90
-10
30%
-3
3
93
The deduction will reduce taxes (create a tax savings), but no cash
outflow will be generated
2)
2)
Define - Financial leverage occurs when the return from borrowed funds is greater than the
12
Financial Risk - the chance a company might default on its debt obligations
Capital account represents the owner's equity placed into the business
a)
b)
c)
d)
13
3) More on Partnerships
A) Division of Partnership Income (ways to divide net income & net loss)
1)
2)
3)
4)
Fixed Ratio
Ratio of Capital Balances
Salary & Interest Allowance
Divide the Remainder
40,000
60,000
100,000
0.40
0.60
======> Partnership Agreement
b)
c)
d)
e)
10,000
2,000
6,667
18,667
BB
40,000
0.05
2,000
BB
60,000
0.05
3,000
Partner B
3,000
3,333
6,333
Partner A
Partner B
Bal.
25,000
15,000
10,000
< ===Amount added to each partner's capital account
Remainder
2
1
3
66.67%
33.33%
10,000
3,333
14
f)
10,000
2,000
(18,000)
(6,000)
BB
40,000
0.05
2,000
BB
60,000
0.05
3,000
Partner B
Bal.
(12,000)
(22,000)
3,000
(27,000)
(9,000)
(6,000) < ===Amount subtracted from each partner's capital account
Partner A
Partner B
Remainder
2
1
3
66.67%
33.33%
(27,000)
(9,000)
Advantage (limited liability) - An investor can only loose his or her investment (not personal property)
=> True for => minority shareholders
=> Major stockholders can be liable for their decisions
2)
Advantage - Corporations can raise large amounts of capital (easier than sole proprietorships & partnerships)
3)
4)
15
4)
5)
Who Cares??? = If existing shareholders do not purchase the newly issued shares, the existing
shareholders will have reduced voting power.
Right to share in any dividends
Right to share in any liquidation
a)
Common shareholders are usually last in line to receive assets of the corporation in the event of
a bankruptcy.
2)
Cumulative P/S
a)
Cumulative P/S
1) Unpaid P/S dividendsUnpaid
are called
P/S==>
dividends are called ==> Dividends in Arrears
2) Use ==> Dividend in Use ==> Dividend in Arrears Example ==> Packet
16
Date of Declaration - board of directors announces the payment of a dividend (legal liability created)
2)
Date of Record - listed shareholders on the date of record will receive a dividend
3)
D) Dividends are not an expense of the corporation (dividends represent a return of capital)
17
9) Stock Splits
A) General logic (Stock Splits)
1) Reduce the price of the stock (more people can purchase
the stock at a lower price (increase the liquidity of the stock))
===> Increasing the Liquidity (of the stock) => increase the ease of buying or of selling the stock
===> Berkshire Hathaway Example
B) Stock splits require no journal entries
1)
2)
18
19
B)
Borrower Risk = > default on the loan = > Not make scheduled payments
1)
C)
Investor Risk = > default = > Company does not payoff its debts
D)
2)
>
Cost of Borrowed
Funds
Total Debt
Total Equity
1)
2)
3)
Who Cares????
a)
4)
B)
Equation =
2)
Example
30,000 =
10,000
3.00
General Rule: As the times interest ratio goes up, the firm
is in a better position to payoff creditors.
3)
B)
C)
D)
Market Rate of Interest (also called yield, market, & effective rate)
1)
E)
4)
The current market rate demanded by the market place (set by the market place)
Face Rate - Interest rate printed on the face of the note or bond.
