How well am i doing statement of cash flows
Download
1 / 35

Chapter 17 - PowerPoint PPT Presentation


  • 299 Views
  • Updated On :

Chapter 17 “How Well Am I Doing?” Statement of Cash Flows Purpose of the Statement of Cash Flows Can we meet our obligations to creditors? Are cash flows sufficient to support ongoing operations? Why is there a difference between net income and net cash flow?

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Chapter 17' - Gabriel


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
How well am i doing statement of cash flows l.jpg

Chapter17

“How Well Am I Doing?”Statement of Cash Flows


Purpose of the statement of cash flows l.jpg
Purpose of the Statement of Cash Flows

Can we meet our obligations to creditors?

Are cash flows sufficient to support ongoing operations?

Why is there a difference between net income and net cash flow?

Will the company have to borrow money to make needed investments?

Can we pay dividends?


Slide3 l.jpg

Currency and Bank Accounts

T-bills

Commercial Paper

Money Market Funds

Cash

The term cash on the statement of cash flows refers broadly to both currency and cash equivalents.

Cash


Constructing the statement of cash flows using noncash balance sheet accounts l.jpg

Changes in Capital Stock

Changes in Liabilities

Dividends Paid to Stockholders

Changes in Noncash Assets

Net Income

Constructing the Statement of Cash Flows Using Noncash Balance Sheet Accounts

Net Cash Flows for a Period


Constructing the statement of cash flows using noncash balance sheet accounts5 l.jpg

Sources

Uses

Net Income

Always

Net Loss

Always

Changes in noncash assets

Decreases

Increases

Changes in liabilities*

Increases

Decreases

Changes in capital stock

accounts

Increases

Decreases

Dividends paid to stockholders

Always

* Contra assets follow the rules for liabilities.

Constructing the Statement of Cash Flows Using Noncash Balance Sheet Accounts


Constructing the statement of cash flows using noncash balance sheet accounts6 l.jpg
Constructing the Statement of Cash Flows Using Noncash Balance Sheet Accounts

Increases in noncash asset accounts imply uses of cash.

Example: Inventory is purchased on credit from a supplier.

It is implied that cash was used to acquire the inventory.


Constructing the statement of cash flows using noncash balance sheet accounts7 l.jpg
Constructing the Statement of Cash Flows Using Noncash Balance Sheet Accounts

Increases in liability accounts imply sources of cash.

Example: Inventory is purchased on credit from a supplier.

It is implied that an increase in a payable has the effect of increasing cash available for other uses.


Constructing the statement of cash flows using noncash balance sheet accounts8 l.jpg
Constructing the Statement of Cash Flows Using Noncash Balance Sheet Accounts

Decreases in noncash assets accounts imply sources of cash.

Example: Accounts receivable decreases when a customer pays their bill.

When the customer pays his bill, the company’s cash increases.


Constructing the statement of cash flows using noncash balance sheet accounts9 l.jpg

I.O.U. Balance Sheet Accounts

Constructing the Statement of Cash Flows Using Noncash Balance Sheet Accounts

Decreases in liability accounts imply uses of cash.

Example: The company made a payment on a note payable held by a creditor.

When the company makes the payment, cash decreases.


Organizing a full fledged statement of cash flows l.jpg

XYZ Company Balance Sheet Accounts

Cash Flow Statement

For the Period Ending MM/DD/YY

I.

Operating Activities

$ XXX

II.

Investing Activities

XXX

III.

Financing Activities

XXX

Net Cash Flows for the

Period

$ XXX

Add:

Beg. Cash Balance

XXX

Ending Cash Balance

$ XXX

Organizing a Full-Fledged Statement of Cash Flows

Cash flows are divided into three categories.


Organizing a full fledged statement of cash flows11 l.jpg

XYZ Company Balance Sheet Accounts

Cash Flow Statement

For the Period Ending MM/DD/YY

I.

Operating Activities

$ XXX

II.

Investing Activities

XXX

III.

Financing Activities

XXX

Net Cash Flows for the

Period

$ XXX

Add:

Beg. Cash Balance

XXX

Ending Cash Balance

$ XXX

Organizing a Full-Fledged Statement of Cash Flows

A reconciliation of beginning cash to ending cash is also required.

{


Operating activities l.jpg

Net Income (Loss) Balance Sheet Accounts

$ XXX

Add:

Decr. in Current Noncash Assets

XXX

Incr. in Current Liabilities

XXX

Depreciation Charges

XXX

Losses

XXX

Less:

Incr. in Current Noncash Assets

(XXX)

Decr. in Current Liabilities

(XXX)

Gains

(XXX)

Net Cash Flows from Operating Activities

$ XXX

Operating Activities

Includes those activities that enter into the determination of net income


Operating activities13 l.jpg

Change in Account Balance during Period Balance Sheet Accounts

Increase

Decrease

Current

Subtract

from

Add

to

Noncash Assets

net income

net income

Current

Add

to

Subtract

from

Liabilities

net income

net income

Operating Activities

Changes in current assets and current liabilities imply changes in cash, as indicated below.


