Chapter 16
Download
1 / 69

Statement of Cash Flows - PowerPoint PPT Presentation


  • 97 Views
  • Uploaded on

Chapter 16. Statement of Cash Flows. Objective 1. Describe the cash flow activities reported in the statement of cash flows.

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 ' Statement of Cash Flows' - kasa


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

Chapter 16

Statement of Cash Flows


Objective 1

Describe the cash flow activities reported in the statement of cash flows


The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a company’s ability to do the following:

  • Generate cash from operations

  • Maintain and expand its operating capacity

  • Meet its financial obligations

  • Pay dividends


Reporting Cash Flows

The statement of cash flows reports cash flows from three types of activities:

1.Cash flows from operating activities are cash flows from transactions that affect net income.

2.Cash flows from investing activities are cash flows from transactions that affect the investments in noncurrent assets of the company.

3.Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the company.


Exhibit 1

Cash Flows


Cash Flows from Operating Activities

The direct method reports the sources of operating cash and the uses of operating cash.


The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash.


The primary advantage of the indirect method is that it reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

If you use the direct method, you will need to provide a reconciliation—which is the indirect method.

Over 99% of companies use the indirect method.


Exhibit 2 reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Cash Flows from Operations: Direct and Indirect Methods—NetSolutions

The same


Cash Flows from Investing Activities reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

  • Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets.

  • Cashoutflows from investing activities normally include payments to acquire fixed assets, investments, and intangible assets.


Cash Flows from Financing Activities reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

  • Cash inflows from financing activities normally arise from issuing debt or equity securities.

  • Cashoutflows from financing activities normally include paying cash dividends, repaying debt, and acquiring treasury stock.


Noncash Investing and Financing Activities reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Noncash investing and financing activities are transactions that do not directly affect cash. The effect of such transactions is recorded in a separate schedule that appears at the bottom of the statement of cash flows.


No Cash Flow Per Share reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Cash flow per share should not be reported on a company’s financial statements for the following reasons:

  • Users may misinterpret cash flow per share as the per-share amount available for dividends.

  • Users may misinterpret cash flow per share as equivalent to earnings per share.


Example Exercise 16-1 reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Classifying Cash Flows

Identify whether each of the following would be reported as an operating, investing, or financing activity in the statement of cash flows.

  • Purchase of patent d. Cash sale

  • Payment of cash dividend e. Purchase of treasury stock

  • Disposal of equipment f. Payment of wages expense


Example Exercise 16-1 reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.(continued)

i

o

  • Purchase of patent d. Cash sale

  • Payment of cash dividend e. Purchase of treasury stock

  • Disposal of equipment f. Payment of wages expense

f

f

i

o


Objective 2 reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Prepare a statement of cash flows, using the indirect method.


Efficient Approach reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

The indirect method of reporting cash flows from operating activities uses the logic that a change in any balance sheet account (including Cash) can be analyzed in terms of changes in other balance sheet accounts.


Exhibit 3 reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Income Statement and Comparative Balance Sheet

(continued)


Exhibit 3 reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

Income Statement and Comparative Balance Sheet (continued)


Retained Earnings reconciles the difference between net income and net cash flows from operations. Also, the indirect method is less costly to use than the direct method.

The analysis of Retained Earningsprovides a good starting point for determining the cash flows from operating activities.


The net income of $108,000 is the first amount reported in the Cash Flows from Operating Activities section.

The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year.


Cash flows from operating activities: the Cash Flows from Operating Activities section.

Net income $108,000

Adjustments to reconcile net income to net cash flow from operating activities:

Adjustments to Net Income

This phrase is added to indicate that accrual basis net income is being adjusted to arrive at cash flows from operations.


Exhibit 4 the Cash Flows from Operating Activities section.

Adjustments to Net Income (Loss) Using the Indirect Method

Step 1

Step 2

Step 3


Step 1 the Cash Flows from Operating Activities section.

Expenses that do not affect cash are added. Such expenses decreased net income, but did not involve cash payments and, thus, are added to net income. Examples include depreciation of fixed assets and amortization of intangible assets.


Step 2 the Cash Flows from Operating Activities section.

Loses and gains on disposal of assets are added or deducted. The disposal (sale) of assets is an investing activity, rather than an operating activity. Losses on disposal of assets are added back to net income. Gains on disposal of assets are deducted from net income.


Step 3 the Cash Flows from Operating Activities section.

Changes in current operating assets and liabilities are added or deducted as follows:

  • Increases in noncash current operating assets are deducted.

  • Decreases in noncash current operating assets are added.

  • Increases in current operating liabilities are added.

  • Decreases in current operating liabilities are deducted.


Example Exercise 16-2 the Cash Flows from Operating Activities section.

Adjustments to Net Income—Indirect Method

Omni Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $3,400 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,100 from sale of land. Reconcile a net income of $50,000 to net cash flow from operating activities.


