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Chapter 12

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  1. Chapter 12 The Statement of Cash Flows Financial Accounting 4e by Porter and Norton

  2. 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

  3. 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

  4. from balance sheets 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

  5. 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

  6. 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 (i.e. Patents, trademarks, etc.)

  7. 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

  8. 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

  9. 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

  10. Indirect Method - Operating Activities Income Statement Conversion of accrual Net Income to cash basis Cash Flows from Operating Activities

  11. 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) Accounts Receivable Bal. Jan. 1 57,000 Net increase 6,000 Decrease $6,000 Bal. Dec. 31 63,000

  12. Inventory Bal. Jan. 1 92,000 Bal. Dec. 31 84,000 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) Decrease in inventory 8,000 8,000 Net decrease Increase $8,000

  13. 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) Decrease in inventory 8,000 Increase in accounts payable 7,000 Accounts Payable 31,000 Bal. Jan. 1 7,000 Net increase 38,000 Bal. Dec. 31 Increase $7,000

  14. 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) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Salaries & Wages Payable 9,000 Bal. Jan. 1 Net decrease 2,000 7,000 Bal. Dec. 31 Decrease $2,000

  15. 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) 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 Bal. Jan. 1 18,000 6,000 Net decrease Bal. Dec. 31 12,000 Decrease $6,000

  16. 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) 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 Income Taxes Payable 5,000 Bal. Jan. 1 3,000 Net increase 8,000 Bal. Dec. 31 Increase $3,000

  17. 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) 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 Gain on sale of machine ( 5,000) Depreciation expense 40,000 Loss on retirement of bonds 3,000 Add back noncash expense Report entire outflow as a financing activity Gain is not part of operating activities

  18. Accumulated Depreciation Investing Activities Book value of equipment sold was $20,000. Original cost of equipment was $35,000. From Balance Sheet 75,000 Bal. Jan. 1 40,000 Expense Disposals 15,000 100,000 Bal. Dec. 31

  19. Bonds Payable Financing Activities From Balance Sheet 260,000 Bal. Jan. 1 Retirement 60,000 200,000 Bal. Dec. 31

  20. Capital Stock Financing Activities From Balance Sheet 75,000 Bal. Jan. 1 25,000 Stock issued 100,000 Bal. Dec. 31

  21. Retained Earnings Financing Activities From Balance Sheet 193,000 Bal. Jan. 1 120,000 Net income 2004 Cash dividends 67,000 246,000 Bal. Dec. 31

  22. Master T Account for Cash Flows from Financing Activities Cash Flows From Financing Activities Cash receipts from: Cash payments for: • Sale of Stock • Borrowings • Debt Retirements • Dividends • Stock Repurchases Net cash inflows Net cash outflows -OR-

  23. Master T Account for Cash Flows from Financing Activities Cash Flows From Financing Activities Cash receipts from: Cash payments for: 63,000 Retirement of bonds 67,000 Payment of cash dividends Issuance of stock 25,000 105,000 Net cash outflows

  24. 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

  25. 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)

  26. End of Chapter 12