Nonpublic Sources - A business borrows from individuals or from institutions (like insurance companies)
B)
Public Sources - A business borrows by issuing debt to the public (Example =>Chicago Board of Trade)
1) Corp. bonds then can be traded
5)
2)
3)
4)
21
b)
Cash Pmt
c)
Reduction in
- Interest Exp. = Note Payable
2,820.08
(500.00)
2,320.08
5)
b)
10,000.00
10,000.00
500.00
2,320.08
2,820.08
384.00
2,436.08
2,820.08
Interest Expense
500.00
384.00
884.00
Notes Payable
10,000.00
2,320.08
2,436.08
5,243.84
22
B)
2)
3)
b)
9,245.56
754.44
10,000.00
10,000.00
754.44
9,245.56 < = Cash Proceeds
Carrying Value
1/2 year (.08/2)
C)
369.82
9,245.56
0.04
369.82
2)
3)
D)
369.82
Periodic Payment with a Lump-Sum Note => FIGURE JUST LIKE A BOND
1)
23
6)
Leases
A)
B)
Lease Terms
C)
1)
2)
Types of Leases
1)
b)
XX
XX
Only pay for use, no ownership interest by lessee (like rent expense)
2)
Capital Lease - Lessee / Buyer acquires a substantial interest in the leased property
24
7)
Market Rate > Face Rate ==> Bond or note sold at a discount
0.15
0.10
1)
B)
Market Rate < Face Rate ==> Bond or note sold at a premium
0.08
0.15
1)
C)
Par value / Face value of Bond or Note = $1,000, then the company
will receive more than $1,000
Market Rate = Face Rate ==> Bond or note sold at a face value (par value)
0.05
0.05
1)
D)
Par value / Face value of Bond or Note = $1,000, then the company
will receive less than $1,000
Par value / Face value of Bond or Note = $1,000, then the company
will receive $1,000.
Sell to B
Investor A wants
a 15% Return
Investor B
wants a 13%
Return
Investor C wants
a 13% Return
Investor D
wants a 15%
Return
8)
9)
B)
C)
26
Review
1)
2)
The Capital account represents the owner's equity placed into the business
a)
b)
c)
d)
B)
2)
B)
The par value is the minimum price a stock should be sold for
at its initial public offering (IPO).
2)
If a share of stock is sold below the par value during the IPO, then the shareholder
becomes liable for the difference between the par value and the market value.
3)
C)
Add. PIC is used to record value received beyond the par value of the stock
No par stock, without a stated value (will not use the account Add. PIC )
27
D)
$
$
1.00
50,000
10.00
500,000
Common Stock
Add. PIC - C/S
50,000
450,000
Asset +
OE +
OE +
3)
500,000
Corporate Earnings
A)
Net Income
Dividends
Declared
B) Quick Review
C)
1)
Revenues & Gains - Expenses & Losses > 0 ===> Net Income
2)
Revenues & Gains - Expenses & Losses < 0 ===> Net Loss
28
4)
Treasury Stock
A) Define => treasury stock => Company / corporation buys back its own stock
B)
D)
1)
2)
Treasury stock is found in the stockholders' equity section of the balance sheet.
3)
4)
500,000
500,000
Treasury Stock
500,000
=========>
Treasury Stock
Beg. Bal.
+ Purchases Sales (at
(at cost)
cost)
5)
6)
29
5)
Stock Splits
A) General logic (Stock Splits)
1) Reduce the price of the stock, more people can purchase
the stock at a lower price
===> Berkshire Hathaway Example
B)
C)
6)
D)
E)
2)
Date of Declaration
Dividends Declared or Retained Earnings
Dividends Payable
B)
1,000
1,000
Date of Record
NO ENTRY REQUIRED
C)
Date of Payment
Dividends Payable
Cash
D)
1,000
1,000
30
7)
B)
Small Stock Dividend => Under 20% of the => shares outstanding
C)
Solve
Debit
100,000
Credit
Debit
20,000
Credit
< =(100,000*.02)*50
20,000 < =(100,000*.02)*10
80,000 <= Plug
20,000
31
Accounting Equation
Assets =
PP & E
Liabilities +
Owners' Equity
Equipment / Buildings
XXX
Accumulated Depr.
XXX
Depreciation Expense
XXX
Land
XXX
NO DEPRECIATION EXP
Patents
XXX
Intangible Assets
Natural Resources
Amortization Expense
XXX
Mines
XXX
Depletion
creates
Inventory
Inventory
XXX
2)
10,000
7,000
3,000
32
B)
2)
Buildings
3)
Equipment
C)
PP & E assets are viewed as long-term assets (benefit more than one accounting period)
D)
Acquiring PP & E
1)
PP & E assets are capitalized - placed on the balance sheet, not expensed
all at once (used in the business, NOT FOR RESALE (not inventory))
2)
3)
a)
Sales tax
b)
Setup costs
c)
Freight
d)
Key - The capitalized asset should include all costs necessary to get
the asset ready for its intended use.
