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Chapter 12

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

  2. Dell Computer Corp. IBM Hewlitt-Packard Co. Gateway, Inc. Increase (Decrease) Net Income in Cash(Loss) $ 591 $2,122 (948) 3,579 6,995 (903) (265) (298) Cash Flows and Net Income for Four Computer Companies in 2002 (in millions)

  3. 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

  4. Readily convertible to cash • Little risk of price change • Original maturity to investor of three months or less 1 2 3 4 5 6 7 8 9 10 1 2 3 11 12 13 14 15 16 17 4 5 6 7 8 9 10 1 2 3 18 19 20 21 22 23 24 11 12 13 14 15 16 17 4 5 6 7 8 9 10 25 26 27 28 29 30 31 18 19 20 21 22 23 24 11 12 13 14 15 16 17 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Cash Equivalents • Examples: • Commercial paper • U.S. Treasury bills • Certain money market funds

  5. 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

  6. 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 from balance sheets

  7. 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

  8. 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 (e.g., patents, trademarks)

  9. 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

  10. 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

  11. 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

  12. Preparing the Statement of CashFlows: Direct Method • Step 1 • Set up three schedules Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities • Step 2 • Determine the cash flows from operating activities by analyzing each item on the income statement, current assets and current liabilities

  13. From Balance Sheet From Income Statement Direct Method - Operating Activities Determine cash collected from customers: Beginning accounts receivable $ 57,000 + Sales revenue 670,000 – Cash collections (x) = Ending accounts receivable $ 63,000 Solve for x. Cash collections = $664,000

  14. Schedule of Cash Flows from Operating Activities Cash receipts from: Sales on account 664,000

  15. Direct Method - Operating Activities Interest Revenue: Since no Interest Receivable account exists on the balance sheet, the interest earned was received, not accrued. Gain on Sale of Machine: Not an operating cash flow

  16. Schedule of Cash Flows from Operating Activities Cash receipts from: Sales on account 664,000 Interest 15,000

  17. Direct Method - Operating Activities Calculate cash paid to suppliers by first finding purchases: Beginning inventory $ 92,000 + Purchases (x) – Cost of goods sold (390,000) = Ending inventory $ 84,000 Solve for x. Purchases = $382,000

  18. Direct Method - Operating Activities Then examine Accounts Payable to determine cash paid to suppliers: Beginning accounts payable $ 31,000 + Purchases 382,000 – Cash payments (x) = Ending accounts payable $ 38,000 Solve for x. Cash paid to suppliers = $ 375,000

  19. Schedule of Cash Flows from Operating Activities Cash receipts from: Sales on account 664,000 Interest 15,000 Cash payments for: Inventory purchases (375,000)

  20. Direct Method - Operating Activities Salaries and wages: Beginning salaries & wages pay. $ 9,000 + Salaries & wages expense 60,000 – Cash payments to employees (x) = Ending salaries & wages pay. $ 7,000 Solve for x. Cash paid for salaries & wages = $ 62,000

  21. Schedule of Cash Flows from Operating Activities Cash receipts from: Sales on account 664,000 Interest 15,000 Cash payments for: Inventory purchases (375,000) Salaries and wages (62,000)

  22. Direct Method - Operating Activities Depreciation expense is not a cash flow Insurance Expense and Prepaid Insurance: Beginning prepaid insurance $ 18,000 + Cash payments for insurance (x) – Insurance expense (12,000) = Ending prepaid insurance $ 12,000 Solve for x. Cash paid for insurance = $6,000

  23. Schedule of Cash Flows from Operating Activities Cash receipts from: Sales on account 664,000 Interest 15,000 Cash payments for: Inventory purchases (375,000) Salaries and wages (62,000) Insurance (6,000)

  24. Direct Method - Operating Activities Interest Expense: Since no Interest Payable account exists on the balance sheet, the interest expensed was paid, not deferred. Income Tax Expense and Income Taxes Payable: Beginning income taxes payable $ 5,000 + Income tax expense 50,000 – Cash payments for taxes (x) = Ending income taxes payable $ 8,000 Solve for x. Cash paid for taxes = $47,000

  25. Schedule of Cash Flows from Operating Activities Cash receipts from: Sales on account $ 664,000 Interest 15,000 Cash payments for: Inventory purchases (375,000) Salaries and wages (62,000) Insurance (6,000) Interest (15,000) Taxes (47,000) Net cash provided by operating activities $ 174,000

