Differences Between Net Accounting Help

Differences Between Net Differences Between Net come an Net Cash.Plows from Operating Activities Allison Corporation reported net income of $65,000, but net ‘cash flows from operating activities of only $50,000. What caused this $15,000 difference? . The answer, in short, is many things. First, depreciation expense reduces net income but does not affect ‘net cash flows. Next, all the adjustments that we made to net sales. cost of goods sold. and expenses represented short-term timing differences between net

•.income and the underlying net cash flows from operating activities. Finally. non-operating gains and losses may cause differences between net income and net cash flows from operations.  Non-operating gains and losses may result from sales of plant assets. marketable securities, and other investments, and from the retirement of long-term debt.

These gains and losses affect the cash flows relating to investing or financing activities. not the cash flows from opera-ting activities.Reporting Operating Cash Flows:

The Direct and Indirect Me. In our illustration, we use the direct method of computing and reporting the net cash flows from operating activities.

The direct method shows the specific cash out flows comprising the operating activities of the business.

The FASB has expressed its preference for the direct method. but it also allows companies to use an alternative called the Indirect method. Computation of net. cash flows from operating activities by the indirect method looks quite different from the direct method computation.

However, both methods result in the same net cash flows from operating activities. Under the indirect method, the computation  begins with accrual-based net income (as shown in the income statement) and then shows the various adjustments necessary to reconcile net income with net cash [nun operating activities. The general format of this computation is summarized as follows:

The preceding summary describes the differences between net income and net cash flows from operating activities in broad, general terms,

In an actual statement of cash flows a dozen or more specific items’ may appear in this reconciliation.·(Supplemental Schedule A, lot page 571, illustrates the application of the indirect method to the operating activities ,of Allison Corporation.) . “

In this chapter we emphases~ redirection method, .as we consider it tore the more informative and more readily understood ‘approach, and it i~ the method recommended by the FASa. Most of our assignment material is based on the direct method. Further coverage of the’ indirect method is provided .in Suppemental,topic A at the end of the Cash’Flows from Investing Paragraphs 7 through 9 in the additional! information ‘for our Allison Corporation example provide most of the.information necessary to determine the cash flows from investing activities. In the following discussion, we’ Strategist. presentation of these cash flows and plain the sources of the informational in the numbered paragraphs.

Much information about investing activities can-be obtained simply. by looking I!other changes’ in the related asset accounts during the year, Debit entries in these accounts represent purchases of the assets, or cash outlays-Credit entries represent sales. of th~ assets.
or receipts. However, credit entries in asset UCC(~underrepresented only the cost (or book value) of the assets sold. To determine the  proceeds from these sales transactions, we must adjust the amount of the credit entries for any gains’ or losses recognized on the sides.

Purchases and Sales of Securities TQtrate, consider paragraph 7, which suprizes the debit and credit entries to the Marketable Securities account. As explained ear” lier in, this chapter, the $65,000 in,debit entries represents purchases of marketable securities. The $44,000 in credit entries restrengthen cost of marketable securities sold during the period.

However, the commencements shows that these securities were sold , at a $4.000 loss. Thus the cash proceeds from these sales amounted to only $40,000 ($44,000 cost, minus $4,000 loss on sale). In the statement of cash flows, these investing activities are summarized as follows:the principal amount on outstanding notes (loans). (Interest rece’ived is credited to the Interest Revenue account and is included among the cash receipts from operating activities.)

Cash Paid to Acquire Plant Assets Paragraph 9 states that Allison Corporation purchased plant assets during the year for $200,000, ‘paying $160,000 in cash and issuing a long-term note payable for the $40,000 balance.

Notice that only the $160. payment appears in the statement of cash flows. However; one objective of thls Financial statement is to show all of the company’s, investing and financing’ activities during the year. Therefore, the non cash aspects of these transactions are shown in a supplementary schedule, as follow This supplementary schedule accompanies the statement of cash flows Proceeds from Sales of Plant Assets.

Assume that an analysis or” the plant asset accounts shows net credit entries totaling $44′,000 in the year. (“Net credit entries” means all credit entries, net of related debits to accumulated depreciation when assets were , sold.) These net credit entries represent. the book value of plant assets sold during the year.

However, the income statement Slows that these assets were sold at a gain of , $31,000. Therefore, the cash proceeds from sales of plant assets amounted to $75.000. as follows:

61

Notice that both the proceeds from short-term borrowing of $45,000 (a positive cash flow) and the payments to settle short-term debts of $55,090 (a negative cash flow) are presented in the statement of cash flows. Presenting directions of the changes in cash, rather than combining the two and presenting a net amount of $10,000 ($55,000  – $45,(00), is an important feature of the statement of cash flows. Presenting both positive and negative cash flows is referred to as presenting gross cash flows rather than presenting net cash flows.

Is it possible to determine the proceeds of short-term borrowing transactions throughout the year without carefully reviewing each cash eeceipt? The answer is yes-easily. The proceeds from short-term borrowing are equal the sum of the credit entries in the short-term Notes Payable account. Payments to settle short-term debts are equal to the debit entries in this account.

Proceeds from Issuing Bondi Payable and Capital StockParagrllph’11 states that AI- ‘lisen Corporation received cash of $100,000 by issuing bonds, payable.

This amount was determined by summing the credit, entries in the Bonds Payable account. The Bonds Payable account included no debit entries during the year; thus no bonds were retired.

Paragraph 12 states that during the year Allison Corporation issued capital stock for , $50,000. The proceeds from issuing stock are equal to the sum of the credit entries made in the Capital Stock and Additional Paid-in Capital accounts ($10,000 + $40,000).

Cash Dividends Paid to Stockholders Paragraph 13 states that Allison Corporation declared and paid cash dividends of $40,000 during the year. If dividends are both declared and paid during the same year, the cash payments are equal to the related debit entries in the Retained Earnings account.

If the balance sheet includes a liability for dividends payable, the amounts debited to Retained Earnings represent dividends declared during the period, which may differ from the amount of dividends paid. To determine cash dividends paid, we must adjust the amount of dividends declared by adding any decrease (or subtracting any increase) in the Dividends Payable account over the period. N.t ‘herta. (decrease) in cash and cash equivalents” $35,000 Cash and cash equivalents, beginning of year 20,000 Cash and cash equivalents. . end of year. =$55,000 Relationship Between the ‘Statement of Cash Flows and the Balance Sheet The first asset appearing in the balance sheet is Cash and Cash Equivalents.

The statement of cash flows explains in some detail the change in this asset from one balance sheet date to the next. The last three lines in the statement of. cash flows illustrate this relationship. as shown in our Allison Corporation example:

Posted on November 21, 2015 in Statement of cash Flows

Share the Story

Back to Top
Share This