Net income………………………………………. $50,000

Adjustments to reconcile net income to net cash flow from operating activities:

Depreciation…………………………………. 12,000

Amortization of patents………………………. 3,400

Gain on sale of land………………………... (4,100)

Net cash flow from operating activities…….. $61,300

Example Exercise 16-2 (continued)


Exhibit 5 income………………………………………. $50,000

Cash Flows from Operating Activities—Indirect Method

Step 1

Step 2

Step 3

(continued on Slide 31)


The account, shown below, indicates that income………………………………………. $50,000Accumulated Depreciation—Building increased by $7,000.

Step 1:The comparative balance sheets indicate that Accumulated Depreciation—Building increased by $7,000.


Exhibit 5 income………………………………………. $50,000

Cash Flows from Operating Activities—Indirect Method (continued)

Step 1

(continued)


Step 2 income………………………………………. $50,000

The proceeds, which included the gain, are reported in the Investing section of the statement of cash flows. Thus, the $12,000 is deducted from net income in determining cash flows from operating activities.


Exhibit 5 income………………………………………. $50,000

Cash Flows from Operating Activities—Indirect Method (continued)

(continued)


Step 3 income………………………………………. $50,000

Next, select the current operating assets and liabilitiesthat impact cash flows and determine their increases and decreases. Slide 35 may prove helpful.


December 31 income………………………………………. $50,000

Increase

Decrease*

2009

2010

9,000

8,000*

3,200*

2,200

500*

Accounts receivable (net) $ 74,000 $ 65,000

Inventories 172,000 180,000

Accounts payable (mdse.) 43,500 46,700

Accrued expenses payable 26,500 24,300

Income taxes payable 7,900 8,400

Note that Cash and Dividends Payable are not included in this analysis.


Exhibit 5 income………………………………………. $50,000

Cash Flows from Operating Activities—Indirect Method (concluded)

Step 1

Step 2

Step 3


Example Exercise 16-3 income………………………………………. $50,000

Changes in Current Operating Assets and Liabilities—Indirect Method

Victor Corporation’s comparative balance sheet for current assets and current liabilities was as follows:

Dec. 31, 2011

Dec. 31, 2010

Accounts receivable $ 6,500 $ 4,900

Inventory 12,300 15,000

Accounts payable 4,800 5,200

Dividends payable 5,000 4,000

Adjust net income of $70,000 for changes in operating assets and liabilities to arrive at cash flows from operating activities.


Net income…………………………………………….. $70,000

Adjustments to reconcile net income to net cash flow from operating activities:

Increase in accounts receivable………………. (1,600)

Decrease in inventory…………………………... 2,700

Decrease in accounts payable………………… (400)

Net cash flow from operating activities …..…..…. $70,700

Example Exercise 16-3 (continued)


Example Exercise 16-4 income…………………………………………….. $70,000

Cash Flows from Operating Activities—Indirect Method

Omicron, Inc. reported the following data:

Net income $120,000

Depreciation expense 12,000

Loss on disposal of equipment 15,000

Increase in Accounts receivable 5,000

Decrease in Accounts payable (2,000)

Prepare the cash flows for operating activities section of the statement of cash flows using the indirect method.


Cash flows from operating activities: income…………………………………………….. $70,000

Net income……………………………………….. $120,000 Adjustments to reconcile net income to net cash flow from operating activities:

Depreciation………………………………….. 12,000

Loss from disposal of equipment………... 15,000

Changes in current operating assets and liabilities:

Increase in accounts receivable………….. (5,000)

Decrease in accounts payable…………….. (2,000)

Net cash flow from operating activities……... $140,000

Example Exercise 16-4 (continued)


Dividends income…………………………………………….. $70,000

Cash dividends of $28,000 were declared during 2010. Note the entry highlighted in yellow.


Only $24,000 of the dividends was paid in 2010. income…………………………………………….. $70,000

Since dividend payments are a financing activity, the dividend payment is reported in the Financing Activities section.


Common Stock income…………………………………………….. $70,000

Rundell, Inc.’s Common Stock account increased by $8,000 during 2010.


Paid-in Capital in Excess of Par—Common Stock income…………………………………………….. $70,000 increased $40,000 during the year.

Issuing company stock is a financing activity, so cash flows from financing activities increases by $48,000 ($8,000 + $40,000).


Bonds Payable income…………………………………………….. $70,000

Bonds Payable decreased $50,000 during 2010. A check with Rundell’s income statement show that there was no gain or loss on the retirement.

Retiring a bond payable is a financing activity, so a cash outflow of $50,000 is reported in the Financing Activities section of the statement of cash flows.


Building income…………………………………………….. $70,000

The Building account increased by $60,000.

The cash outflow for this purchase is shown in the Financing Activities section of the statement.