  26. Preparing the Statement of CashFlows: Direct Method • Step 3 • Determine the cash flows from investing activities by examining the long-term asset accounts and any additional info

  27. Direct Method – Investing Activities Long-Term Investments: The net increase of $30,000 matches the additional info given on the balance sheet and required the use of cash. Land: The additional balance sheet info reveals that a note payable was issued. No cash was involved in the land transaction so it should be reported in a separate schedule instead of on the Statement of Cash Flows

  28. Direct Method – Investing Activities Property and Equipment: The additional balance sheet info reveals that equipment was purchased for $75,000 and a machine was sold for $25,000. Beginning property and equip. $280,000 + Acquisitions 75,000 – Disposals (x) = Ending property and equip. $320,000 Solve for x. The cost of fixed assets sold = $35,000

  29. Direct Method – Investing Activities Accumulated Depreciation: Beginning accum. depreciation $ 75,000 + Depreciation expense 40,000 – Accum. depreciation on assets sold (x) = Ending accum. depreciation $100,000 Solve for x. The accumulated depreciation on the assets disposed of during the year = $15,000

  30. Schedule of Cash Flows from Investing Activities Cash inflows from: Sale of machine $ 25,000 Cash outflows from: Purchase of investment (30,000) Purchase of property and equip. (75,000) Net cash used by investing activities $(80,000)

  31. Date Dept. of Treasurer Jane Doe Paycheck for Preparing the Statement of CashFlows: Direct Method • Step 4 • Determine the cash flows from financing activities

  32. Direct Method – Financing Activities Notes payable: This increase is already shown on a supplemental schedule of noncash activities. Bonds payable: Bonds with a face value of $60,000 are retired by paying $63,000.

  33. Direct Method – Financing Activities Capital stock was issued for cash Retained earnings: Beginning retained earnings $ 193,000 + Net income 120,000 – Cash dividends (x) = Ending retained earnings $ 246,000 Solve for x. Cash paid for dividends = $67,000

  34. Schedule of Cash Flows from Financing Activities Cash inflows from: Issuance of stock $ 25,000 Cash outflows from: Retirement of bonds (63,000) Payment of cash dividends (67,000) Net cash used by financing activities $(105,000)

  35. 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

  36. 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)

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

  38. 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) From balance sheet: Accts. receivable, 2004 $63,000 Accts. receivable, 2003 57,000 $ 6,000 Decrease $6,000

  39. 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) Gain on sale of machine 5,000 Selling price of machine $25,000 Book value of machine 20,000 Gain on sale $ 5,000 Increase $5,000

  40. 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) Gain on sale of machine 5,000 Decrease in inventory 8,000 From balance sheet: Inventory, 2003 $92,000 Inventory, 2004 84,000 $ 8,000 Decrease $8,000

  41. 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) Gain on sale of machine 5,000 Decrease in inventory 8,000 Increase in accounts payable 7,000 From balance sheet: Accts. payable, 2004 $38,000 Accts. payable, 2003 31,000 $ 7,000 Increase $7,000

  42. 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) Gain on sale of machine 5,000 Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Salaries & wages payable, 2003 $9,000 Salaries & wages payable, 2004 7,000 $2,000 Decrease $2,000

  43. 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) Gain on sale of machine 5,000 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, 2003 $18,000 Prepaid insurance, 2004 12,000 $ 6,000 Decrease $6,000

  44. 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) Gain on sale of machine 5,000 Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000 Depreciation expense 40,000 Add back noncash expense

  45. 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) Gain on sale of machine 5,000 Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000 Depreciation expense 40,000 Increase in income taxes payable 3,000 Inc. taxes payable, 2004 $8,000 Inc. taxes payable, 2003 5,000 $3,000 Increase $3,000

  46. 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) Gain on sale of machine ( 5,000) 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 Depreciation expense 40,000 Loss on retirement of bonds 3,000 Report entire outflow as a financing activity

  47. Cash Flow Adequacy • Measures company’s ability to meet principal and interest obligations • Creditors concerned with cash available to repay debts after company has replaced its long-term assets Cash Flow from Operating Activities - Capital Expenditures . Avg. Debt Maturing over Next Five Years

  48. Appendix Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows

  49. Indirect Method: Using a Work Sheet Enter account balances

  50. Indirect Method: Using a Work Sheet Record investing & financing activities