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The Statement of Cash Flows Chapter 12 Objective 1 Identify the purposes of the statement of cash flows. Basic Concepts Reports the entity’s cash flows (cash receipts and cash payments) during the period Purposes of the Statement of Cash Flows Predict future cash flows

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objective 1
Objective 1

Identify the purposes of the statement of cash flows.

basic concepts
Basic Concepts
  • Reports the entity’s cash flows (cash receipts and cash payments) during the period
purposes of the statement of cash flows
Purposes of the Statementof Cash Flows
  • Predict future cash flows
  • Evaluate management decisions
  • Determine the ability to pay dividends to stockholders’ and payments to creditors
  • Show the relationship of net income to the business’s cash flows
what is cash
What is Cash?
  • Cash on hand
  • Cash in the bank
  • Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delay
    • Money-market investments
    • U.S. Government Treasury bills
objective 2
Objective 2

Distinguish among operating, investing, and financing cash flows.

operating investing and financing activities
Operating, Investing, and Financing Activities
  • Operating activities create revenues, expenses, gains, and losses.
  • Investing activities increase and decrease long-term assets.
  • Financing activities obtain cash from investors and creditors.
two formats for operating activities
Two Formats forOperating Activities
  • Indirect method reconciles from net income to net cash provided by operating activities
  • Direct method reports all cash receipts and cash payments from operating activities
  • The two methods have no effect on investing or financing activities.
two formats for operating activities9
Indirect Method

Net income $XXX

Adjustments:

Depreciation, etc. XXX

Net income provided by operating activities $XXX

Direct Method

Collection from customers $XXX

Deductions:

Payment to suppliers, etc. XXX

Net income provided by operating activities $XXX

Two Formats forOperating Activities

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

objective 3
Objective 3

Prepare a statement of cash flows by the indirect method.

the indirect method operating activities
Positive Items

Net income

Depreciation/amortization

Loss on sale of long-term assets

Decreases in current assets other than cash

Increases in current liabilities

Negative Items

Net loss

Gain on sale of long-term assets

Increases in current assets other than cash

Decreases in current liabilities

The Indirect Method:Operating Activities
the indirect method investing activities
Positive Items

Sale of plant assets

Sale of investments that are not cash equivalents

Collections of loans receivable

Negative Items

Acquisition of plant assets

Purchase of investments that are not cash equivalents

Making loans to others

The Indirect Method:Investing Activities
the indirect method financing activities
Positive Items

Issuing stock

Selling treasury stock

Borrowing money

Negative Items

Payment of dividends

Purchase of treasury stock

Payment of principal amounts of debts

The Indirect Method:Financing Activities
comparative balance sheets
Anchor Corporation – December 31

(In thousands)

20x2

20x1

Inc/dec)

Assets

Current:

Cash

Accounts receivable

Interest receivable

Inventory

Prepaid expenses

Long-term receivable

Plant assets, net

Total

$ 22

93

3

135

8

11

453

$725

$ 42

80

1

138

7

219

$487

$ (20)

13

2

(3)

1

11

234

$238

Comparative Balance Sheets
comparative balance sheets15
Comparative Balance Sheets

Anchor Corporation – December 31

(In thousands)

20x2

20x1

Inc/dec)

Liabilities

Current:

Accounts payable

Salary payable

Accrued liabilities

Long-term debt

Stockholders’ equity

Common stock

Retained earnings

Total

$ 91

34

1

160

359

110

$725

$ 57

6

3

77

258

86

$487

$ 34

(2)

(2)

83

101

24

$238

income statement
Income Statement

Anchor Corporation

Year Ended December 31, 20x2

(In thousands)

Revenues and gains:

Sales revenue $284

Interest revenue 12

Dividend revenue 9

Gain on sale of plant assets 8

Total revenues and gains $313

income statement17
Income Statement

Anchor Corporation

Year Ended December 31, 20x2

(In thousands)

Expenses:

Cost of goods sold $150

Salary and wage expense 56

Depreciation expense 18

Other operating expense 17

Interest expense 16

Income tax expense 15

Total expenses $272

income statement18
Income Statement

Anchor Corporation

Year Ended December 31, 20x2

(In thousands)

Total revenues and gains $313

Total expenses 272

Net income $ 41

statement of cash flows operating activities
Statement of Cash Flows(IndirectMethod)

Year Ended December 31, 20x2 (In thousands)

Cash flows from operating activities:

Net Income $41

Adjustments to reconcile net income to

net cash provided by operating activities:

A Depreciation 18

B Gain on sale of plant (8)

Statement of Cash Flows:Operating Activities

Depreciation does not affect cash, but it decreases net income – add it back in.

