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Interest and dividends from investments Cash outflows include cash paid for: 1 . The purchase of inventory. 2. Salaries, wages, and other operating expenses. Ex. / payment of employee salaries, 3. Interest on debt. Ex. / Payment of interest on a note payable. 4. Income taxes Net cash flows from operating activities: Difference between the inflows and outflows Depreciation expenses Reduces net income but not cash Direct Method of Reporting the cash effect of each operating activity is reported directly in the SF.
Directly related to principal revenue-generating activities SCOFF = cash receipts from operating activities (-) cash payments from operating activities Indirect Method cash flow from operating activities is derived indirectly by starting with ported net income and adding or subtracting items to convert that amount too cash basis.
Starts with net income and works backwards to convert to cash Net Income + Depreciation GA ins/ *losses If A/R goes up (minus), If it goes down (add) If Inventory goes up (minus), If it goes down (add) Prepaid expenses goes up (minus) Accrued expenses goes up (add) = SCOFF investing Activities involve the acquisition and sale of (1) long-term assets used in the business and (2) non-operating investment assets. Related to the acquisition and disposition of long-term assets. Cash Inflows 1 The purchase of long lived assets used in the business (UP&E). Ex. Purchase of equipment for cash 2. The purchase of investment securities like stocks and bonds of other entities (except those classified as cash equivalents and trading securities). Ex. / purchase of common stock of another corporation for cash. 3. Loans to other entities Cash Outflows 1 . The sale of long-lived assets used in the business (UP&E). 2. The sale of investment securities (other than cash equivalents and trading securities). Ex. ‘ sale of merchandise for cash 3. The collection of a noontide receivable (excluding the collection of interest, which is an operating activity.
If Nanning Activities involve cash inflows and outflows from transactions with creditors (excluding trade creditors) and owners. Related to the external financing of the company 1. Owners when shares are sold to them. Ex. / issuance of common stock for cash 2. Creditors when cash is borrowed through notes, loans, mortgages, and bonds. Ex. / cash proceeds from a note payable 1 . Owners in the form of dividends or other distributions. Ex. / payment of cash dividends to shareholders. 2. Owners for the reacquisition Of shares previously sold 3.
Creditors as repayment of the principal amounts of debt (excluding trade payable that relate to operating activities). Ex. / payment of principal on note payable Noncoms investing and financing activities Ex. / issuance of bonds payable in exchange for land and building CHAPTER 5 Installment Sales Method Recognized revenue and costs only when cash payments are received. Each payments assumed to be composed of two components: 1) A partial recovery of the cost of the item sold. 2) A gross profit component. Connection is proportion to cash received Gross profit percentage -?? (gross profit/ sales price) Make installment sale: Dry. Installment receivables Cry. Inventory Cry. Deferred Gross Profit Collect Cash: Dry. Cash Cry. Installment Recur. Dry. Deferred Gross Profit Cry. Realized Gross Profit Cost Recovery Method when there is an extremely high degree of uncertainty regarding the ultimate cash collection defers all gross profit recognition until cash equal to the cost of the item sold has been received.
Defers recognition until cash collected equals cost Right of Return because the return of merchandise can contradict the benefits of having made a sale, the sell must meet specific criteria before revenue is recognized in situations when the right of return exists. Could cause the deferral of revenue recognition beyond delivery point Consignment Sales moieties a company arranges for another company to sell its product under consignment. Risks and rewards of ownership retained by seller Software generally, a portion of the proceeds received from the sale of software is deferred and recognized as revenue in future period.
Companies usually sell multiple software elements in a bundle for a lump-sum contract price. When this happens the revenue from the arrangements should be allocated to the various element based on ‘Wonder-specific objective evidence” (“VOSS”) of fair values of the individual estimates. VOSS are the sales prices of the elements hen sold separately by that vendor. The bundle often includes product, upgrades, post-contract customer support, and other services. Franchise Sales the fees to be paid by the franchisee to the franchiser usually comprise (1) the initial franchise fee and (2) continuing franchise fees.
The initial franchise fee usually is a fixed amount, but it may be payable in installments. The continuing fees are paid to the franchiser for continuing rights as well as for advertising and promotion. Initial Franchise Fee: or. Cash Dry. Note Recur. Cry. Unearned franchise fee revenue Dry. Unearned franchise fee revenue Cry. Franchise fee Continuing franchise fees: Cry. Service Revenue CHEAPER 7 Cash and Cash Equivalents Cash Includes currency and coins, balances in checking accounts, and items acceptable for deposit in these accounts, such as checks and money orders received from customers.
Cash Equivalent short-term highly liquid investments that can be readily converted to cash with little risk of loss. Include money market funds, treasury bills, and commercial paper. Investments must have a maturity date no longer than three months from the date of purchase. Internal control the success of any business enterprise depends on an effective system of internal control refers to a company’s plan to (a) encourage adherence to company policies and procedures, (b) promote operational efficiency, (c) minimize errors and theft, and (d) enhance the reliability and accuracy of accounting data.
Cash Receipts as cash is the most liquid of all assets, a well designed and functioning system of internal control must surround all cash transactions. Separation of duties helps safeguard against theft. Cash Disbursements proper controls for cash disbursements should be designed to prevent any unauthorized payments and ensure that disbursements are recorded in the roper accounts. 1. All disbursements other than very small disbursements from petty cash, should be made by check. This provides permanent record. 2.
All expenditures should be authorized before a check is prepared. 3. Checks should be signed only by authorized individuals. Restricted Cash cash that is restricted in some way and not available for current use usually is reported as a nonoccurrence asset such as investments and funds or other assets. Ex. / a company might set aside funds for future plant expansion, which would be classified as investment funds and other assets. Accounts Receivable Receivables resulting from the sale of goods or services on account and are often referred to as trade receivables.
Non trade receivables are those other than trade receivables and include tax refund claims, interest receivable, and loans by the company to other entities including stockholders and employees. When a receivable, trade or noontide, is accompanied by a formal promissory note, it is referred to as a note receivable. Trade Discounts usually a percentage reduction from the list price. Seller lowers selling price Cash Discounts often called sales discounts present reductions not in the selling price of the good or service but in the amount to be paid by a credit customer if paid within a specified period of time.