LESSON 18 1 Understanding Cash Flow Analysis CENTURY

LESSON 18 -1 Understanding Cash Flow Analysis CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18 -1

2 CASH FLOW ANALYSIS page 531 Cash flow analysis helps owners, creditors, and other interested parties: 1. Determine a company’s potential to produce cash in the future. 2. Judge a company’s ability to pay bills and repay debts. 3. Explain changes in the cash account balance. 4. Evaluate a company’s investment and equity transactions. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18 -1

3 STATEMENT OF CASH FLOWS CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning page 532 LESSON 18 -1

4 TIMING OF REVENUE RECOGNITION Accrual Basis vs. page 533 Cash Basis Revenue recognized at the time it is earned. Revenue recognized at the time cash is received. Revenues $25, 000. 00 Revenues Expenses 0. 00 Expenses Net Income $25, 000. 00 Net Income CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning $ 0. 00 LESSON 18 -1

5 TIMING OF EXPENSE RECOGNITION Accrual Basis vs. page 533 Cash Basis Expense recognized at the time it is incurred. Expense recognized at the time cash is paid. Revenues $25, 000. 00 Revenues Expenses 3, 000. 00 Expenses Net Income $22, 000. 00 Net Income CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning $ 0. 00 LESSON 18 -1

6 CASH FLOWS FROM OPERATING ACTIVITIES Cash Inflows (sources of cash) n Cash sales of merchandise n Cash sales of services n Interest income n Dividends received from the ownership of stock in other companies n Cash received from charge customers page 534 Cash Outflows (uses of cash) n Advertising n Credit card fees n Insurance expense n Interest payments n Payroll expenses n Property tax n Utility expenses n Income tax CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18 -1

7 CASH FLOWS FROM INVESTING ACTIVITIES Cash Inflows (sources of cash) n Sale of property n Sale of equipment n Sale of building n Collections of long-term loans page 534 Cash Outflows (uses of cash) n Purchase of land n Purchase of equipment n Purchase of building n Purchase of patents or special licenses n Loans to other companies n Purchase of stock in other companies n Purchase of bonds in other companies CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18 -1

8 CASH FLOWS FROM FINANCING ACTIVITIES Cash Inflows (sources of cash) n Capital stock issue n Mortgage issue n Bond issue n Long-term loans page 535 Cash Outflows (uses of cash) n Purchase of treasury stock n Payment of cash dividends n Repayment of land/note principal n Retirement of bond principal CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18 -1

9 TERMS REVIEW n n n n page 536 accrual basis of accounting cash flows statement of cash flows operating activities investing activities financing activities CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 18 -1