Chapter 11 Notes

Chapter 11

The Statement of Cash Flows

Learning Objective OneIdentify the ________ of the statement of cash flows

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Timing of the Financial Statements

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12-31-10 (a point in

time)

Balance

Sheet

For the year ended 12-31-11(a period of time)

Income Statement

Balance Sheet

Statement of Changes in

Equity Statement of Cash Flows

12-31-11 (a point in

time)

Balance SheetAccrual

Focus on cash

_______________________

Purposes of Cash Flow Statements•________future cash flows

▫Past payments and receipts predict future payments and receipts

•________management decisions▫Running a business requires cash, so

information on operations, investments, and financing indicates management performance

•Show _____________________________▫Income is measured under __________, so it

may not match with ____. Important to understand the cash position


Learning Objective TwoDistinguish among operating, investing and financing cash flows

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Cash Flow Categories

_______

• Create revenue, expenses, gains and losses

_______

• Relate to non-current assets• PPE• Investments

_______

• Obtain cash from and pay cash to investors and creditors 6Copyright ©2014 Pearson Education.

Cash Flow Categories


Collections from customers

Receipts of interests & dividendsSale of short-term investments

Other operating receipts

Sale of PPE

Sale of long-term investments

Collections of loans from others

Issuance of shares

Sale of treasury shares

Proceeds from loans & borrowings

Payment to suppliers

Payments to employees

Payments of interest & income taxPurchase of short-term investments

Acquisition of PPE

Purchase of long-term investmentsMaking loans to others

Repurchase of shares

Purchase of treasury shares

Payment of debt principal

Other operating payments

Payment of dividend

Operating

Activities

Investing Activities

Financing

Activities

Increases Cash Decreases Cash______________________

Exercise 11-16A


A Sale of long-term investmentB Issuance of long-term note payable to borrow

cashC Increase in prepaid expensesD Payment of cash dividendE Loss on sale of equipment (remove from O)F Decrease in merchandise inventoryG Acquisition of equipment by issuance of a note

payableH Increase in accounts payableI Amortization of intangible assetsJ Net income

Indicate whether each of the following items relates to operating (O), investing (I), financing (F), noncash investing and financing (NIF), or a transaction that is not reported on the statement of cash flows (N). Indicate whether each item increases (+) or decreases (–) cash. The indirect method is used for operating activities.

Exercise 11-16A


K Payment of long-term debtL Accrual of salary expenseM Cash sale of landN Purchase of long-term investmentO Acquisition of building by cash paymentP Purchase of treasury sharesQ Issuance of share capital for cashR Decrease in accrued liabilitiesS Depreciation of equipment (add back non-cash

exp)

Relationship to Balance Sheet


Current assets Current liabilities

Long-term assets

Long-term liabilities

Owners’ equity

________cash flows

________cash flows

________cash flows________

cash flows

Formats for Cash Flow Statement related to _____________________


• Reconciles from __ ______ to cash provided by operating activities

_____

• Reports all cash receipts and cash payments from operating activities

_____

Most companies use the Indirect Method

The IASB suggests the Direct Method because it better predicts future cash flow

Learning Objective ThreePrepare cash flows from operating activities by the __________


Operating Activities


Net Income

Depreciation, Depletion & Amortization

Gains on sales of long-term

assets

Losses on sales of long-term

assets

Increases in current

assets

Decreases in

current liabilities

Decreases in

current assets

Increases in current liabilities

Under the indirect method, operating cash flows starts with ________! We then adjust for _________items


Indirect Cash Flows Steps• Step 1

▫ Start with ________(or pretax income) from the income statement.

• Step 2▫ From the income statement, add back ________, depletion, and

amortization expense, and remove any gains (or add back losses) on the sale of long-term assets.

• Step 3▫ Examine the balance sheet, identify changes in “______ ______”

(current assets and current liabilities), except for cash and cash equivalents.

• Step 4▫ Deduct increases in current assets other than cash and add

decreases in current assets other than cash.• Step 5

▫ Deduct decreases in current liabilities and add increases in current liabilities.

Cash Flow Template: Operating


Cash Flows From Operating ActivitiesNet incomeAdjustments to reconcile net income to net cash provided by operating activities:+ Depreciation/depletion/amortization expense+ Loss on sale of long-term assets- Gain on sale of long-term assets- Increases in current assets other than cash+ Decreases in current assets other than cash+ Increases in current liabilities- Decreases in current liabilities= Net cash provided by operating activities

Understanding Reconciliation of Net Income to CFO


•Depreciation, Depletion, and Amortization Expenses▫Depreciation ________________________

______. Add-back cancels the earlier deduction

•Gains and Losses on Sale of Long-term Assets▫These are included in ___________, not

operating

Learning Objective FourPrepare cash flows from investing activities


Cash Flow Template: Investing


Cash Flows from Investing Activities+ Sales of long-term assets- Purchases of long-term assets+ Collections of notes receivable- Loans to others= Net cash provided by (used for) investing activities

Long-term assets include PPE, Investments, etc.