Company buys a drill press for the shop = invoice price = $10,000
b)
c)
d)
e)
10,000
800
500
200
Capitalized Cost
11,500
33
5)
6)
b)
Land is part of the PP & E balance sheet category (must be used in the operations
of the business)
Land is NOT depreciated
c)
2)
3)
4)
Key - The capitalized asset should include all costs necessary to get
the asset ready for its intended use.
b)
Capital Expenditure - the expenditure's benefits extend beyond the current period
1)
2)
Revenue Expenditure - the expenditure's benefits do not extend beyond the current period
1)
2)
An expense is created
850
850
34
3)
Matching Principle - Accrual accounting tries to match the benefits (revenues generated)
with the expenses that created the benefits.
1)
B)
500
500
1)
2)
3)
Contra Asset
Not closed - balance sheet account
C)
4)
Depreciation Calculations
A)
2)
2)
3)
4)
Depreciable Cost
a)
Depreciable cost = Capitalized Cost of the asset - Salvage Value of the asset
35
5)
Depreciation Methods
A)
Straight-line Depreciation
1)
Straight-line Formula =
2)
3)
4)
Straight-line example
a)
b)
c)
d)
Solve
Straight-line Formula =
6 years
1,000
Cost
Salvage Value
Estimated useful life of the asset
7,000
1)
5,000
2,000
7,000
1,000
1,000
Accumulated Depr.
2)
Depr. Exp.
Each Year
1,000
1,000
Equipment
Less: Accumulated Depr.
Book Value
Accumulated Depreciation
1,000
1,000
2,000
Year 1
7,000
1,000
6,000
Year 2
7,000
2,000
5,000
Yr. 1
Yr. 2
Ending Bal. Yr. 2
36
B)
Units-of-Production
1)
Units-of-Production formula =
can be hours, units produced, miles, and any other output measure
2)
3)
Step 1:
Figure ==> Depr. expense per unit of output (see above formula)
b)
Step 2:
Figure ==> Depreciation Expense = Depr. expense per unit X Actual Output
Units-of-Production example
a)
b)
Salvage Value =
1,000
c)
8,000
d)
e)
Units-of-Production =
Per unit of output
Step 1:
Step 2:
8,000
2,000
10,000
Cost
10,000
100,000
Salvage Value
Estimated Output
10,000
1,000
100,000
Figure ==> Depreciation Expense = Depr. expense per unit X Actual Output
Depr. Expense = .09 X 8,000 hours the first year =
1)
720
720
Accumulated Depr.
2)
720
Year 1
10,000
720
9,280
Accumulated Depr.
720 Year 1
900 year 2
1,620
3)
Year 2
10,000
1,620
8,380
10,000 X .09
37
C)
2)
b)
Matching Principle ==> DDB assumes more benefits will be received in the earlier years of an
asset's life. Since more benefits are produced in the earlier
years of an asset's life, more depreciation expense
should be matched with the earlier years.
c)
Real-life examples
1)
Car ==> A car's value will decrease faster in the first few years of a car's life.
2)
Computer => A computer's value will decrease faster in the first few years of a computer's life.
DDB Calculation
a)
b)
c)
Do not depreciate more than the depreciable cost. Once the book value
equals the salvage value, stop the DDB depreciation expense process.
d)
DDB Example
Asset Purchased, January 1, 20X5
Asset's capitalized cost =
Salvage Value
Est. Life of the Asset
10,000
5,250
8 Year
( 1 / 8) * 2 =====>
0.25
2,500
2,500
2,500
38
39
Year 2:
Year 1
10,000
2,500
7,500
Equipment
Less: Accumulated Depr.
Book Value
1,875
Depreciation Expense
Accumulated Depreciation
1,875
Year 1
10,000
2,500
7,500
Year 2
10,000
4,375
5,625
Equipment
Less: Accumulated Depr.
