Accounting II

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© 1989 John Petroff

THE CASH BASIS FUNDS STATEMENT
SOURCES OF CASH
1) Operating income - is usually the largest and most frequent source of cash provided a business is profitable. When revenues exceed expenses, cash flow increases. When expenses exceed revenues, cash flow decreases.
2) Issuance of capital stock or long-term debt.
3) The sale of noncurrent assets such as equipment, land, buildings, patents, etc.

CASH PROVIDED BY OPERATIONS
CONVERSION OF NET INCOME FROM A ACCRUAL BASIS TO A CASH BASIS
1) The following items should be added to net income: depreciation expenses, increases in current liabilities, decreases in current assets, and the amortization of bond discount or intangible assets.
2) The following items should be subtracted from net income: amortization of bond premium, increases in current assets, and decreases in current liabilities.

WORKING CAPITAL FUNDS STATEMENT
SOURCES OF WORKING CAPITAL
1) Operating income - when revenues exceed expenses.
2) The issuance of long-term debt.
Example: Issued a $50,000 bond due to mature in ten years.
3) The issuance of capital stock.
Example: 10,000 shares of $100 par preferred stock are sold to
shareholders for $105 a share.
4) The sale of noncurrent assets. Example: building, land, bonds,
equipment, etc.

WORKING CAPITAL FUNDS STATEMENT
USES OF WORKING CAPITAL
1) The declaration of cash dividends.
Example: The board of directors issues a declaration that all
common shareholders will receive $0.50 for each share held.
2) The retirement of long-term debt.
Example: Full payment is made to bondholders at maturity.
3) The purchase of noncurrent assets. Example: equipment, land,
buildings, etc.

WORKING CAPITAL FUNDS STATEMENT
WORKING CAPITAL IS NOT AFFECTED BY THE FOLLOWING TRANSACTIONS
1) Those that are only between current asset accounts.
Example: Cash is used to purchase inventory.
2) Those that are only between current liability accounts.
Example: A 90 day note is drawn up for a trade receivable.
3) Those that are only between current asset and current
liability accounts.
Example: A cash payment is made to reduce accounts payable.

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