Land income…………………………………………….. $70,000

The $45,000 decline in the Land account was from two transactions.


Earlier, as part of Step 2 in preparing the Operating Activities section, the $12,000 gain was deducted from net income.

Step 2

The proceeds of $72,000 from the sale of land are reported in the Investing Activities section of the statement of cash flows.


The October 12 transaction is the purchase of land for cash of $15,000. This transaction is reported as an outflow of cash in the Cash Flows from Investing Activities section.


Example Exercise 16-5 of $15,000. This transaction is reported as an outflow of cash in the

Land Transactions on the Statement of Cash Flows

Alpha Corporation purchased land for $125,000. Later in the year the company sold land with a book value of $165,000 for $200,000. How are the effects of these transactions reported on the statement of cash flows?


Example Exercise 16-5 of $15,000. This transaction is reported as an outflow of cash in the (continued)

The gain on sale of land is deducted from net income as shown below:

Gainon sale of land………………..$(35,000)

The purchase and sale of land is reported as part of cash inflow from investing activities as shown below:

Cash received for sale of land…… $200,000

Cash paid for purchase of land….. (125,000)


Exhibit 6 of $15,000. This transaction is reported as an outflow of cash in the

Statement of Cash Flows—Indirect Method

payable


Objective 3 of $15,000. This transaction is reported as an outflow of cash in the

Prepare a statement of cash flows, using the direct method.


The Direct Method of $15,000. This transaction is reported as an outflow of cash in the

The final amount reported in the Cash Flows from Operating Activities section will be the same whether the direct or indirect approach is used. The methods differin how the data are obtained, analyzed, and reported.


Cash Received from Customers of $15,000. This transaction is reported as an outflow of cash in the

Rundell, Inc. reports sales of $1,180,000 for 2010. To determine the cash received from customers, sales are adjusted by any increase or decrease in accounts receivable.


$0 of $15,000. This transaction is reported as an outflow of cash in the

$1,180,000

= $1,171,000

$(9,000)


Example Exercise 16-6 of $15,000. This transaction is reported as an outflow of cash in the

Cash Received from Customers—Direct Method

Sales reported on the income statement were $350,000. The accounts receivable balance declined $8,000 over the year. Determine the amount of cash received from customers.

Sales……………………………………………… $350,000

Add decrease in accounts receivable……… 8,000

Cash received from customers……………… $358,000


Cash Payments for Merchandise of $15,000. This transaction is reported as an outflow of cash in the

Rundell, Inc. reports cost of merchandise sold of $790,000. To determine the cash payment for merchandise, the $790,000 is adjusted for any increase or decrease in inventories and accounts payable (assuming the accounts payable are owed to merchandise suppliers).


$(8,000) of $15,000. This transaction is reported as an outflow of cash in the

$790,000

= $785,200

$3,200


Example Exercise 16-7 of $15,000. This transaction is reported as an outflow of cash in the

Cash Payment for Merchandise—Direct Method

Cost of merchandise sold reported on the income statement was $145,000. The accounts payable balance increased $4,000, and the inventory balance increased by $9,000 over the year. Determine the amount of cash paid for merchandise.

Cost of merchandise sold……………………… $145,000

Add increase in inventory……………………… 9,000

Deduct increase in accounts payable……….. (4,000)

Cash paid for merchandise……………………. $150,000


Cash Payments for Operating Expenses of $15,000. This transaction is reported as an outflow of cash in the

Rundell, Inc. reports total operating expenses of $203,000, which includes depreciation expense of $7,000. To determine cash payments for operating expenses, the other operating expenses (excluding depreciation) of $196,000 are adjusted for any increase or decrease in accrued expenses payable.


$0 of $15,000. This transaction is reported as an outflow of cash in the

$196,000

= $193,800

$(2,200)


Interest Expense of $15,000. This transaction is reported as an outflow of cash in the

Rundell, Inc. reports interest expense of 8,000. To determine the cash payments for interest, the $8,000 is adjusted for any increases or decreases in interest payable.


$0 of $15,000. This transaction is reported as an outflow of cash in the

$8,000

= $8,000

$0


Cash Payments for Income Taxes of $15,000. This transaction is reported as an outflow of cash in the

Rundell, Inc. reports income tax expense of $83,000. To determine the cash payments for income taxes, the $83,000 is adjusted for any increases or decreases in income taxes payable.


$500 of $15,000. This transaction is reported as an outflow of cash in the

$83,000

= $83,500

$0


Exhibit 7 of $15,000. This transaction is reported as an outflow of cash in the

Statement of Cash Flows—Direct Method

(continued)


Exhibit 7 of $15,000. This transaction is reported as an outflow of cash in the

Statement of Cash Flows—Direct Method (continued)


THE END of $15,000. This transaction is reported as an outflow of cash in the


ad