Sales of long-term assets are investing

Activities – remove gains from net income.

statement of cash flows operating activities20
Statement of Cash Flows: Operating Activities

Statement of Cash Flows(IndirectMethod)

Year Ended December 31, 20x2 (In thousands)

C Increase in accounts receivable (13)

C Increase in interest receivable (2)

C Decrease in inventory 3

C Increase in prepaid expenses (1)

C Increase in accounts payable 34

C Decrease is salary payable (2)

C Decrease in accrued liabilities (2) 27

Net cash provided by operating activities $68

changes in current asset and current liability accounts c
Changes in Current Asset and Current Liability Accounts – C

1. An increase in a current asset other

than cash indicates a decrease in cash.

2. A decrease in a current asset other

than cash indicates an increase in cash.

3. A decrease in a current liability

indicates a decrease in cash.

4. An increase in a current liability

indicates an increase in cash.

statement of cash flows investing activities
Statement of Cash Flows(IndirectMethod)

Year Ended December 31, 20x2 (In thousands)

Cash flows from investing activities:

Acquisition of plant assets $(306)

Loan to another company (11)

Proceeds from sale of plant assets 62

Net cash used for investing activities $(255)

Statement of Cash Flows:Investing Activities
statement of cash flows financing activities
Statement of Cash Flows(IndirectMethod)

Year Ended December 31, 20x2 (In thousands)

Cash flows from financing activities:

Proceeds from issuance of common stock $101

Proceeds from issuance of long-term debt 94

Payment of long-term debt (11)

Payment of dividends (17)

Net cash provided by financing activities $167

Statement of Cash Flows:Financing Activities
statement of cash flows
Statement of Cash Flows(IndirectMethod)

Year Ended December 31, 20x2 (In thousands)

Net cash provided by operating activities $ 68

Net cash used for investing activities (255)

Net cash provided by financing activities 167

Net decrease in cash $ (20)

Cash balance, December 31, 20x1 42

Cash balance, December 31, 20x2 $ 22

Statement of Cash Flows
computing acquisition and sales of plant assets
Computing Acquisition andSales of Plant Assets
  • Anchor had plant assets, net of depreciation, of $219,000 at the beginning of the year and $453,000 at year end. The acquisition of plant assets amounted to $306,000 during the year.
computing acquisition and sales of plant assets26
Computing Acquisition andSales of Plant Assets

The income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets. What is the book value of the assets sold?

Beginning balance + Acquisitions – Depreciation

– Book value of assets sold = Ending balance

computing acquisition and sales of plant assets27
Computing Acquisition andSales of Plant Assets

$219,000 + 306,000 – 18,000 – X= $453,000

X = $219,000 + 306,000 – 18,000 – 453,000

X = $54,000 (book value)

How much are the proceeds

from the sale of plant assets?

computing acquisition and sales of plant assets28
Computing Acquisition andSales of Plant Assets

Book value + Gain – Loss = Sale proceeds

$54,000 + $8,000 – 0 = $62,000

computing acquisition and sales of plant assets29
Computing Acquisition andSales of Plant Assets

Plant Assets (Net)

Beginning bal. 219,000

Acquisitions 306,000

Ending bal. 453,000

Depreciation 18,000

Book val. 54,000

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

computing acquisition and sales of investments
Computing Acquisition andSales of Investments

Beginning balance + Purchases

– Book value of investment sold

= Ending balance

computing loans and their collections
Computing Loans andTheir Collections

Beginning balance + New loans made

– Collections

= Ending balance

computing issuances and payments of long term debt
Computing Issuances and Payments of Long-Term Debt

Beginning balance was $77,000.

New debt amounting to $94,000

was incurred during the year.

The ending balance for the Long-Term

Debt account was $160,000.

