Cash Flow December

8/12/2019 Cash Flow December

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The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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13-2 STATEMENT OF CASHFLOWS

Some investors believe that "cash isking".

The statement of cash flows is one of themain financial statements.

The other financial statements are the

balance sheet, income statement, and

statement of stockholders' equity.


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13-3

Cash flow versus Income Statement

The cash flow statement identifies the cash thatis flowing in and out of the company.

The difference of Inflow and Outflow of

the Cash is indentified

Because the income statement is preparedunder the accrual basis of accounting, therevenues reported may not have been collected.

Similarly, the expenses reported on the incomestatement might not have been paid


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13-4

Provides information about the cash receiptsand cash payments of a business entity

during the accounting period.

Helps investors with questions about thecompanys:

Ability to generate positive cash flows.

Ability to meet its obligations and to paydividends.

Need for external financing.

Investing and financing transactions for theperiod.

Purpose of the Statement of CashFlows


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13-5

Cash flows from operating activities

+ Cash flows from investing activities

+ Cash flows from financing activities

Net change in cash during period

+ Beginning cash balance

= Ending cash balance

Format and structure of the cash flowstatement


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13-6

The Statement of Cash Flows mustinclude the following three sections:

Cash Flows from OperatingActivitiesCash Flows from InvestingActivities

Cash Flows from FinancingActivities

Classification of Cash Flows


7/61 The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

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13-7

Outflowsto:

PAYMENTS to: Suppliers of merchandise

and services.

Employees.

Lenders for interest. Governments for taxes.

Inflows from: Sales to customers.

Interest and dividends

received.

CashFlows

fromOperatingActivities

+

_

OperatingActivities

Cash f lows from operating

activitiesare cash flows from

transactions that affect netincome, Current Assets and

Current Liabilities.



Slide

13-8 Cash Flows from InvestingActivities

Cash flows from investing activities are cash flows fromtransactions that affect the investments in noncurrent assets

of the company. Cash inflows from investing activities

normally arise from selling fixed assets, investments, andintangible assets.

Cashoutflows from investing activities normally include

payments to acquire fixed assets, investments, and

intangible assets.

1



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13-9

CashFlowsfrom

InvestingActivities

+

_

Inflowsfrom: Selling investments and plant

assets.

Collecting of principal on loans.

Outflowsto:

Payments to acquireinvestments and plant assets.

Purchase debt or equityinvestments.

Make loans.

Investing Activities



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13-10

Cash f lows from financingactivities

Cash f lows from f inancing act iv i t iesarecash flows from transactions that affect the equityand debt of the company.

Cash in f lowsfrom financing activities normallyarise from issuing debt or equity securities.

Cashout f lowsfrom financing activities normallyinclude paying cash dividends, repaying debt, andacquiring treasury stock.



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13-11

+

_

Inflowsfrom: long-term borrowing.

Owners (for example, from

issuing stock).

Outflowsto: Repayments of borrowed

funds.

Payment of dividends.

Purchase treasury stock.

Financing Activities

CashFlowsfrom

FinancingActivities

Related to the externalfinancin



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13-12



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13-13

Identify whether each of the following would be reported as anoperating, investing, or financing activity in the statement ofcash flows.

a. Purchase of patent d. Cash sale

b. Payment of cash dividend e. Purchase of treasury stock

c. Disposal of equipment f. Payment of wages expense

i

f

i

1Quiz TimeClassifying Cash Flows

o

f

o



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13-14

CashEquivalents

CashCurrency

Short-term, highly liquid investments. Readily convertible into cash.

So near maturity that market value is unaffected byinterest rate changes.

Cash and Cash Equivalents


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13-15

Company Name

Statement of Cash Flows

Period Covered

Cash flows from operating activities:

[List of individual inflows and outflows]

Net cash provided (used) by operating activities $ #####

The operatingcash flows section

can be preparedusing either thedirect method or

the indirectmethod.

Lets look at

the In-DirectMethod for

preparing theStatement ofCash Flows.


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13-16 Steps in Preparation

The statement of cash flows is prepared using thefollowing information:

1. Comparative balance sheets

The changes between the beginning and endingbalance sheets are analyzed to determine thesources of changes in cash flows.

2. Current income statementThe current income statement provides theinformation required to determine the sources anduses of cash during the accounting period.


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13-17

Comparative BalanceSheet

Shiner Corporation

Assets Dec 31, 2012 Dec 31, 2011

Cash $54,000 $37,000

AccountsReceivable

$18,000 $28,000

Inventories $54,000 $0

PrepaidExpenses

$14,000 $6,000

Land $45,000 $70,000

Change

17000

-10,000

54,000

8000

-25,000

Cash

Inflow

Inflow

Cashoutflow

outflow

inflow


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13-18

Prepare a statement of

cash flows, using theindirect method.

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13-19

Companies favor the indirect

method for two reasons:

1. Easier and less costly toprepare.

2. Focuses on differences

between net income and net

cash flow from operating

activities.

Usefulness and Format

SO 3 Explain the impact of the product life cycle on a companys cash flows.

Indirect and Direct Methods

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13-20

SO 4 Prepare a statement of cash f lows us ing the indirect method.

