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Chapter 12 The Statement of Cash Flows Financial Accounting, Alternate 4e by Porter and Norton Dell Computer Corp. IBM Hewlitt-Packard Co. Gateway, Inc. Increase (Decrease) Net Income in Cash (Loss) $ 591 $2,122 (948) 3,579

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chapter 12

Chapter 12

The Statement of Cash Flows

Financial Accounting, Alternate 4e by Porter and Norton

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)

Cash Flows and Net Income for Four Computer Companies in 2002

(in millions)

purpose of the statement of cash flows
Purpose of the Statement of Cash Flows
  • Explains changes in cash over a period of time
  • Summarizes cash inflows and outflows from:

Operating

Activities

Investing

Activities

Financing

Activities

cash equivalents

Readily convertible to cash

  • Little risk of price change
  • Original maturity to investor of three months or less

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Cash Equivalents
  • Examples:
  • Commercial paper
  • U.S. Treasury bills
  • Certain money market funds
statement of cash flows format

outflows

Statement of Cash Flows Format

Cash

Classified by:

Operating activities

Investing activities

Financing activities

inflows

=

Beginning

Cash+

= Ending

Cash

Increase or decrease in cash

statement of cash flows format6
Statement of Cash Flows Format

Cash flows from operating activities:

Inflows $ xxx

Outflows (xxx)

Net cash provided (used) by operating activities $ xxx

Cash flows from investing activities:

Inflows $ xxx

Outflows (xxx)

Net cash provided (used) by investing activities xxx

Cash flows from financing activities:

Inflows $ xxx

Outflows (xxx)

Net cash provided (used) by financing activities xxx

Net increase (decrease) in cash and cash equivalents $ xxx

Cash and cash equivalents at beginning of year xxx

Cash and cash equivalents at end of year $ xxx

from balance sheets

operating activities

Incur employee

salaries and wages

Sell products

and services

Incur utility and

other operating

costs

Operating Activities

Cash transactions concerned with acquiring and selling products and services

Make inventory

purchases

investing activities

Purchase/Sell

long-term

investments

Buy/Sell

property, plant

& equipment

Investing Activities

Cash transactions concerned with acquiring and disposing of long-term assets

Purchase/Sell intangible assets

(e.g., patents, trademarks)

financing activities

Sell/Repurchase

stocks

Borrow $/

repay loans

Issue dividends

Date

Dept. of Treasurer

Jane Doe

Paycheck for

Financing Activities

Cash transactions concerned with internal and external financing of the business

Issue/Retire

bonds

categorizing cash flow activities
Operating Activities

Investing Activities

Long-Term

Liabilities

or

Stockholders’

Equity

Financing

Activities

Long-Term

Assets

Categorizing Cash Flow Activities

Income

Statement

Transactions

Current

Assets

and

Current

Liabilities

methods to report cash from operating activities
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
preparing the statement of cash flows direct method
Preparing the Statement of CashFlows: Direct Method
  • Step 1
    • Set up three schedules

Cash Flows from

Operating Activities

Cash Flows from

Investing Activities

Cash Flows from

Financing Activities

  • Step 2
    • Determine the cash flows from operating activities by analyzing each item on the income statement, current assets and current liabilities
slide13

From Balance

Sheet

From Income

Statement

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

schedule of cash flows from operating activities
Schedule of Cash Flows from Operating Activities

Cash receipts from:

Sales on account 664,000

slide15

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

schedule of cash flows from operating activities16
Schedule of Cash Flows from Operating Activities

Cash receipts from:

Sales on account 664,000

Interest 15,000

slide17

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

slide18

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

schedule of cash flows from operating activities19
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)

slide20

Direct Method - Operating Activities

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

Solve for x.

