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Chapter 13
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  1. Chapter 13 Statement of Cash Flows

  2. Objectives of this Chapter • I. Identify business activities which can generate or use cash. • 2.Differentiate income flows from cash flows of operating activities. • 3. Introduce the content and the usefulness of the statement of cash flows. • 4. Learn how to prepare the statement of cash flows. Statement of Cash Flows

  3. 1. Activities which can either generate cash or use cash for a business entity • A. Operating activities. • B. Investing activities. • C. Financing activities. Statement of Cash Flows

  4. I. Activities which can either generate cash or use cash for a business entity • Operating activities: • Cash Inflows: • 1. Collections from customers including cash received from sales (or services) and collections of A/R. • 2. Cash receipts of interests or dividends. • 3. Collections of other operating receipts (i.e., unearned revenue, rent revenue). Statement of Cash Flows

  5. Cash Flows from Operating Activities (contd.) • Cash Outflows: • 1. Payments to suppliers. • 2. Payments to employees. • 3. Payments for interest expense. • 4. Payments for income taxes. • 5. Payments for other expenses(i.e., Prepaid expenses; rent expenses). Statement of Cash Flows

  6. Activities which can either generate cash or use cash for a business entity • A. Operating activities. • B. Investing activities. • C. Financing activities. Statement of Cash Flows

  7. Cash Flows from Investing Activities • Transactions involving acquiring (Investing (Cash outflows)) and selling (Disinvesting (Cash inflows)): • a. Property, Plant and Equipment. • b. Investments (current and non-current). • c. Notes Receivable (current and non-current). Statement of Cash Flows

  8. Notes Receivable • Notes Receivable (current and non-current), including: • Lending money (N/R , cash outflow); • Collecting of loan (N/R , cash inflow); • Selling of N/R (N/R, discounting N/R, cash inflow) Statement of Cash Flows

  9. Activities which can either generate cash or use cash for a business entity • A. Operating activities. • B. Investing activities. • C. Financing activities. Statement of Cash Flows

  10. Cash Flows from Financing Activities • Obtaining resources from owners and creditors (cash inflows) and repaying the amount borrowed (cash outflows). • Cash inflows: • Cash received from issuance of common stock. • Cash received from issuance of bonds. • Cash received from issuance of N/P (short-term or long term). Statement of Cash Flows

  11. Cash Flows from Financing Activities (contd.) • Cash Outflows: • Retirement of bonds. • Retirement of stock. • Payments of N/P. • Payments of dividends. Statement of Cash Flows

  12. 2. Differentiate income flows from cash flows of operating activities • The operating activities are also reported in the income statement (I/S). • Differences between operating activities reported in I/S and cash flow statement: • I/S is prepared on an accrual basis. • Statement of cash flows is prepared on a cash basis. • Therefore, net income ǂ cash flows from operating activities in most cases. Statement of Cash Flows

  13. Net Income vs. Net Cash Provided by Operating Activities (Source: Annual Reports)

  14. Net Cash from Operating, Investing and Financing ( $ in millions)

  15. Operating Activities (contd.) • Two approaches can be used to reconcile net income to net cash flows of operating activities: • 1. Indirect Method • ==> Lump-Sum Adjustment • 2. Direct Method • ==> Individual Account Adjustment Statement of Cash Flows

  16. Reconciliation: Indirect Method • Adjust net income for all differences between income flows (on an accrual basis) and cash flows (on a cash basis). Statement of Cash Flows

  17. Reconciliation: Direct Method • Adjust each revenue account on I/S to cash collection and adjust each expense account to cash payment. • Subtract total cash payments from total cash collections to derive net cash flows of the operation activities. Statement of Cash Flows

  18. 3. The Content and the Usefulness of the Statement of Cash Flows • In order to show cash flows of a company, cash flows of all three types activities occurred during the reporting period should be reported in one statement. • SFAS No. 95, “Statement of Cash Flows,” requires companies present the statement of cash flows using a specific format. Statement of Cash Flows

  19. SFAS No. 95 • Following SFAS No. 95, the statement of cash flows should have three sections: • 1. Cash flows from operating activities. • 2. Cash flows from investing activities. • 3. Cash flows from financing activities. • See p33-35 and 41-43 for examples of Statement of Cash Flows. Statement of Cash Flows

  20. The Usefulness of the Statement of Cash Flows • The following questions can be answered from the cash flow statement: • 1. What is the relationship between net income and cash provided by operations? • 2. Why did cash decreased when net income increased? • 3. What expansion (investment) activities took place and how were they financed? Statement of Cash Flows

