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1
Chapter 12
The Statement of Cash Flows
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Financial Accounting, Alternate 4e by Porter and Norton
2
Cash Flows and Net Income for Four Computer Companies in 2002
Dell Computer Corp.
IBM
Hewlitt-Packard Co.
Gateway, Inc.
Increase(Decrease) Net
Income in Cash (Loss)
$ 591 $2,122
(948) 3,579
6,995 (903)
(265) (298)
(in millions)
3
Purpose of the Statement of Cash Flows
Explains changes in cash over a period of time
OperatingActivities
FinancingActivities
InvestingActivities
Summarizes cash inflows and outflows from:
4
Cash EquivalentsA
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
Readily convertible to cash
Little risk of price change
Original maturity to investor of three months or less
Examples:• Commercial paper• U.S. Treasury bills• Certain money market funds
5
Statement of Cash Flows Format
Classified by:Operating activitiesInvesting activitiesFinancing activities
outflowsinflows Cash
Increase or decrease in cash
BeginningCash +
= EndingCash
=
6
Statement of Cash Flows FormatCash flows from operating activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by operating activities $ xxxCash flows from investing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by investing activities xxxCash flows from financing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $ xxxCash and cash equivalents at beginning of year xxxCash and cash equivalents at end of year $ xxx
from balance sheets
7
Cash transactions
concerned with acquiring and
selling products and services
Make inventory purchases
Sell products and services
Incur employee salaries and wages
Incur utility andother operating
costs
Operating Activities
8
Cash transactions concerned with acquiring and
disposing of long-term assets
Purchase/Sell intangible assets (e.g., patents, trademarks)
Buy/Sellproperty, plant
& equipment
Purchase/Selllong-term
investments
Investing Activities
9
Cash transactions
concerned with internal and
external financing of the business
Issue/Retire bonds
Borrow $/repay loans
Sell/Repurchase stocks
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Issue dividendsPay
check
for
Date
Dept.
of Tre
asurer
Jane D
oe
Financing Activities
10
Categorizing Cash Flow Activities
Current Assets
andCurrent
Liabilities
IncomeStatement
Transactions
Operating Activities
Long-Term Liabilities
or Stockholders’
Equity
Financing ActivitiesLong-Term
Assets
Investing Activities
11
Methods to ReportCash from Operating Activities
Direct Method
Indirect Method
both methods arrive at same
cash from operating activities
reports major classes of cash receipts and payments
adjusts net income to remove effect of accruals and deferrals
12
Preparing the Statement of CashFlows: Direct Method
Step 1– Set up three schedules
Cash Flows fromOperating Activities
Cash Flows fromInvesting Activities
Cash Flows fromFinancing Activities
Step 2– Determine the cash flows from operating
activities by analyzing each item on the income statement, current assets and current liabilities
13
Direct Method - Operating Activities
Determine cash collected from customers:
Beginning accounts receivable $ 57,000+ Sales revenue 670,000– Cash collections (x)= Ending accounts receivable $ 63,000
Solve for x. Cash collections = $664,000
From BalanceSheet
From IncomeStatement
14
Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account 664,000
15
Direct Method - Operating Activities
Interest Revenue: Since no Interest Receivable account exists on the balance sheet, the interest earned was received, not accrued.
Gain on Sale of Machine: Not an operating cash flow
16
Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account 664,000
Interest 15,000
17
Direct Method - Operating Activities
Calculate cash paid to suppliers by first finding purchases:
Beginning inventory $ 92,000+ Purchases (x)– Cost of goods sold (390,000)= Ending inventory $ 84,000 Solve for x.
Purchases = $382,000
18
Direct Method - Operating Activities
Then examine Accounts Payable to determine cash paid to suppliers:
Beginning accounts payable $ 31,000+ Purchases 382,000– Cash payments (x)= Ending accounts payable $ 38,000
Solve for x. Cash paid to suppliers = $ 375,000
19
Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account 664,000
Interest 15,000
Cash payments for:
Inventory purchases (375,000)
20
Salaries and wages:
Beginning salaries & wages pay. $ 9,000+ Salaries & wages expense 60,000– Cash payments to employees
(x)= Ending salaries & wages pay. $ 7,000
Direct Method - Operating Activities
Solve for x. Cash paid for salaries & wages = $ 62,000
21
Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account 664,000
Interest 15,000
Cash payments for:
Inventory purchases (375,000)
Salaries and wages (62,000)
22
Direct Method - Operating Activities
Depreciation expense is not a cash flow
Insurance Expense and Prepaid Insurance:
Beginning prepaid insurance $ 18,000+ Cash payments for insurance (x)– Insurance expense (12,000)= Ending prepaid insurance $ 12,000
Solve for x. Cash paid for insurance = $6,000
23
Schedule of Cash Flows from Operating Activities
Cash receipts from:
Sales on account 664,000
Interest 15,000
Cash payments for:
Inventory purchases (375,000)
Salaries and wages (62,000)
Insurance (6,000)
24
Direct Method - Operating Activities
Interest Expense: Since no Interest Payable account exists on the balance sheet, the interest expensed was paid, not deferred.
