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

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chapter 12

Chapter 12

The Statement of Cash Flows

Financial Accounting 4e by Porter and Norton

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

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 format4

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

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

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

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
indirect method operating activities
Indirect Method - Operating Activities

Income Statement

Conversion

of accrual Net Income

to cash

basis

Cash Flows from Operating Activities

slide11

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

slide12

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

slide13

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

slide14

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

slide15

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

slide16

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

slide17

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

slide18

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

slide19

Bonds Payable

Financing Activities

From Balance

Sheet

260,000 Bal. Jan. 1

Retirement 60,000

200,000 Bal. Dec. 31

slide20

Capital Stock

Financing Activities

From Balance

Sheet

75,000 Bal. Jan. 1

25,000 Stock issued

100,000 Bal. Dec. 31

slide21

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

slide22

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-

slide23

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

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 format25
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)