  21. The Content and the Usefulness of the Statement of Cash Flows (contd.) • 4. How much is the cash provided by operating activities? • 5. What happened to the proceeds received from issuance of bonds or common stock? Statement of Cash Flows

  22. 4. Procedures for Preparation of the Statement of Cash Flows • 1. Operating Cash Flows (indirect method). • 2. Investing Cash Flows. • 3. Financing Cash Flows. Statement of Cash Flows

  23. 4.1 Operating Cash Flows (Indirect Method; Reconciliation Method) • Net Income •  Adjustments • + Any increase in current Liabilities (except for N/P) • + Any decrease in current assets (except for cash and N/R) • - Any decrease in current liabilities (except for N/P) • - Any increase in current assets (except for cash and N/R) Statement of Cash Flows

  24. Net Income Adjustments Adjustments to Convert Net Income to Net Cash Flow from Operating Activities • + Depreciation expense, Bad Debt expense • + Loss on disposal of assets or liabilities • - Gain on disposal of assets or liabilities Statement of Cash Flows

  25. 4.2 Investing Cash Flows • Inflows: decrease in noncurrent assets (i.e., long-term investments, P.P.E.) and certain current assets (i.e., trading securities, N/R). • Outflows: increases in noncurrent assets and certain current assets Statement of Cash Flows

  26. 4.3 Financing Cash Flows • Inflows: increases in noncurrent liabilities (i.e., B/P, N/P), stockholders’ equity and certain current liability (i.e., N/P). • Outflows: decreases in noncurrent liabilities, stockholders’ equity, certain current liability and dividend payment. Statement of Cash Flows

  27. Adjustments:+ Loss on Disposal of Assets or Liability • Example: Sale a piece of land with a cost of $9,000 for $7,000 • Cash 7,000 • Loss on Sale of Landa 2,000 • Land 9,000 • a. This transaction results in a cash increase of $7,000. Statement of Cash Flows

  28. Data needed to prepare statement of cash flows • 1. Comparative balance sheet statements. • 2. The income statement. • 3. The retained earnings statement. • 4. Other supplemental information concerning the reasons for the changes in the B/S accounts (other than cash). Statement of Cash Flows

  29. Example 1Layton Company Balance Sheet (12/31/x2) • a. Land was sold at cost for cash during the year. • b. A building was purchased for cash during the year and no building or equipment was sold during the year. Statement of Cash Flows

  30. Example 1 (contd.)Layton Company Balance Sheet (12/31/x2) • a. Bonds were issued at the end of year. Statement of Cash Flows

  31. Example 1 (contd.)Income Statement (for the year ended 12/31x2) Statement of Cash Flows

  32. Example 1 (contd.)Layton Company Retained Earnings (20x2) Statement of Cash Flows

  33. Layton CompanyStatement of Cash Flows For the Year Ended December 31, 20x2 • Net cash flow from operating activities: • Net Income $7,000 • Adjustments to reconcile net • income to net cash provided by • operating activities: • Add: Depreciation expense 2,300 • Increase in A/P 1,500 • Less: Increase in A/R (2,700) • Net cash provided by • operating activities $8,100 Statement of Cash Flows

  34. Layton CompanyStatement of Cash Flows (contd.) • Cash flows from investing activities: • Proceeds from sale of land $3,000 • Payments for • purchase of building (12,000) • Net cash used • by investing activities (9,000) • Cash flows from financing activities: • Proceeds from issuance of bonds 7,000 • Payments of dividends (3,500) • Net cash provided by • financing activities 3,500 Statement of Cash Flows

  35. Layton CompanyStatement of Cash Flows (contd.) • Net increase in cash $2,600 • Cash, Jan 1, 19x2 $4,000 • Cash, Dec 31, 19x2 $6,600 Statement of Cash Flows

  36. Example 2:Green Company Balance Sheet • Accounts 1/1/x2 12/31/x2 Difference • Cash $3,500 $5,500 • A/R 4,400 3,600 800  • Inventory 5,000 6,600 1,600  • Land 8,200 12,200 4,000c  • Building & Equip 35,700 48,700 13,000a,d • Acc. Depr. (6,000) (8,700) • Total Assets $50,800$67,900 Statement of Cash Flows

  37. Green Company Balance Sheet (contd.) • A/P $5,100 $3,200 1,900  • Salary Payable 1,400 1,800 400  • B/P, 10% 7,000 15,000 8,000b  • Common Stock, $10 par 8,000 9,000 1,000 • Paid-in Capital 16,000 19,000 3,000  • R/E 13,300 19,900 • Total Liabilities • & Equity $50,800$67,900 Statement of Cash Flows