Income Tax Expense and Income Taxes Payable:
Beginning income taxes payable $ 5,000+ Income tax expense 50,000– Cash payments for taxes (x)= Ending income taxes payable $ 8,000
Solve for x. Cash paid for taxes = $47,000
25
Schedule of Cash Flows from Operating ActivitiesCash receipts from:
Sales on account $ 664,000Interest 15,000
Cash payments for:Inventory purchases (375,000)Salaries and wages (62,000)Insurance (6,000)Interest (15,000)Taxes (47,000)
Net cash provided by operating activities $ 174,000
26
Preparing the Statement of CashFlows: Direct Method
Step 3– Determine the cash flows from investing
activities by examining the long-term asset accounts and any additional info
27
Direct Method – Investing Activities
Long-Term Investments: The net increase of $30,000 matches the additional info given on the balance sheet and required the use of cash.
Land: The additional balance sheet info reveals that a note payable was issued.
No cash was involved in the land transaction so it should be reported in a separate schedule instead of on the Statement of Cash Flows
28
Direct Method – Investing Activities
Property and Equipment: The additional balance sheet info reveals that equipment was purchased for $75,000 and a machine was sold for $25,000.
Beginning property and equip. $280,000+ Acquisitions 75,000– Disposals (x)= Ending property and equip. $320,000
Solve for x. The cost of fixed assets sold = $35,000
29
Direct Method – Investing Activities
Accumulated Depreciation:
Beginning accum. depreciation $ 75,000
+ Depreciation expense 40,000
– Accum. depreciation on assets sold (x)
= Ending accum. depreciation $100,000
Solve for x. The accumulated depreciation on the assets disposed of during the year = $15,000
30
Cash inflows from:Sale of machine $ 25,000
Cash outflows from:Purchase of investment (30,000)Purchase of property and equip. (75,000)
Net cash used by investing activities $(80,000)
Schedule of Cash Flows from Investing Activities
31
Preparing the Statement of CashFlows: Direct Method
Step 4– Determine the cash flows from
financing activities
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
32
Direct Method – Financing Activities
Notes payable: This increase is already shown on a supplemental schedule of noncash activities.
Bonds payable: Bonds with a face value of $60,000 are retired by paying $63,000.
33
Direct Method – Financing Activities
Capital stock was issued for cash
Retained earnings:
Beginning retained earnings $ 193,000+ Net income 120,000– Cash dividends (x)= Ending retained earnings $ 246,000Solve for x. Cash paid for dividends = $67,000
34
Cash inflows from:Issuance of stock $ 25,000
Cash outflows from:Retirement of bonds (63,000)Payment of cash dividends (67,000)
Net cash used by financing activities $(105,000)
Schedule of Cash Flows from Financing Activities
35
Noncash Investing and Financing Activities
Disclose important financing and investing activities which do not require cash
Buy Assets through Debt Financing from Supplier
Exchange Stock for Assets
Certificate of Stock
Examples:
36
Statement of Cash Flows FormatCash flows from operating activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by operating activities $ xxxCash flows from investing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by investing activities xxxCash flows from financing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $ xxxCash and cash equivalents at beginning of year xxxCash and cash equivalents at end of year $ xxx
Only section of statement that differs in form between direct and indirect method (net cash flow total is the
same)
37
Indirect Method - Operating Activities
Income Statement
Cash Flows from Operating Activities
Conversion of accrual
to cash basis
38
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable (6,000)
Decrease $6,000
From balance sheet:
Accts. receivable, 2004 $63,000Accts. receivable, 2003 57,000
$ 6,000
39
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable (6,000)Gain on sale of machine 5,000
Increase $5,000
Selling price of machine $25,000Book value of machine 20,000Gain on sale $ 5,000
40
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000
Decrease $8,000
From balance sheet:Inventory, 2003 $92,000Inventory, 2004 84,000
$ 8,000
41
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000
Increase $7,000
From balance sheet:Accts. payable, 2004 $38,000Accts. payable, 2003 31,000
$ 7,000
42
Indirect Method - Operating ActivitiesNet cash flows from operating activities:
Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000)
Decrease $2,000
Salaries & wages payable, 2003 $9,000Salaries & wages payable, 2004 7,000
$2,000
43
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000
Decrease $6,000
Prepaid insurance, 2003 $18,000Prepaid insurance, 2004 12,000
$ 6,000
44
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Depreciation expense 40,000
Add back noncash expense
45
Indirect Method - Operating ActivitiesNet cash flows from operating activities:
Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Depreciation expense 40,000Increase in income taxes payable 3,000
Increase $3,000
Inc. taxes payable, 2004 $8,000Inc. taxes payable, 2003 5,000
$3,000
46
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine ( 5,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Increase in income taxes payable 3,000Depreciation expense 40,000Loss on retirement of bonds 3,000
Report entire outflow as a
financing activity
47
Cash Flow Adequacy
Measures company’s ability to meet principal and interest obligations
Creditors concerned with cash available to repay debts after company has replaced its long-term assets
Cash Flow from Operating Activities - Capital Expenditures . Avg. Debt Maturing over Next Five Years
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
48
Appendix
Accounting Tools:
A Work-Sheet Approach to the
Statement of Cash Flows
49
Indirect Method: Using a Work Sheet
Enter account balances
50
Indirect Method: Using a Work Sheet
Record investing &
financing activities
51
Indirect Method: Using a Work Sheet
Enter net income
52
Indirect Method: Using a Work Sheet
Enter noncash revenues or expenses
53
Indirect Method: Using a Work Sheet
Extend current assets& current liabilities
54
Indirect Method: Using a Work Sheet
Total columns
55
Indirect Method: Using a Work Sheet
Determine net cash inflow (outflow)
56
End of Chapter 12
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293