Book Value
1,875
Year 3
Years 4 - 8
10,000
###
4,750
4,750
5,250
5,250
Year 3:
Step 2: Figure the depreciation expense
Depreciation expense = Depreciation Rate X Book Value of the Asset
Depreciation expense = .25 X 5,625 ===>
1,406.25
Do not use
5,625
5,250
375
Depreciation Expense
Accumulated Depreciation
375
375
Years 4 - 8:
No depreciation will be taken in years 4 - 8.
40
3)
Depr. Exp.
$
2,500
Depr. Exp.
$
1,875
41
6)
Disposal of PP & E
A)
Step 1: Make sure depr. expense has been updated to the point of sale
B)
C)
Accumulated Depr.
12,000 Past depr. recorded
1,000 January 1, 20X1 - June 30, 20X1
13,000
Cost
Accumulated Depr.
Book Value
Cash Received
Gain on Sale of Equip.
20,000
13,000
7,000
9,000
2,000
1,000
1,000
Cash
Accumulated Depreciation
Equipment
Gain on Sale of Equip.
9,000
13,000
20,000
2,000
42
7)
Natural Resources
A) Examples of Natural Resources
1)
Coal
2)
Gold Mine
3)
Oil
B)
Cost
Salvage Value
Estimated units of Natural Resources
C)
43
8)
B)
Goodwill
=> General Example
=> Total Stock Value => $25,000
=> FMV Assets - FMV Liabilities => $ 17,000 - $ 7,000 => $ 10,000
=> Net Assets = FMV Assets - FMV Liabilities
=> Total Stock Value - (FMV of the Net Assets ( FMV Assets - FMV Liab.)) = Goodwill
=> $ 25,000 - $ 10,000 = Goodwill of => $ 15,000
=> Internally generated goodwill will NOT be found on the balance sheet
C)
2)
Patents
3)
Copyrights
57,000
Cash
D)
57,000
1,200
1,200
The above entry will increase an expense and reduce an asset's value.
The above journal entry will reduce net income (income statement issue).
The above journal entry will not reduce the company's cash (st. of cash flows issue).
E)
F)
44
9)
Revision of Estimates
A)
B)
C)
Formula
Carrying Value - Revised Salvage Value
Remaining Useful Life
D)
10)
====>
Depr. Expense
An estimate change will impact the current period and future periods. Previous
financials statement will not be revised.
B)
200
200
45
11)
12,000
10,000
7,000
Journal Entry
FMV =>
B)
12,000
7,000
10,000
9,000
15,000
20,000
2,000
Journal Entry
FMV =>
12)
15,000
2,000
3,000
20,000
13)
46
14)
Tax Laws
=> Depreciation is based on MACRS.
=> MACRS => Modified Accelerated Cost Recovery System
=> The MACRS rules classify property based on the tax laws.
=> Half-year convention => A company can generally only depreciate
an asset for half of the first year (based on the IRS rules).
=> The MACRS rules do not allow for any salvage value of the asset
at the end of the life of the asset (under the IRS rules).
15) Land held for speculation / held as an investment (not part of the operating assets)
=> This type of land should be classified as an investment asset (not part of PP&E).
16)
17)
Impairment Issues
=>
47
18)
20,000
$
20,000
Dec. 31, Year-End Value => 1,000 shares of Adams Inc., FMV @ $22.00 per share
Trading Security - Adams Inc.
Unrealized Gain - Trading Sec.
2,000
$
2,000
48
19)
Ethical Case:
You start a small oil corporation. This corporation has a few
assets. The assets' prices have increased in value.
The reputation of your business has also grown over the
past few years. Your customers know and value your
technology.
Your accountant creates the below information.
Cash
A/R
PP&E
Patents
Total
Per GAAP
100,000
120,000
650,000
20,000
890,000
Cash
A/R
PP&E
Patents
Goodwill
Total
Est.
Economic
Value
100,000
120,000
900,000
1,200,000
500,000
2,820,000
Issues:
The financial statements should be created in conformity
with GAAP rules. GAAP usually will not let long-term assets
be increased in value. The internally generated goodwill
will NOT be found on the balance sheet.