  38. Income Statement For the Year Ended 12/31/20x2 Sales Revenue $80,000 CGS (48,600) Gross Profit $31,400 Operating Expenses: Deprecation Expense $3,400 Other Expenses 15,900 (19,300) $12,100 Other Revenues & Expenses Gains on Sale of Equipment $600 Interest Expense (700) (100) Income Before Income Tax $12,000 Income Tax Expense (3,600) Net Income $8,400 . Statement of Cash Flows 38

  39. Retained Earnings (20x2) • Beginning balance • of retained earnings $13,300 • Add: Net Income 8,400 • 21,700 • Less: Dividends (1,800) • Ending balance • of retained earning $19,900 Statement of Cash Flows

  40. Supplemental Information for 20x2 • (a) Equipment was purchased for cash at a cost of $15,200. • (b) Ten-year bonds payable with a face value of $8,000 were issued for $8,000 at the end of the year. • (c) Land was acquired through the issuance of 100 shares of $10 par common stock when the stock was selling at a market price of $40 per share. • (d) Equipment with a cost of $2,200 and a book value of $1,500 was sold for $2,100 cash. Statement of Cash Flows

  41. GREEN CompanyStatement of Cash Flows For the Year Ended December 31, 20x2 • Net cash flows from operating activities: • Net Income $8,400 • Adj. To reconcile net income to net • cash provided by operating activities: • Add: Depreciation Expense 3,400 • Decrease in A/R 800 • Increase in S/P 400 • Less: Increase in Inventory (1,600) • Decrease in A/P (1,900) • Gain on sale of Equipment (600) • Net cash provided by operating activities $8,900 Statement of Cash Flows

  42. GREEN Company Statement of Cash Flows (contd.) Cash flows from investing activities: Payments for purchase of equip. (15,200) Proceeds from sale of equipment 2,100 Net cash used by investing activities (13,100) Cash flows from financing activities: Proceeds from issuance of bonds 8,000 Payments of dividends (1,800) Net cash provided by financing activities 6,200 Net increase in cash (see Schedule 1) $2,000 Cash, Jan 1, 19x2 $3,500 Cash, Dec 31, 19x2 $5,500 42 Statement of Cash Flows

  43. GREEN Company Statement of Cash Flows (contd.) Schedule 1: Investing & financing activities not affecting cash flows: Investing activities: Acquisition of land by Issuance of common stock ($4,000) Financing Activities: Issuance of common stock for land $4,000 43 Statement of Cash Flows

  44. Direct Exchange • Direct exchange: An example of a direct exchange is issuing bonds to acquire a building. This transaction should appear in the schedule of the cash flow statement as an investing activity (i.e., acquisition of building) and as a financing activity (i.e., issue bonds for building). Statement of Cash Flows

  45. Partial Cash Investing and Financing Activities • Example: acquiring land costing $10,000 by paying $1,000 down and signing a $9,000 notes payable. Statement of Cash Flows

  46. Partial Cash Investing and Financing Activities (contd.) • Presentation on Cash Flow Statement for Partial Investing & Financing Activities: • Cash Flows from Investing Activities: • Purchase of land by issuance • of note and cash ($10,000) • Less: issuance of note 9,000 • Cash payment • for purchase of land ($1,000) Statement of Cash Flows

  47. Cash Flows from the Operating Activities • Activities can be presented using: • a. Indirect Method (as used in examples 1,2): • N/I  Adjustments to reconcile net income to cash flows. • b. Direct Method: The operating cash outflows are deducted from the operating cash inflows to determine the net cash provided by (or used in) operating activities. Statement of Cash Flows

  48. Cash Flows from the Operating Activities(contd.) • SFAS No. 95 allows the use of both methods, but encourages the use of the direct method. • However, if the direct method is used, a reconciliation of net income and cash flows from operating activities using the indirect method must be provided in the supplementary statement. Statement of Cash Flows

  49. Using The Direct Method in Preparing The Operating Cash Flows • Cash inflows from operating activities: • 1. Collections from customers. • 2. Interest & dividends collected. • 3. Other operating receipts. Statement of Cash Flows

  50. Using The Direct Method in Preparing The Operating Cash Flows (contd.) • Cash outflows from operating activities: • 1. Payments to suppliers. • 2. Payments to employees. • 3. Payments of interest. • 4. Other operating payments. • 5. Payments of income taxes. Statement of Cash Flows