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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 4e by Porter and Norton
2
Cash Flows and Net Income for Four Computer Companies in 2001
IBM
Sun Microsystems
Gateway, Inc.
Western Digital
Increase(Decrease) Net
Incomein Cash (Loss)
$ 2,767 $ 7,723
(377) 927
247 (1,034)
(16) (99)
(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 (i.e. Patents, trademarks, etc.)
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 master T accounts
Cash Flows fromOperating Activities
Cash Flows fromInvesting Activities
Cash Flows fromFinancing Activities
Step 2– Determine the cash flows from operating
activities
13
Bal. Jan. 1 57,000
Bal. Dec. 31 63,000
From BalanceSheet
Accounts Receivable
??? Cash collections
Direct Method - Operating Activities
Review journal entries recorded during period:
Sales on account 670,000
Accounts receivable 670,000Sales (from income statement) 670,000
14
Accounts Receivable
Bal. Jan. 1 57,000
Bal. Dec. 31 63,000
Sales on account 670,000
664,000 Cash collections
Direct Method - Operating Activities
Review journal entries recorded during period:Accounts receivable 670,000
Sales (from income statement) 670,000
From BalanceSheet
15
Interest Revenue
15,000 Interest earned and received
Direct Method - Operating Activities
Review journal entries recorded during period:Cash 15,000
Interest Revenue 15,000
16
Inventory
Direct Method - Operating Activities
Review journal entries recorded during period:
Bal. Jan. 1 92,000
Bal. Dec. 31 84,000
From BalanceSheet
Purchases on account ???
390,000 Cost of goods sold
Cost of Goods Sold (from Inc. Stmt.) 390,000 Inventory 390,000
17
Accounts Payable
Direct Method - Operating Activities
Review journal entries recorded during period:
31,000 Bal. Jan. 1
38,000 Bal. Dec. 31
From BalanceSheet
Cash payments ??? 382,000 Purchases
Inventory 382,000 Accounts Payable 382,000
18
Accounts Payable
Direct Method - Operating Activities
Review journal entries recorded during period:
31,000 Bal. Jan. 1
38,000 Bal. Dec. 31
From BalanceSheet
Cash payments 375,000 382,000 Purchases
Accounts Payable 375,000 Cash 375,000
19
Salaries and Wages Payable
Direct Method - Operating Activities
Review journal entries recorded during period:
9,000 Bal. Jan. 1
7,000 Bal. Dec. 31
From BalanceSheet
Cash payments ??? 60,000 Expense
Salary and Wages Expense 60,000 Salaries and Wages Payable 60,000
20
Salaries and Wages Payable
Direct Method - Operating Activities
Review journal entries recorded during period:
9,000 Bal. Jan. 1
7,000 Bal. Dec. 31
From BalanceSheet
Cash payments 62,000 60,000 New unpaid wages
Salary and Wages Payable 62,000 Cash 62,000
21
Direct Method - Operating Activities
Review journal entries recorded during period:Depreciation Expense 40,000
Accumulated Depreciation 40,000
There is no effect on cash flow from depreciation.
22
Prepaid Insurance
Direct Method - Operating Activities
Review journal entries recorded during period:
Bal. Jan. 1 18,000
Bal. Dec. 31 12,000
From BalanceSheet
Cash payments ??? 12,000 Expense
Insurance Expense 12,000 Prepaid Insurance 12,000
23
Prepaid Insurance
Direct Method - Operating Activities
Review journal entries recorded during period:
Bal. Jan. 1 18,000
Bal. Dec. 31 12,000
From BalanceSheet
Cash payments 6,000 12,000 Expense
Prepaid Insurance 6,000 Cash 6,000
24
Interest Expense
Direct Method - Operating Activities
Review journal entries recorded during period:
Bal. Jan. 1 0
Bal. Dec. 31 0
From BalanceSheet
Cash payments 15,000 15,000 Expense
Interest Expense 15,000 Cash 15,000
25
Income Taxes Payable
Direct Method - Operating Activities
Review journal entries recorded during period:
5,000 Bal. Jan. 1
8,000 Bal. Dec. 31
From BalanceSheet
Cash payments ???50,000 Expense
Income Taxes Expense 50,000 Income Taxes Payable 50,000
26
Income Taxes Payable
Direct Method - Operating Activities
Review journal entries recorded during period:
5,000 Bal. Jan. 1
8,000 Bal. Dec. 31
From BalanceSheet
Cash payments 47,00050,000 Expense
Income Taxes Payable 47,000 Cash 47,000
27
Cash Flows From Operating Activities
Net cashinflows 174,000
375,000 Inventory purchases 62,000 Salaries and wages 6,000 Insurance 15,000 Interest 47,000 Taxes
Cash receipts from: Cash payments for: Sales on account 664,000 Interest 15,000
Master T Account for Cash Flows from Operating Activities
28
Preparing the Statement of CashFlows: Direct Method
Step 3– Determine the cash flows from investing
activities
29
Long-Term Investments
Direct Method – Investing Activities
Review journal entries recorded during period:
Bal. Jan. 1 90,000
Bal. Dec. 31 120,000
From BalanceSheet
Purchases 30,000
Long-Term Investments 30,000 Cash 30,000
30
Direct Method – Investing Activities
Review journal entries recorded during period:Land 50,000
Notes Payable 50,000
No cash was involved in this transaction so it should be reported in a separate
schedule instead of on the Statement of Cash Flows
31
Property & Equipment
Direct Method – Investing Activities
Review journal entries recorded during period:
Bal. Jan. 1 280,000
Bal. Dec. 31 320,000
From BalanceSheet
Acquisitions 75,000
Property & Equipment 75,000 Cash 75,000
??? Disposals
32
Accumulated Depreciation
Direct Method – Investing Activities
Book value of equipment sold was $20,000. Original cost of equipment was $35,000.