Cash paid for salaries & wages = $ 62,000

schedule of cash flows from operating activities21
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)

slide22

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

schedule of cash flows from operating activities23
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)

slide24

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

schedule of cash flows from operating activities25
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)

Interest (15,000)

Taxes (47,000)

Net cash provided by operating

activities $ 174,000

preparing the statement of cash flows direct method26
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
slide27

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

slide28

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

direct method investing activities
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

slide30

Schedule of

Cash Flows from Investing Activities

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)

preparing the statement of cash flows direct method31

Date

Dept. of Treasurer

Jane Doe

Paycheck for

Preparing the Statement of CashFlows: Direct Method
  • Step 4
    • Determine the cash flows from financing activities
slide32

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.

slide33

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 $ 246,000

Solve for x. Cash paid for dividends = $67,000

slide34

Schedule of

Cash Flows from Financing Activities

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)

noncash investing and financing activities

Examples:

Exchange Stock for Assets

Certificate of Stock

Buy Assets through Debt Financing from Supplier

Noncash Investing and Financing Activities
  • Disclose important financing and investing activities which do not require cash
statement of cash flows format36
Statement of Cash Flows Format

Cash flows from operating activities:

Inflows $ xxx

Outflows (xxx)

Net cash provided (used) by operating activities $ xxx

Cash flows from investing activities:

Inflows $ xxx

Outflows (xxx)

Net cash provided (used) by investing activities xxx

Cash flows from financing activities:

Inflows $ xxx

Outflows (xxx)

Net cash provided (used) by financing activities xxx

Net increase (decrease) in cash and cash equivalents $ xxx

Cash and cash equivalents at beginning of year xxx

Cash 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)

indirect method operating activities
Indirect Method - Operating Activities

Income Statement

Conversion

of accrual

to cash

basis

Cash Flows from Operating Activities

slide38

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable (6,000)

From balance sheet:

Accts. receivable, 2004 $63,000

Accts. receivable, 2003 57,000

$ 6,000

Decrease $6,000

slide39

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable (6,000)

Gain on sale of machine 5,000

Selling price of machine $25,000

Book value of machine 20,000

Gain on sale $ 5,000

Increase $5,000

slide40

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine 5,000

Decrease in inventory 8,000

From balance sheet:

Inventory, 2003 $92,000

Inventory, 2004 84,000

$ 8,000

Decrease $8,000

slide41

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine 5,000

Decrease in inventory 8,000

Increase in accounts payable 7,000

From balance sheet:

Accts. payable, 2004 $38,000

Accts. payable, 2003 31,000

$ 7,000

Increase $7,000

slide42

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine 5,000

Decrease in inventory 8,000

Increase in accounts payable 7,000

Decrease in salaries & wages payable ( 2,000)

Salaries & wages payable, 2003 $9,000

Salaries & wages payable, 2004 7,000

$2,000

Decrease $2,000

slide43

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine 5,000

Decrease in inventory 8,000

Increase in accounts payable 7,000

Decrease in salaries & wages payable ( 2,000)

Decrease in prepaid insurance 6,000

Prepaid insurance, 2003 $18,000

Prepaid insurance, 2004 12,000

$ 6,000

Decrease $6,000

slide44

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine 5,000

Decrease in inventory 8,000

Increase in accounts payable 7,000

Decrease in salaries & wages payable ( 2,000)

Decrease in prepaid insurance 6,000

Depreciation expense 40,000

Add back noncash expense

slide45

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine 5,000

Decrease in inventory 8,000

Increase in accounts payable 7,000

Decrease in salaries & wages payable ( 2,000)

Decrease in prepaid insurance 6,000

Depreciation expense 40,000

Increase in income taxes payable 3,000

Inc. taxes payable, 2004 $8,000

Inc. taxes payable, 2003 5,000

$3,000

Increase $3,000

slide46

Indirect Method - Operating Activities

Net cash flows from operating activities:

Net income xx,xxx

Adjustments to reconcile net income:

Increase in accounts receivable ( 6,000)

Gain on sale of machine ( 5,000)

Decrease in inventory 8,000

Increase in accounts payable 7,000

Decrease in salaries & wages payable ( 2,000)

Decrease in prepaid insurance 6,000

Increase in income taxes payable 3,000

Depreciation expense 40,000

Loss on retirement of bonds 3,000

Report entire outflow as a financing activity

cash flow adequacy
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

appendix
Appendix

Accounting Tools:

A Work-Sheet Approach to the

Statement of Cash Flows

indirect method using a work sheet50
Indirect Method: Using a Work Sheet

Record investing & financing activities

indirect method using a work sheet52
Indirect Method: Using a Work Sheet

Enter noncash

revenues or expenses

indirect method using a work sheet53
Indirect Method: Using a Work Sheet

Extend current assets

& current liabilities

indirect method using a work sheet55
Indirect Method: Using a Work Sheet

Determine net cash inflow (outflow)

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