©Cambridge Business Publishers, 2017
FINANCIAL ACCOUNTING
Fifth Edition
CHAPTER 4
Reporting and Analyzing
Cash Flows
Thomas Dyckman Michelle Hanlon
Robert Magee Glenn Pfeiffer
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Target Corp's Cash Flows: Analyzing Operating, Investing, & Financing Activities, Essays (university) of Business Systems
An excerpt from the textbook 'financial accounting' by dyckman, hanlon, magee, and pfeiffer, focusing on chapter 4, which explains the purpose and components of a company's statement of cash flows. Target corporation's consolidated statement of cash flows, as well as instructions on how to prepare the operating, investing, and financing sections using the direct method. This information is essential for students and professionals seeking to understand cash flow statements and their significance in financial analysis.
What you will learn
- What are noncash investing and financing activities and how are they reported in the Statement of Cash Flows?
- How are cash transactions classified in the Statement of Cash Flows?
- How are cash flows from operating activities calculated?
- What is the purpose of the Statement of Cash Flows?
- What are operating, investing, and financing activities in the context of the Statement of Cash Flows?
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2017/2018
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FINANCIAL ACCOUNTING
Fifth Edition
CHAPTER 4
Reporting and Analyzing
Cash Flows
Thomas Dyckman Michelle Hanlon
Robert Magee Glenn Pfeiffer
Learning Objective 1
Explain the purpose of the statement of cash flows and classify cash transactions by type of business activity: operating, investing, or financing. Explain the purpose of the statement of cash flows and classify cash transactions by type of business activity: operating, investing, or financing.
Cash and Cash Equivalents
Short-term, highly liquid investments that are
Easily convertible into a known amount of cash,
and
Close enough to maturity that their market value
is not sensitive to interest rate changes
Generally investments with initial maturities
of three months or less
Examples of cash equivalents
Money market accounts
Treasury bills
Commercial paper
Cash and Cash Equivalents
(^) On the statement of cash flows
Cash equivalents are added to cash
Treated as a single sum
Why?
The purchase and sale of investments in
cash equivalents are considered to be part
of a firm’s overall management of cash
rather than a source or use of cash
(^) Managers refer to cash and cash equivalents as ‘cash’
Same label used
in the textbook
Same label used
in the textbook
Target’s Statement of Cash Flows
Investing and Financing Sections
Target Corporation
Consolidated Statement of Cash Flows
(millions) Fiscal Year
Investing activities 2014 Expenditures for property and equipment ($1,786 ) Proceeds from disposal of property and equipment 95 Cash paid for acquisitions, net of assumed cash (20 ) Other investments 106 Cash required for investing activities - continuing operations (1,605 ) Cash required for investing activities - discontinued operations (321 ) Cash required for investing activities (1,926 ) Financing activities Change in commercial paper, net (80 ) Additions to long-term debt 1, Reductions of long-term debt (2,079 ) Dividends paid (1,025 ) Stock options exercises and related tax benefit 373 Cash required for financing activities (998 ) Net increase in cash and cash equivalents 1, Cash and cash equivalents at beginning of period 695 Cash and cash equivalents at end of period $2,
Target used cash
from operations for
financing activities
and investing
activities during
its year ending
January 31, 2015.
Framework for the Statement of Cash Flows Cash receipts and payments are classified into one of three categories:
Operating
Activities
Investing
Activities
Financing
Activities
Change in cash and cash equivalents
Examples of Operating Activities
Operating activities include cash received and paid
related to selling goods and rendering services
and are directly related to the company’s primary
day-to-day business activities.
Investing Activities
Cash Flows Involving…
- Acquiring and disposing of property, plant, and equipment and intangible assets
- Purchasing and selling government securities including other company’s stocks, bonds, and other non cash-equivalent securities
- Lending and subsequent collection of money
Summary Information for Three Competitors
Usefulness of Classifications
Three competitors generated $100,000 of cash:
A likely recurring source that can sustain the company. A likely recurring source that can sustain the company. Not likely to recur. Will replacement assets be needed? Not likely to recur. Will replacement assets be needed? Repayment required. Repayment required.
Learning Objective 2
Construct the operating activities section of the statement of cash flows using the direct method. (Part 1) Construct the operating activities section of the statement of cash flows using the direct method. (Part 1)
Option 2:
Preparing the Operating Section of the Statement of Cash Flows The difference between a revenue or an expense reported in the income statement and a related cash receipt or expenditure reported in the statement of cash flows will be reflected as a change in one or more balance sheet accounts. Income Statement Revenues Expenses Cash Flow Statement Cash Receipts Cash Expenditures Net Income + Adjustments = Cash flow operations
or, more specifically…
Preparing the Operating Section
of the Statement of Cash Flows
(^) Start with the income statement and balance sheet. Convert revenue and expenses to cash flows from operating activities with the following adjustments:
- Convert sales revenues to cash receipts from customers
- Convert cost of goods sold to cash paid for merchandise purchased
- Convert wages expense to cash paid to employees
- Convert rent expense and advertising expense to cash paid amounts
- Convert other adjusting entries to cash flows
- Eliminate depreciation expense and other noncash operating expenses
1) Convert Sales Revenues
to Cash Received From Customers
Cash flow (Collections) Net income (Revenue) accounts receivable Change in unearned revenue Change in = +
-
Using the FSET totals from the prior slide:
The relationship can be rewritten as follows:
Therefore, cash received from customers is $5,700.