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Strategic Accounting. Statement of Cash Flows. CASH INFLOWS. Operating Activities. Investing Activities. Financing Activities. Sale of operational assets Sale of investments Collections of loans. Issuance of stock Issuance of bonds and notes. Cash received from revenues. Business.

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strategic accounting
Strategic Accounting

Statement of Cash Flows

slide2

CASH INFLOWS

Operating Activities

Investing Activities

Financing Activities

Sale of operational assets

Sale of investments

Collections of loans

Issuance of stock

Issuance of bonds and notes

Cash received from revenues

Business

Cash paid for expenses

Purchase of operational assets

Purchase of investments

Loans to others

Payment of dividends

Repurchase of stock

Repayment of debt

CASH OUTFLOWS

cash and cash equivalents
Short-term, highly liquid investments.

So near maturity that there is insignificant risk of market value fluctuation from interest rate changes.

Maturity of 3 months or less

Cash and Cash Equivalents

Cash Equivalents

Resources immediately available to pay obligations.

cash equivalents
Cash Equivalents

Treasury bill 100,000

Cash 100,000

  • Inflow or outflow of cash?
  • Neither – moves $100,000 from one cash account to another “cash” account
slide5
Cash flows from operating activities:

Cash inflows:

From customers $98

From investment revenue 3

Cash outflows:

To suppliers of goods (50)

To employees (11)

For interest (3)

For insurance (4)

For income taxes (11)

Net cash flows from operating activities $22

Cash flows from investing activities:

Purchase of land ($30)

Purchase of short-term investment (12)

Sale of land 18

Sale of equipment 5

Net cash flows from investing activities (19)

Cash flows from financing activities:

Sale of common shares $26

Retirement of bonds payable (15)

Payment of cash dividends (5)

Net cash flows from financing activities 6

Net increase in cash $9

Cash balance, January 1 20

Cash balance, December 31 $29

cash flows from operating activities
Cash flows from operating activities are both inflows and outflows of cash that result from activities reported in the income statement.

Exception: IAS No. 7 allows companies to report interest and dividends received and paid as operating, investing, or financing cash flows, provided that they are classified consistently from period to period

Cash Flows From Operating Activities
slide7
Income StatementCash Flows from Operating ActivitiesRevenues: Cash inflows: Sales and service revenue Cash received from customers Investment revenue Cash revenue received Noncash revenues and gains

(e.g., gain on sale of assets) [Not reported]Less: Expenses:Less: Cash outflows:Cost of goods sold Cash paid to suppliers

Salaries expense Cash paid to employees Noncash expenses and losses (depreciation, amortization, bad debts, loss on sale of assets) [Not reported] Interest expense Cash paid to creditors Other operating expenses Cash paid for expenses Income tax expense Cash paid to the governmentNet incomeNet cash flows from operating activities

cash flows from operating activities direct method
CASH FLOWS FROM OPERATING ACTIVITIESDirect Method

Cash flows from operating activities are the elements of net income, but reported on a cash basis.

Cash flows from operating activities:Cash inflows: From customers $98 From investment revenue 3Cash outflows: To suppliers of goods (50) To employees (11) For interest (3) For insurance (4) For income taxes (11)Net cash flows from operating activities $22

cash flows from operating activities indirect method
CASH FLOWS FROM OPERATING ACTIVITIESIndirect Method

Derived indirectly by starting with reported net income and working backwards to convert that amount to a cash basis.

Cash flows from operating activities:Net income $12Adjustments for noncash effects: Gain on sale of land (8) Depreciation expense 3 Loss on sale of equipment 2Changes in operating assets and liabilities:

Increase in accounts receivable (2) Decrease in inventory 4 Increase in accounts payable 6 Increase in salaries payable 2 Discount on bonds payable 2 Decrease in prepaid insurance 3 Decrease in income tax payable (2)Net cash flows from operating activities $22

cash flows from investing activities
CASH FLOWS FROM INVESTING ACTIVITIES

Related to the acquisitionanddispositionof assets, other than (a) inventory and (b) assets classified as cash equivalents.

Included in this classification are cash payments to acquire:

Property, plant and equipment and other productive assets [except inventories].

Investments in securities [except cash equivalents].

Nontrade receivables.

When these assets later are liquidated, any cash receipts from their disposition also are classified as investing activities.

Cash Flows from Investing Activities: Purchase of land $(30) Purchase of short-term investments (12) Sale of land 18 Sale of equipment 5 Net cash flows from investing activities (19)

cash flows from financing activities
CASH FLOWS FROM FINANCING ACTIVITIES

Inflows and outflows of cash resulting from the external financing of a business, including cash inflows from:

 The sale of common and preferred stock

 The issuance of bonds and other debt securities

Subsequent transactions related to these financing transactions are also classified as financing activities, such as:

 The repurchase of common or preferred stock (retirement or treasury stock)

 The repayment of debt

 The payment of cash dividends to shareholders

Cash Flows from Financing Activities: Sale of common stock $26 Retirement of bonds payable (15) Payment of cash dividends (5)Net cash flows from financing activities 6

significant noncash activities
SignificantNoncash Activities

Common noncash activities include:

Retiring bonds by issuing stock.