Preparing the Statement of Cash Flows

IllustrationIndirect Method Illustration 12-5

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13-21



Illustration 12-5

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13-22

SO 4.


Illustration 12-5

Additional information for 2012:

1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment.

2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulateddepreciation $1,000) for $4,000 cash.

3. Issued $110,000 of long-term bonds in direct exchange for land.

4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was alsopurchased for cash.

5. Issued common stock for $20,000 cash.

6. The company declared and paid a $29,000 cash dividend.

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13-23

Step 1: Operating Activities

Determine net cash provided/used by operating activities by

converting net income from accrual basis to cash basis.


Preparation of the Statement of Cash FlowsIndirect Method

Common adjustments to Net Income (Loss):

Add back non-cash expenses (depreciation, amortization,

or depletion expense).

Deduct gains and add losses.

Changes in noncash current assets and current liabilities.

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13-24

Depreciation Expense

Although depreciation expense reduces net income, it does

not reduce cash. The company must add it back to net

income.



Net income 145,000$

Adjustments :

Depreciation expense 9,000

Net cash provided by operating activities 154,000$

Illustration 12-7


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13-25

Which is an example of a cash flow from an operating

activity?

a. Payment of cash to lenders for interest.

b. Receipt of cash from the sale of capital stock.

c. Payment of cash dividends to the companys

stockholders.

d. Dividend Payable

e. None of the above.

Question



Dividend Payables are not

considered in Cash Flow

Analysis

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13-26

Loss on Sale of Equipment

Companies report as a source of cash in the investing

activities section the actual amount of cash received from

the sale. For the sake of operating section, reverse

treatments are made:

Any losson sale is addedto net income in the

operating section (non-cash expense).

Any gainon sale is deductedfrom net income in the

operating section.


Operating Activities

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13-27




Net income 145,000$

Adjustments to reconcile net income to net cashprovided by operating activities:


Loss on sale of equipment 3,000


Illustration 12-8

Loss on Sale of Equipment

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13-28

Adjustments to Net IncomeIndirect Method

Omni Corporations accumulated depreciation

increased by $12,000, while patents decreased by$3,400 between balance sheet dates. There were

no purchases or sales of depreciable or intangibleassets during the year. In addition, the incomestatement showed a gain of $4,100 from sale ofland. Reconcile a net income of $50,000 to net

cash flow from operating activities.

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13-29

Net income. $50,000Adjustments to reconcile net income to net

cash flow from operating activities:Depreciation. 12,000Amortization of patents. 3,400Gain on sale of land... (4,100)

Net cash flow from operating activities.. $61,300

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13-30

Changes to Noncash Current Asset Accounts

When the Accounts Receivable balancedecreases,



Company adds to net income the amount of the decrease in

accounts receivable because the difference has been received

in form of cash.

Accounts Receivable

1/1/012 Balance 30,000

A/R Received During the year 10,000

12/31/12 Balance 20,000

Illustration 12-9

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13-31




Net income 145,000$




Decrease in accounts receivable 10,000


Illustration 12-10


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13-32

When the Inventory balanceincreases, cash has been paid to

purchase the inventory.




Inventory

1/1/12 Balance 10,000

Purchases 5,000

12/31/12 Balance 15,000

The company deducts from net income this inventory increase.

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13-33




Net income 145,000$





Increase in inventory (5,000)



Illustration 12-10


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13-35




Net income 145,000$






Increase in prepaid expenses (4,000)


Changes to Noncash Current Asset AccountsIllustration 12-10

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13-36

Changes to Noncash Current Liability Accounts

When Accounts Payable increases, the company received more

in goods than it actually paid for. The increase is addedto net

income to determine net cash provided by operating activities.

When Income Tax Payable decreases, the income tax expense

reported on the income statement was less than the amount of

taxes paid during the period. The decrease is subtractedfrom

net income to determine net cash provided by operating activities.



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13-37



Net income 145,000$

Adjustments to reconcile net income to net cash

provided by operating activities:





Increase in prepaid expenses (4,000)

Increase in accounts payable 16,000

Decrease in income taxes payable (2,000)


Illustration 12-11

Changes to Noncash Current Liability Accounts

SO 4

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13-38

Changes in Current Operating Assets and LiabilitiesIndirect Method

Victor Corporations comparative balance sheet for current

assets and current liabilities was as follows:

Dec. 31, 2011 Dec. 31, 2010

Accounts receivable $ 6,500 $ 4,900Inventory 12,300 15,000Accounts payable 4,800 5,200Dividends payable 5,000 4,000

Adjust net income of $70,000 for changes in operatingassets and liabilities to arrive at cash flows fromoperating activities.

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13-39

Net income.. $70,000Adjustments to reconcile net income to netcash flow from operating activities:

Increase in accounts receivable. (1,600)

Decrease in inventory... 2,700Decrease in accounts payable (400)Net cash flow from operating activities ..... $70,700

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13-40

Cash Flows from Operating ActivitiesIndirect Method

2

Omicron, Inc. reported the following data:

Prepare the cash flows for operating activitiessection of the statement of cash flows using the

indirect method.