75,000 Bal. Jan. 1
100,000 Bal. Dec. 31
From BalanceSheet
40,000 ExpenseDisposals 15,000
33
Cash Flows From Investing Activities
80,000 Net cash outflows
30,000 Purchase of investments
75,000 Purchase of property and equipment
Cash receipts from: Cash payments for: Sale of machine 25,000
Master T Account for Cash Flows from Investing Activities
34
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
35
Direct Method – Financing Activities
Review journal entries recorded during period:Land 50,000
Notes Payable 50,000
No cash was involved in this transaction so it should be reported in a separate
schedule instead of on the Statement of Cash Flows
36
Bonds Payable
Direct Method – Financing Activities
Review journal entries recorded during period:
260,000 Bal. Jan. 1
200,000 Bal. Dec. 31
From BalanceSheet
Retirement 60,000
Loss on Retirement of Bonds 3,000Bonds Payable 60,000
Cash 63,000
37
Capital Stock
Direct Method – Financing Activities
Review journal entries recorded during period:
75,000 Bal. Jan. 1
100,000 Bal. Dec. 31
From BalanceSheet
25,000 Stock issued
Cash 25,000 Capital Stock 25,000
38
Retained Earnings
Direct Method – Financing Activities
Review journal entries recorded during period:
193,000 Bal. Jan. 1
246,000 Bal. Dec. 31
From BalanceSheet
120,000 Net income 2004
Retained Earnings 67,000 Cash 67,000
Cash dividends 67,000
39
Cash Flows From Financing Activities
Net cash inflows
Cash receipts from: Cash payments for:
• Debt Retirements• Dividends• Stock Repurchases
• Sale of Stock• Borrowings
Master T Account for Cash Flows from Financing Activities
Net cash outflows-OR-
40
Cash Flows From Financing Activities
105,000 Net cash outflows
63,000 Retirement of bonds
67,000 Payment of cash dividends
Cash receipts from: Cash payments for: Issuance of stock 25,000
Master T Account for Cash Flows from Financing Activities
41
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:
42
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)
43
Indirect Method - Operating Activities
Income Statement
Cash Flows from Operating Activities
Conversion of accrual
to cash basis
44
Bal. Jan. 1 57,000
Bal. Dec. 31 63,000
Accounts Receivable
Net increase 6,000
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
45
Bal. Jan. 1 92,000
Bal. Dec. 31 84,000
Inventory
8,000 Net decrease
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 in inventory 8,000
Increase $8,000
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)Decrease in inventory 8,000Increase in accounts payable 7,000
Increase $7,000
Accounts Payable
31,000 Bal. Jan. 1
38,000 Bal. Dec. 31
7,000 Net increase
47
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 in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000)
Decrease $2,000
Salaries & Wages Payable
9,000 Bal. Jan. 1
7,000 Bal. Dec. 31
Net decrease 2,000
48
Indirect Method - Operating ActivitiesNet cash flows from operating activities:
Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Decrease 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
Bal. Jan. 1 18,000
Bal. Dec. 31 12,000
6,000 Net decrease
49
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 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 3,000
Increase $3,000
Income Taxes Payable
5,000 Bal. Jan. 1
8,000 Bal. Dec. 31
3,000 Net increase
50
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 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 3,000Gain on sale of machine ( 5,000)Depreciation expense 40,000Loss on retirement of bonds 3,000
Add back noncash expense
Gain is not part of operating activities
Report entire outflow as a
financing activity
51
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
52
Appendix
Accounting Tools:
A Work-Sheet Approach to the
Statement of Cash Flows
53
Indirect Method: Using a Work Sheet
Enter account balances
54
Indirect Method: Using a Work Sheet
Record investing &
financing activities
55
Indirect Method: Using a Work Sheet
Enter net income
56
Indirect Method: Using a Work Sheet
Enter noncash revenues or expenses
57
Indirect Method: Using a Work Sheet
Extend current assets& current liabilities
58
Indirect Method: Using a Work Sheet
Total columns
59
Indirect Method: Using a Work Sheet
Determine net cash inflow (outflow)
60
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
Recommended