20)
49
Chapter 17
1) Comprehensive Income
A)
2)
Purpose => The income statement reflects the earnings generated by the
company during the accounting period.
B)
Single-step Format
a)
2)
Multi-Step Format
a)
Under the multi-step format, income & expenses are divided by the
activities that created the income or expense
50
B)
Expense!!!!
Income from Operations = Gross Profit - Selling & Administrative Expenses (Operating Exp.)
D)
E)
F)
Income Taxes
G)
H)
DE items
1) D = Discontinued Operations (net of taxes)
2) E = Extraordinary Items (net of taxes)
I)
Net Income
2)
Reason for separation - Show financial statement readers the discontinued operations
will not contribute towards future earnings.
a)
If the discontinued operations were mingled with the other central operations of the
business, a reader could not see the sections of the business that will not
contribute to the future earnings of the business.
51
3)
b)
c)
4)
b)
c)
B)
( 1,000 X ( 1 - .3))
( -10,000 X ( 1 - .3))
2)
b)
Infrequent => Event does not happen very often (almost never again)
Extraordinary Example
a)
3)
4)
Gas fire in Hutchinson --> Say a business was damaged by the gas fire,
this type of event is very unusual and should never happen again.
b)
52
1)
B)
EPS Example:
1)
2)
3)
4)
5)
6)
Solve - EPS
a)
330,000
30,000 Shares
5,000 Shares
20,000 Shares
(30,000-5,000)
(25,000+20,000)
30,000 X
25,000 X
45,000 X
3 / 12
5 / 12
4 / 12
7,500
10,417
15,000
32,917
or (30,000-5,000+20,000)
b)
C)
EPS =
$ 600,000 - $ 330,000
32,917 Shares
=====>
8.20
53
Past History
=> The income statement would account for the
total change from one accounting principle to another
accounting principle. This catch-up number was called
a cumulative effect of a change in accounting principle.
The catch-up number would adjust net income in total
for the past differences between the two accounting principles.
Example
=> DDB deprecation => would be higher than straight-line depreciation
B)
C)
The Book (old book issue)=> Cumulative Effect of a Change in Accounting Principle
The new rules have replaced the cumulative accounting logic
found in the book.
54
7) Earnings Quality
A) Definition of Earnings Quality
Definition => High quality earnings should help a financial statement reader
predict future earnings.
*Transitory Earnings => Transitory earnings are earnings that are not
part of the normal earning process.
* (not what the company does), (not part of the normal
earning process)
* Example => Gains & Losses on PP&E Item (selling PP&E assets)
* Example => Impairment Item
* Permanent Earnings => The earnings generated from the central operations of the business.
* Permanent earnings are usually income statement accounts found
before the "other items."
* Net Sales
* Cost of Goods Sold
(Gross Margin)
* Selling & Administrative Expenses (Operating Exp.)
8) A new revenue recognition process will be used by the business world (rules for 2017).
This revenue recognition process will replace the old GAAP rules.
A)
B)
56
B)
C)
2)
Our generation must take responsibility for our own personal investment.
I believe everyone in this room will have some individual stock ownership.
Any financial statement analysis knowledge should help you make
better investment decisions.
B)
Creditors want to make sure they get their investments back and receive a return.
2)
Credit Rating Agencies ---> Watched closely by creditors ( Moody's & Standards & Poor)
2)
B)
What happens when an investor does not feel he or she will receive an acceptable rate
of return?
**
3)
B)
2)
4)
b)
Ratio Analysis
A)
Activity Ratios
1)
2)
1)
b)
1)
B)
Liquidity
1)
Current Ratio =
Current Asset
Current Liabilities
Importance: The ratio shows the amount of current assets to
cover current liabilities.
2)
C)
2)
3)
Price-earnings Ratio
Current Stock Market Price
Earnings Per Share (EPS)
Importance: As the P/E ratio increases, the stock becomes
a more expensive stock.
*
General Rule: An investor wants to buy a stock before the P/E ratio increases.