Operating activities14 l.jpg

Net Income (Loss) Balance Sheet Accounts

$ XXX

Add:

Decr. in Current Noncash Assets

XXX

Incr. in Current Liabilities

XXX

Depreciation Charges

XXX

Losses

XXX

Less:

Incr. in Current Noncash Assets

(XXX)

Decr. in Current Liabilities

(XXX)

Gains

(XXX)

Net Cash Flows from Operating Activities

$ XXX

Change in Account Balance during Period

Increase

Decrease

Current

Subtract

from

Add

to

Noncash Assets

net income

net income

Current

Add

to

Subtract

from

Liabilities

net income

net income

Operating Activities


Operating activities15 l.jpg

Net Income (Loss) Balance Sheet Accounts

$ XXX

Add:

Decr. in Current Noncash Assets

XXX

Incr. in Current Liabilities

XXX

Depreciation Charges

XXX

Losses

XXX

Less:

Incr. in Current Noncash Assets

(XXX)

Decr. in Current Liabilities

(XXX)

Gains

(XXX)

Net Cash Flows from Operating Activities

$ XXX

Change in Account Balance during Period

Increase

Decrease

Current

Subtract

from

Add

to

Noncash Assets

net income

net income

Current

Add

to

Subtract

from

Liabilities

net income

net income

Operating Activities


Operating activities16 l.jpg

Net Income (Loss) Balance Sheet Accounts

$ XXX

Add:

Decr. in Current Noncash Assets

XXX

Incr. in Current Liabilities

XXX

Depreciation Charges

XXX

Losses

XXX

Less:

Incr. in Current Noncash Assets

(XXX)

Decr. in Current Liabilities

(XXX)

Gains

(XXX)

Net Cash Flows from Operating Activities

$ XXX

Operating Activities

Depreciation and Amortization charges are added back to net income because they are decreases in noncash assets.


Operating activities17 l.jpg

Net Income (Loss) Balance Sheet Accounts

$ XXX

Add:

Decr. in Current Noncash Assets

XXX

Incr. in Current Liabilities

XXX

Depreciation Charges

XXX

Losses

XXX

Less:

Incr. in Current Noncash Assets

(XXX)

Decr. in Current Liabilities

(XXX)

Gains

(XXX)

Net Cash Flows from Operating Activities

$ XXX

Operating Activities

Gains are subtracted from net income.

Losses are added back to net income.


Investing activities l.jpg

Add: Balance Sheet Accounts

Proceeds from sale of land,

buildings, equipment, or other

noncurrent assets

$ XXX

Receipt of principal from

investments

XXX

Less:

Payments to acquire land,

buildings, equipment, or other

noncurrent assets

(XXX)

Payments to acquire

investments

(XXX)

Net Cash Flows from Investment Activities

$ XXX

Investing Activities

Includes transactions that involve the acquisition or disposal of noncurrent assets.


Financing activities l.jpg

Add: Balance Sheet Accounts

Proceeds from borrowings

$ XXX

Proceeds from issuing capital

stock

XXX

Proceeds from sale of bonds

XXX

Less:

Principal payments on

borrowed funds

(XXX)

Payments related to bond

maturities

(XXX)

Dividend payments

(XXX)

Net Cash Flows from Investment Activities

$ XXX

Financing Activities

Includes transactions involving receipts from or payments to creditors and owners.


Other cash flow issues l.jpg

For investing activities and financing activities, like-kind inflows and outflows of cash must be shown separately on the statement of cash flows.

Example:

XYZ sells an old building for $700,000 and purchases a new building for $1,000,000.

The $700,000 inflow of cash and the $1,000,000 outflow of cash must be shown separately.

Other Cash Flow Issues


Direct method or indirect method l.jpg

Indirect Method inflows and outflows of

Net income is reconciled to cash flow from operating activities.

No supplemental schedule is required.

Used by 98.8% of companies.

Direct Method

Net income is reconstructed on a cash basis.

Requires a supplemental reconciliation of net income to cash flow from operating activities.

Used by 1.2% of companies.

Direct Method or Indirect Method?


Other cash flow issues22 l.jpg

Example: inflows and outflows of

Bobo, Inc. acquires a building in exchange for 2,000 shares of common stock.

This is reported in a separate supplemental schedule attached to the statement of cash flows.

Direct exchange transactions occur when noncurrent balance sheet items are swapped.

Such exchanges must be disclosed.

Other Cash Flow Issues


Interpretation of the statement of cash flows l.jpg
Interpretation of the Statement of Cash Flows inflows and outflows of

Examine the operating activities section carefully.

  • Negative cash flow is usually a sign of fundamental difficulties.

  • Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities.



Example indirect method l.jpg
Example - Indirect Method inflows and outflows of

Ed’s Hut is a local pizza restaurant. Ed has prepared an adjusted trial balance as of March 31, 2000. Ed needs help preparing the Statement of Cash Flows.

Examine the information provided and prepare a Statement of Cash Flows using the indirect method.


Example indirect method26 l.jpg

Ed's Hut inflows and outflows of

Comparative Trial Balances

3/31/00

3/31/99

Change

DR (CR)

DR (CR)

Incr. (Decr.)

Cash

$

71,000

$

90,000

$

(19,000)

Accounts Receivable

23,000

40,000

(17,000)

Inventory

350,000

300,000

50,000

Land

68,000

100,000

(32,000)

Equipment

84,000

84,000

-

Accumulated Depr.

(45,000)

(39,000)

6,000

Accounts Payable

(38,000)

(27,000)

11,000

Salaries Payable

(9,000)

(14,000)

(5,000)

Note Payable - Joe Doe

-

(50,000)

(50,000)

Common Stock

(500,000)

(450,000)

50,000

R/E, 3/31/2000

(4,000)

N/A

R/E, 3/31/1999

(34,000)

N/A

$

-

$

-

Example - Indirect Method


Example indirect method27 l.jpg
Example - Indirect Method inflows and outflows of

  • Additional Information:

    • There was a net loss for the year of $27,000.

    • Depreciation charges for the year were $6,000.

    • During the year, Ed sold land originally costing $32,000 for $32,000.

    • During the year, Ed paid dividends of $3,000 to the stockholders.

    • Ed issued $50,000 of common stock to settle the note due to Joe Doe.


Example indirect method28 l.jpg

Ed's Hut inflows and outflows of

Operating Activities

Net Loss

$

(27,000)

Example - Indirect Method

Always start with the net income or net loss for the period.


Example indirect method29 l.jpg

Ed's Hut inflows and outflows of

Operating Activities

Net Loss

$

(27,000)

Add:

Decrease in A/R

17,000

Increase in A/P

11,000

Change in Account Balance during Period

Increase

Decrease

Current

Subtract from

Add to

Noncash Assets

net income

net income

Current

Add to

Subtract from

Liabilities

net income

net income

Example - Indirect Method


Example indirect method30 l.jpg

Ed's Hut inflows and outflows of

Operating Activities

Net Loss

$

(27,000)

Add:

Decrease in A/R

17,000

Increase in A/P

11,000

Increase in Depr. Charges

6,000

Example - Indirect Method

Depreciation charges represent a decrease in a noncash asset that must be added back to net income.


Example indirect method31 l.jpg

Ed's Hut inflows and outflows of

Operating Activities

Change in Account Balance during Period

Net Loss

$

(27,000)

Increase

Decrease

Add:

Decrease in A/R

17,000

Current

Subtract from

Add to

Noncash Assets

net income

net income

Increase in A/P

11,000

Current

Add to

Subtract from

Increase in Depr. Charges

6,000

Liabilities

net income

net income

Less:

Increase in Inventory

(50,000)

Decrease in Salaries Payable

(5,000)

Net Cash Flow from Operations

(48,000)

Example - Indirect Method


Example indirect method32 l.jpg

Ed's Hut inflows and outflows of

Operating Activities

Net Loss

$

(27,000)

Add:

Decrease in A/R

17,000

Increase in A/P

11,000

Increase in Depr. Charges

6,000

Less:

Increase in Inventory

(50,000)

Decrease in Salaries Payable

(5,000)

Net Cash Flow from Operations

(48,000)

Example - Indirect Method


Example indirect method33 l.jpg

Ed's Hut inflows and outflows of

Statement of Cash Flows

For the Period Ending March 31, 2000

I. Operating Activities

$

(48,000)

II. Investing Activities

Proceeds from sale of land

32,000

III. Financing Activities

Dividends paid to stockholders

(3,000)

Net Cash Flows for the Period

(19,000)

Add: Beginning Cash Balance

90,000

Ending Cash Balance

$

71,000

Example - Indirect Method


Example indirect method34 l.jpg

Ed's Hut inflows and outflows of

Statement of Cash Flows

For the Period Ending March 31, 2000

I. Operating Activities

$

(48,000)

II. Investing Activities

Proceeds from sale of land

32,000

III. Financing Activities

Dividends paid to stockholders

(3,000)

Net Cash Flows for the Period

(19,000)

Add: Beginning Cash Balance

90,000

Ending Cash Balance

$

71,000

Example - Indirect Method

In addition, on the face of the statement or in a supplemental schedule, disclose the issuance of $50,000 of stock to a creditor, a noncash financing activity.


End of chapter 17 l.jpg
End of Chapter 17 inflows and outflows of

Now, this is what I call CA$H FLOW!


ad