Accounting Principles: Second Canadian Edition
Accounting Principles: Second Canadian Edition
Accounting Principles: Second Canadian Edition
Prepared by:
Carole Bowman, Sheridan College
CHAPTER
18
• Operating activities
• Investing activities
• Financing activities
OPERATING ACTIVITIES
• Include
– Cash effects of transactions that create
revenues and expenses and
– Enter into determination of net income (loss)
• Include
– Purchasing and disposing of investments
and productive long-lived assets using
cash and
– Lending money and collecting the loans
• Include
– Obtaining cash from issuing debt and
repaying the amounts borrowed and
– Obtaining cash from owners/shareholders
and paying them drawings/dividends
Section 1
ILLUSTRATION 18-6
NET INCOME VS. NET CASH PROVIDED
BY OPERATING ACTIVITIES
The indirect method starts with net income and converts it to net
cash provided by operating activities. In other words, it adjusts
net income for items that affect reported net income but do not
affect cash, as shown below.
Accrual Basis of Accounting Cash Basis of Accounting
Incurred
Expenses
Eliminate noncash expenses
NET INCOME TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES
(B/S: Noncash Current Assets and Current Liabilities)
Adjustments to Convert Net Income
to Net Cash Provided (Used) by
Operating Activities
Add* Deduct*
Indirect Method –
Sample Format
OPERATING ACTIVITIES
– DIRECT METHOD
Section 2
CASH RECEIPTS AND CASH PAYMENTS
(Direct Method)
CASH RECEIPTS FROM
CUSTOMERS
{
Cash receipts Revenues + Decrease in accounts receivable
from
customers
= from sales or
– Increase in accounts receivable
CASH PAYMENTS TO SUPPLIERS
Cash
payments to
suppliers
=
+ Increase in inventory
Cost of
goods sold { or
– Decrease in inventory
{ + Decrease in accounts payable
or
– Increase in accounts payable
CASH PAYMENTS FOR OPERATING
EXPENSES
• The relationship among cash payments for
operating expenses, changes in prepaid expenses,
and changes in accrued expenses payable is:
Cash
payments
for services
=
+ Increase in prepaid + Decrease in accrued expenses
Operating
dxpenses { expenses
or
– Decrease in prepaid
expenses
{ payable
or
– Increase in accrued expenses
payable
CASH PAYMENTS FOR INCOME
TAX
Cash
payments for
income tax
=
Income
tax
expense
{
+ Decrease in income tax payable
or
– Increase in income tax payable
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES
Direct Method –
Sample Format
Cash
Provided Average Cash
by ÷ Current Current
Debt
Operating Liabilities
Activities Coverage
CASH RETURN ON SALES
• Cash return on sales indicates how quickly
sales are turned into cash.
• The company is efficient at turning sales
into cash when its cash return on sales is
greater than its accrual-based counterpart,
the profit margin.
Cash
Provided Cash
by Return
Operating ÷ Net Sales
on Sales
Activities
CASH FLOW PER SHARE
Cash Flow
from
Operating, Number of
Cash Flow per
Investing, and
Financing
÷ Common
Shares
Share
Activities
CASH TOTAL DEBT COVERAGE
• Cash total debt coverage indicates the
amount of cash to pay off total debt that is
generated from operating activities.
• The ratio is the cash based counterpart to
the debt to total assets ratio.
Cash
Provided Average Cash Total
by ÷ Total Debt
Operating Liabilities Coverage
Activities
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