D)
Total Debt
Total Equity
Who Cares????
a)
2)
Equation =
Example
30,000 =
10,000
3.00
General Formula
1)
B)
C)
D)
Types of Assets
2)
Amount of Assets
Reports => Liabilities ==> Liabilities represent future economic sacrifice of resources
1)
Types of Liabilities
2)
Amount of Liabilities
2)
B)
Major Classifications
Note: Assets are placed on the balance sheet according to
their liquidity (Liquidity = > How easily can the asset
be converted into cash).
1)
Current Assets - These assets will be converted into cash or used up within one year.
a)
Cash
2)
Marketable Securities
==> Trading Securities (value at FMV)
3)
A/R
====>
A/R
Less: Allow. for D/A
10,000
(600)
9,400
2)
4)
Inventory
5)
Prepaids
3)
b)
Characteristics of PP & E
1)
2)
3)
Long-Term Assets
PP & E assets are shown ( net of accumulated depreciation) => Balance Sheet
1)
c)
4)
Examples of PP & E
1)
Land
2)
Buildings
3)
Equipment
4)
Capital Leases
Intangible Assets
a)
b)
c)
2)
5)
6)
Remember
Liabilities
XXXXX
b)
c)
Accounts Payable
2)
Salaries Payable
3)
Taxes Payable
4)
5)
Unearned Revenue
6)
Accrued Liabilities
7)
8)
Long-Term Liabilities
a)
b)
Examples
1)
2)
10,000
500
9,500
Bonds Payable
Bonds Payable
Premium on Bonds Payable
Carrying Value
c)
d)
30,000
1,000
31,000
7)
8)
b)
Examples
1)
Common Stock
2)
Preferred Stock
3)
Net Income
Dividends
Declared
9)
3)
4)
B)
C)
D)
5)
B)
XX
XX
XX
XX
XX
Provides a link between the income statement & the balance sheet
B)
50,000
50,000
50,000
50,000
68
2)
Operating Section
1)
B)
b)
c)
d)
e)
Investing Section
1)
2)
3)
4)
69
C) Financing Section
1)
2)
Examples
3)
a)
b)
c)
d)
e)
2)
50,000
Equipment
Common Stock
75,000
50,000
75,000
b)
70
3)
Operating Section
1)
2)
B)
Cash Inflows
a)
b)
Cash Outflows
a)
b)
c)
d)
Investing Section
1)
2)
Cash Inflows
a)
Selling equipment
b)
Selling a building
c)
d)
Cash Outflows
a)
Buying equipment
b)
Buying a building
c)
d)
71
2)
Cash Inflows
a)
b)
c)
Cash Outflows
a)
b)
c)
PAYING dividends
1)
72
4)
Major Differences Between the Income Statement & the Statement of Cash Flows
A)
Sales on Account
A/R
80,000
Sales
80,000
80,000
A/R
80,000
3,000
3,000
9,000
9,000
Cash Equivalents
=> Short-term investments (maturity => within 90 days)
=> Highly liquid (easy to covert into cash)
73
6)
Direct Method - The direct method tries to figure where cash inflows and
cash outflows occurred.
==> Firms must still reconcile NI to operating cash flows
B)
Indirect Method - The indirect method converts net income into cash flows
from operations.
==> Indirect Method / Reconciliation Method
B)
74
75
8)
50,000
20,000
70,000
(70,000)
(70,000)
Summary:
Cash Outflows = Expenses
No adjustments
You should assume a corporation has only the below journal entry
for a given year.
Operating Expense
Salaries Expense
Utilities Payable
Salaries Payable
Cash
50,000
20,000
3,000 < = C. Liab.
2,000 < = C. Liab.
65,000
(70,000)
Utilities Payable
Salaries Payable
Cash Flows From Operating Act.
3,000
2,000
(65,000)
Summary:
Cash Outflows Expenses
Adj. must be made
76
77
9)
B)
GAAP - Review
1) Interest Received / Interest Income => Operating Item
2) Interest Paid / Interest Expense => Operating Item
3) Dividends Paid => Financing Item
78