Acquiring an asset by issuing a note payable.

Retiring debt by transferring noncash assets.

Acquiring an asset by capital lease.

u s gaap vs ifrs
U.S. GAAP vs. IFRS

Consistent with U.S. GAAP, cash flows are classified as operating, investing, or financing.

Operating Activities

Investing Activities

Dividends Received

Interest Received

Financing Activities

Dividends Paid

Interest Paid

  • Operating Activities
    • Dividends Received
    • Interest Received
    • Interest Paid
  • Investing Activities
  • Financing Activities
    • Dividends Paid

Typical Classification of Interest and Dividends

direct method analyzing sales revenue
Direct MethodAnalyzing Sales Revenue

 We can compare sales and the change in accounts receivable to determine the amount of cash received from customers. This relationship can be viewed in T–account format as follows:

Accounts Receivable

_______________________________________

Beginning balance 30

Credit sales 100 ? Cash received

(increases A/R) __________ (decreases A/R)

Ending balance 32

Cash received from customers must have been $98million.

summary entry for sales and collection activities
SUMMARY ENTRY FOR SALES AND COLLECTION ACTIVITIES

Note that even if some of the year's sales were cash sales, say $40 million cash sales and $60 million credit sales, the result is the same:

Accounts Receivable

_______________________

Beg. bal. 30 Cash sales $40

Credit sales 60 58 Rec‘d on acct. 58

_______Cash rec‘d $98

Ending bal. 32

($ in millions)

EntryCash (received from customers) 98 Accounts receivable (given) 2 Sales revenue ($100 - 0) 100

analyzing sales review question
Analyzing SalesReview Question

Accounts Receivable was $40,000 on 1/1/11 and $52,000 on 12/31/11. If total sales revenue for 2011 was $800,000, then how much cash was received from customers?

a. $800,000

b. $760,000

c. $812,000

d.$788,000

A/R increased $12,000 during 2011.

Cash (received from customers) 788Accounts receivable 12 Sales revenue 800

analyzing sales review question19
Analyzing SalesReview Question

Accounts Receivable was $40,000 on 1/1/13 and $52,000 on 12/31/13. If total sales revenue for 2013 was $800,000, then how much cash was received from customers?

a. $800,000

b. $760,000

c. $812,000

d. $788,000

A/R increased $12,000 during 2013.

Cash (received from customers) 788Accounts receivable 12 Sales revenue 800

cost of goods sold
Cost of Goods Sold

 UBC sold goods that had cost $60 million. Inventory decreased by $4 million and accounts payable increased by $6 million.

($ in millions)

Cost of goods sold 60 Inventory 4 Accounts payable 6 Cash (paid to suppliers) 50

cost of goods sold review question
Cost of Goods SoldReview Question
  • Determine how much was paid for inventory during the year.Cost of goods sold $900,000

Inventory Jan. 1 $130,000 Dec. 31 $165,000Accts Pay. Jan. 1 $ 23,000 Dec. 31 $ 35,000

a. $900,000

b. $923,000

c. $947,000

d. $877,000

Cost of goods sold 900,000Inventory 35,000 Accounts payable 12,000 Cash (paid to suppliers) 923,000

Cost of goods sold 900Inventory 35 Accounts payable 12 Cash (paid to suppliers) 923

direct method salaries expense

{

Cash paid to Salaries + Decrease in Payable

Employees Expense - Increase in Payable

=

Direct MethodSalaries Expense
  • Cash paid to employees can be determined from the salaries expense.

Salaries expense x Salaries payable x Salaries payable x Cash (paid to employees)

?

salaries expense question
Salaries ExpenseQuestion

Determine how much was paid to employees during the year.

Salaries expense $700,000

Salaries Pay. Jan. 1 $ 35,000 Dec. 31 $ 10,000

a. $700,000

b. $735,000

c. $725,000

d. $675,000

Salaries expense 700,000 Salaries payable 25,000 Cash (paid to employees)

?

direct method estimated expenses
Direct MethodEstimated Expenses

Depreciation, Amortization, and Depletion Expenses

  • These are non-cash expenses.
  • They are not disclosed in the SCF using the direct method.
depreciation
Depreciation

 UBC’s income statement reports depreciation expense of $3 million.

($ in millions)

Depreciation expense 3 Accumulated depreciation 3

 Depreciation is a noncash expense. It is merely an allocation in the current period of a prior cash expenditure (for the depreciable asset).

 Therefore, the depreciation entry has no effect on the statement of cash flows.

bond interest
Bond Interest

UBC’s bond interest expense is $5 million and $2 million of the bond discount was reduced during the year.

The entry that summarizes the recording of bond interest expense:

($ in millions)

Bond interest expense 5 Discount on bonds 2 Cash (paid to bondholders) 3

 If a premium were being reduced, rather than a discount, the cash outflow would be greater than the expense.