Net income $120,000Depreciation expense 12,000Loss on disposal of equipment 15,000

Increase in Accounts receivable 5,000Decrease in Accounts payable (2,000)

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13-41

2

Cash flows from operating activities:Net income.. $120,000Adjustments to reconcile net incometo net cash flow from operating activities:

Depreciation.. 12,000

Loss from disposal of equipment... 15,000Changes in current operating assets

and liabilities:Increase in accounts receivable.. (5,000)Decrease in accounts payable.. (2,000)

Net cash flow from operating activities... $140,000

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13-42

16 53

Prepare a statement of

cash flows, using thedirect method.

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13-43

The final amount reported in theCash Flows from Operating Activitiessection will be the same whether the

direct or indirect approach is used.The methods differin how the dataare obtained, analyzed, and

reported.Direct method starts with CashSales.

The Direct Method3

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13-44

Cash Received from Customers

Rundell, Inc. reports sales of $350,000for

2010. To determine the cash received

from customers, sales are adjusted by any

increase or decrease in accounts

receivable.

3

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13 45


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13-45

Cash Received from CustomersDirect Method

Sales reported on the income statement were$350,000. The accounts receivable balance declined$8,000 over the year. Determine the amount of cashreceived from customers.

Example

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Sales$350,000Add decrease in accounts receivable 8,000

Cash received from customers$358,000

3

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13-46

Cash Payments for

Merchandise

Rundell, Inc. reports purchase of

merchandise of $790,000. To determine the

cash payment for merchandise, the $790,000

is adjusted for any increase or decrease in

inventories and accounts payable (assuming

the accounts payable are owed tomerchandise suppliers).

3

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13-47 Di t M th d


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13-47

Step 1

Step 2

Purchases = COGS

{

+ Increasein inventory

- Decreasein inventory

Cash paid for

merchandise= Purchases { + Decreasein A/P- Increasein A/P

Direct MethodCash Paid for Merchandise

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Cash Payment for MerchandiseDirect Method

Purchase of Merchandise reported on the incomestatement was $145,000. The accounts payable balanceincreased $4,000, and the inventory balance increased by$9,000 over the year. Determine the amount of cash paidfor merchandise.

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Cost of merchandise sold $145,000Add increase in inventory 9,000

Deduct increase in accounts payable.. (4,000)Cash paid for merchandise. $150,000

3

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13 49

Cash Payments for OperatingExpenses

Rundell, Inc. reports total operating expenses of

$203,000, which includes depreciation expense of

$7,000. To determine cash payments for operatingexpenses, the other operating expenses (excluding

depreciation) of $196,000 are adjusted for any

increase or decrease in accrued expenses payable.

3

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13 50

$196,000 = $193,800

$(2,200)

$0

3

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13 51

Interest Expense

Rundell, Inc. reports interest

expense of 8,000. To determine

the cash payments for interest,the $8,000 is adjusted for any

increases or decreases in interest

payable.

3

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13 52 3

$8,000 = $8,000

$0

$0

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Cash Payments for Income

Taxes

Rundell, Inc. reports income tax

expense of $83,000. To determine

the cash payments for income

taxes, the $83,000 is adjusted for

any increases or decreases in

income taxes payable.

3

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3

$83,000 = $83,500

$0

$500

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Statement of Cash FlowsDirect Method

(continued)

3

Exhibit 7


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Cash Budgets are used by management to plan andforecast future cash flows.

Force management to coordinate activities.

Provide managers with advance notice of available resources.

Provide targets useful in evaluating performance.

Provide advance warnings of potential cash shortages.

A Cash Budget can be used to:

Managing Cash Flows

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Increase collection of accountsreceivables.

Keep inventory low.

Delay payment of liabilities. Plan timing of major expenditures.

Invest idle cash.

Managing Cash Flows

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13-59

Cash Budgeting


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Cash Budgeting

Cash Budget

May June July August

Beginning cash balance 27,500$ 15,000$ -$ -$

Add: Cash receipts 3,500

Total available cash 31,000$

Less: Cash disbursements 16,000

Excess (deficiency) of

available cash over cash

disbursements 15,000$

Financing needed

Financing repayments -

Ending cash balance 15,000$

The ending cash balance of one month becomes thebeginning cash balance of the next month.

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Cash Budgeting


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Cash Budgeting

Cash Budget

May June July August

Beginning cash balance 27,500$ 15,000$ 10,000$ 10,000$

Add: Cash receipts 3,500 2,000 9,000 14,000

Total available cash 31,000$ 17,000$ 19,000$ 24,000$

Less: Cash disbursements 16,000 18,000 6,000 8,000

Excess (deficiency) of

available cash over cash

disbursements 15,000$ (1,000)$ 13,000$ 16,000$

Financing needed 11,000 - -

Financing repayments - - 3,000 6,000

Ending cash balance 15,000$ 10,000$ 10,000$ 10,000$

Financing is needed in June because the companymust maintain a minimum cash balance of $10,000.

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End of Chapter 13

Chester, ol

buddy, I wonder if

you could helpme with a little

cash flowproblem Im

having?

Documents

Cash Flow December