How much was the payment?

computing issuances and payments of long term debt33
Computing Issuances and Payments of Long-Term Debt

Long-Term Debt

Payments 11,000

Beginning bal. 77,000

New debt 94,000

Ending bal. 160,000

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

computing issuances of stock purchases of treasury stock
Computing Issuances of Stock: Purchases of Treasury Stock

Beginning balance of common stock +

Issuance of newstock = Ending balance

Beginning balance of treasury stock +

Purchase of treasury stock = Ending balance

computing dividend payments
Computing Dividend Payments

Retained earnings beginning balance +

Net income – Dividends declared

= Ending balance

$86,000 + $41,000 – X = $110,000

X = $110,000 – $86,000 – $41,000

X = $17,000

noncash investing and financing activities
Noncash Investing andFinancing Activities

Suppose Anchor Corporation issued

Common stock valued at $300,000

to acquire a warehouse.

Warehouse Building 300,000

Common Stock 300,000

noncash investing and financing activities37
Noncash Investing andFinancing Activities

Noncash Investing and Financing Activities: (000)

Acquisition of building by issuing common stock $300

Acquisition of land by issuing note payable 70

Payment of long-term debt by issuing

common stock 100

Total noncash investing and financing activities $470

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

learning objective 4
Learning Objective 4

Prepare a statement of cash flows by the direct method.

the direct method
The Direct Method
  • The FASB has expressed a preference for the direct method
  • Provides clearer information about the sources and uses of a company’s operating cash
the direct method40
The Direct Method

Statement of Cash Flows

Year Ended December 31, 20x2

(In thousands)

Cash flows from operating activities:

Receipts:

Collections from customers $271

Interest received on notes receivable 10

Dividends received on investments in stock 9

Total cash receipts $290

the direct method41
The Direct Method

Statement of Cash Flows

Year Ended December 31, 20x2

(In thousands)

Payments:

To suppliers $133

To employees 58

For interest 16

For income tax 15

Total payments 222

Net cash provided by operating activities $ 68

the direct method42
The Direct Method

Statement of Cash Flows

Year Ended December 31, 20x2 (In thousands)

Net cash provided by operating activities $ 68

Net cash used for investing activities (255)

Net cash provided by financing activities 167

Net decrease in cash $(20)

Cash balance, December 31, 20x1 42

Cash balance, December 31, 20x2 $ 22

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

cash flows from operating activities
Cash Flows fromOperating Activities
  • Cash collections from customers
  • Cash receipts of interest
  • Cash receipts of dividends
  • Payments to suppliers
  • Payments to employees
  • Payments for interest and income tax expense
cash flows from investing activities
Cash Flows fromInvesting Activities
  • Purchases of plant assets; investments in, and loans to, other companies
  • Proceeds from the sale of plant assets and investments; and the collections of loans
cash flows from financing activities
Cash Flows fromFinancing Activities
  • Proceeds from the issuance of stock and debt
  • Payment of debt and purchases of the company’s own stock
  • Payment of cash dividends
computing cash collections from customers
Computing Cash Collectionsfrom Customers

Beginning accounts receivable balance

+ Sales on account – Collections

= Ending accounts receivable balance

computing payments to suppliers
Computing Paymentsto Suppliers

Step 1: How much were the purchases?

Beginning inventory + Purchases – Cost of goods sold = Ending Inventory

$138,000 + X – $150,000 = $135,000

X = $150,000 – $138,000 + $135,000

X = $147,000

computing payments to suppliers48
Computing Paymentsto Suppliers

Accounts Payable

Payments for inventory

Beg. balance 57,000

Purchases 147,000

End. balance 91,000

computing payments to suppliers49
Computing Paymentsto Suppliers

Step 2: How much did the business pay for this inventory?

Beginning Accounts Payable + Purchases – Payments = Ending Accounts Payable

$57,000 + $147,000 – X = $91,000

X = $57,000 + $147,000 – $91,000

X = $113,000

computing payments for operating expenses
Computing Payments forOperating Expenses

Beginning prepaid expense + Payments

– Expiration of prepaid expense

= Ending balance

Beginning accrued liabilities + Accrual of

expense at year end – Payments

= Ending balance

Accrual of other operating expenses at year end

+ Expiration of prepaid expense + Payments

= Ending balance

computing payments to employees
Computing Payments to Employees

Salary Payable was $6,000 at the beginning of the year and $4,000 at year end. During the year, Salary Expense was $56,000. How much did the business pay?

$58,000

measuring cash adequacy free cash flow
Measuring Cash Adequacy:Free Cash Flow
  • The amount of cash available from operations after paying for planned investments in plant, equipment, and other long-term assets.

Net cash flow from operating activities

Cash outflow earmarked for investments in

plant, equipment, and other long-term assets