?

insurance expense
Insurance Expense

UBC’s insurance expense was $7 million. Prepaid insurance decreased by $3 million indicating that cash paid for insurance coverage was $3 million less than the insurance expense for the year.

($ in millions)

Insurance expense 7 Prepaid insurance 3 Cash (paid for insurance) 4

?

gains and losses on sale of assets
Gains and Losses on Sale of Assets

Land that originally cost $10 million was sold for $18 million:

($ in millions)

Cash 18 Land 10 Gain on sale of land 8

The gain is simply the difference between cash received in the sale of land (reported as an investing activity) and the book value of the land. To report the $8 million gain as a cash flow from operating activities, in addition to reporting $18 million as a cash flow from investing activities, would be double counting.

loss on sale of equipment
LOSS ON SALE OF EQUIPMENT

UBC sold equipment for $5 million that had cost $14 million and was half depreciated.

($ in millions)

Cash (from sale of equipment) 5 Loss on sale of equipment 2 Accumulated depreciation ($14 x 50%) 7 Buildings and equipment (given) 14

The sale of equipment is an investing activity.

Note: The loss is simply the difference between cash received in the sale of equipment (reported as an investing activity) and the book value of the equipment.

indirect method
INDIRECT METHOD

 By the indirect method, the net cash increase or decrease from operating activities is derived indirectly by starting with reported net income and "working backwards" to convert that amount to a cash basis.

Net income $12Adjustments for noncash effects: Increase in accounts receivable (2) Gain on sale of land (8) Decrease in inventory 4 Increase in accounts payable 6 Increase in salaries payable 2 Depreciation expense 3 Discount on bonds payable 2 Decrease in prepaid insurance 3 Loss on sale of equipment 2 Decrease in income tax payable (2)Net cash flows from operating activities $22

some is items don t affect cash
Some IS Items Don’t Affect Cash

Cash Flows from Operating Activities INCOME STATEMENT INDIRECT METHOD DIRECT METHOD Net income $12 Adjustments :Sales $100 Investment rev. 3

Gain - sale of land 8 Gain - sale of land (8)[Not reported–no cash effect]

Cost of goods sold (60)

Salaries expense (13) Depreciation exp. (3) Depreciation exp. 3[Not reported – no cash effect]

Interest exp. (5) Insurance exp. (7) Loss - sale of equip. (2) Loss - sale of equip. 2[Not reported – no cash effect]Income tax exp. (9)Net cash flows from Net cash flows from Net Income $ 12 operating activities operating activities

No effect on Cash

others affect cash but by an amount different from the expense
Others Affect Cash, but by an Amount Different from the Expense

Cash Flows from Operating Activities INCOME STATEMENT INDIRECT METHOD DIRECT METHOD Net income $12 Adjustments :Sales $100 Increase in A/R (2) Cash from customers $98Investment rev. 3 [No adjustment] Cash from investments 3

Gain - sale of land 8

Cost of goods sold (60) Decr. in inventory 4 Increase in A/P 6 Cash to suppliers (50)Salaries expense (13) Increase in sal. pay. 2 Cash to employees (11)Depreciation exp. (3)

Interest exp. (5) Decr. in bond disc. 2 Cash for interest (3)Insurance exp. (7) Decr. in pre‘d ins. 3 Cash for insurance (4)Loss - sale of equip. (2)

Income tax exp. (9) Decrease in I.Tax/P (2) Cash paid for taxes (11)Net cash flows from Net cash flows from Net Income $ 12 operating activities operating activities

Convert from Accrual to Cash

comparison of direct and indirect methods
COMPARISON OF DIRECT AND INDIRECT METHODS

Cash Flows from Operating Activities INCOME STATEMENT INDIRECT METHOD DIRECT METHOD Net income $12 Adjustments :Sales $100 Increase in A/R (2) Cash from customers $98Investment rev. 3 [No adjustment] Cash from investments 3

Gain - sale of land 8 Gain - sale of land (8) [Not reported–no cash effect]

Cost of goods sold (60) Decr. in inventory 4 Increase in A/P 6 Cash to suppliers (50)Salaries expense (13) Increase in sal. pay. 2 Cash to employees (11)Depreciation exp. (3) Depreciation exp. 3 [Not reported – no cash effect]

Interest exp. (5) Decr. in bond disc. 2 Cash for interest (3)Insurance exp. (7) Decr. in pre‘d ins. 3 Cash for insurance (4)Loss - sale of equip. (2) Loss - sale of equip. 2 [Not reported – no cash effect]Income tax exp. (9) Decrease in I.Tax/P (2) Cash paid for taxes (11)Net cash flows from Net cash flows from Net Income $ 12 operating activities $22 operating activities $22

cash flows
Cash Flows

Based on the joint FASB and IASB Financial Statement Presentation project, the statement of cash flows is slated to change in several ways.

  • Operating and Investing cash flows will be categorized as “Business” activities and some cash flows may switch categories.
  • The statement will have three additional groupings: income taxes, discontinued operations, and equity (if needed).
  • Direct method will be required.