Computing Purchases and Sales of PPE


PPE, NetBeginning balance

+

Acquisitions

- Depreciation

- Book value of assets sold

= Ending Balance

Sale proceeds

= Book value of assets sold

+ Gain - Loss


PPE, Net

Beginning balance

Acquisitions

Depreciation

Book value of assets sold

Ending balance

Computing Purchases and Sales of Investments


InvestmentsBeginning balance

+

Purchases - Book value of investments sold

= Ending Balance

InvestmentsBeginning balance

Purchases

Book value of investments sold

Ending balance

Loans and Collections


Notes ReceivableBeginning balance

+

New Loans made

- Collections = Ending Balance

Notes ReceivableBeginning balance

New loans made

Collections

Ending balance

Learning Objective FivePrepare cash flows from financing activities


Cash Flow Template: Financing


Cash Flows from Financing Activities+ Issuance of shares- Purchase of treasury shares

+ Borrowing- Payment of notes and bonds payable- *Payment of dividends

Net cash provided by (used in) financing activities

Financing Cash Flows mainly come from _________________________

Computing Issuance and Payments of Long-Term Debt


Long-Term Debt (Notes payable, Bonds payable)Beginning balance

+

Issuance of new debt

- Payment of debt

=Ending Balance

Long-Term DebtBeginning balance

Payments of debtIssuance of new debt (borrowing)Ending balance

Computing Issuance of Shares and Purchases of Treasury Shares


Share CapitalBeginning balance

+ Issuance of new shares

= Ending Balance

Share CapitalBeginning balance

Issuance of new shares

Ending balance

Treasury Share (____________________)Beginning balance

+

Purchase of treasury shares

= Ending Balance

Treasury ShareBeginning balance

Ending balance

Purchase of treasury share

Computing Dividends


Retained EarningsBeginning balance

+

Net income - Dividends declared

=Ending Balance

Retained EarningsBeginning balanceDividends declaredNet income

Ending balance

Noncash Investing and Financing Activities


Noncash investing and financing activities: Acquisition of building by issuing shares $$$$ Acquisition of land by issuing note payable $$$$ Payment of long-term debt by issuing shares $$$$Total noncash investing and financing activities $$$$$

Exercise 11-20A•Prepare a cash flow statement using the

indirect method with the following information:

• Net income=$68,900• Dep Exp = $26,000• Acq $212,000 PPE

▫160,000 cash▫52,000 note

• Sale of Land $27,000• Issue Shares $80,000• Pay debt $17,000• Pay dividends $13,000


December 31,2010 2009

Current assets: Cash $30,000 $10,800 Accounts receivable 42,000 59,000 Inventory 30,000 91,000 Prepaid expenses 9,400 8,700Current liabilities: Accounts payable $38,000 $27,000 Accrued liabilities 18,000 99,000

Exercise 11-20A


December 31,2010 2009

Current assets: Change Cash $30,000 $10,800 Accounts receivable 42,000 59,000 Inventory 30,000 91,000 Prepaid expenses 9,400 8,700Current liabilities: Accounts payable $38,000 $27,000 Accrued liabilities 18,000 99,000

Exercise 11-20A


Cash Flows From Operating ActivitiesNet incomeAdjustments to reconcile net income to net cash provided by operating activities:+ Depreciation expense+ Decrease in accounts receivable+ Decrease in inventory- Increase in prepaid expenses+ Increase in accounts payable- Decrease in accrued liabilities= Net cash provided by operating activities

Exercise 11-20A


Cash Flows from Investing Activities+ Sales of land- Purchases of PPE= Net cash used for investing activitiesCash Flows from Financing Activities+ Issuance of share capital- Payment of note payable- Payment of dividends= Net cash provided by financing activities

Exercise 11-20A (combine O, I, and F)


Cash Flows from Investing Activities+ Sales of land- Purchases of PPE= Net cash used for investing activitiesCash Flows from Financing Activities+ Issuance of share capital- Payment of note payable- Payment of dividends= Net cash provided by financing activities

Net increase in cashCash balance, December 31, 2009Cash balance, December 31, 2010

Net cash provided by operating activities

Learning Objective SixPrepare cash flows from operating activities using the direct method


The Direct Method•Preferred by the International Accounting

Standards Board▫Provides ______________about the sources

and uses of cash•Used by very few companies

▫Takes more computations


Operating Cash Flows: Direct Method•________:

▫Collections from customers▫Interest and dividends

•________:▫To suppliers▫To employees▫For interest and income taxes


Computing Operating Cash Flows


Receipts

Income Statement Account Balance Sheet Account

From Customers Sales revenue + Decrease in Accounts Receivable- Increase in Accounts Receivable

Of interest Interest revenue + Decrease in Interest Receivable- Increase in Interest Receivable



Payments


To suppliers

Cost of goods sold

+ Increase in Inventory

+ Decrease in Accounts Payable

- Decrease in Inventory

- Increase in Accounts Payable

Operating expenses

+ Increase in Prepaids

+ Decrease in Accrued Liabilities

- Decrease in Prepaids

- Increase in Accrued Liabilities

To employees

Salary expense

+ Decrease in Salary Payable- Increase in Salary Payable



Payments


For interest

Interest expense

+ Decrease in Interest Payable- Increase in Interest Payable

For income taxes

Income tax expense

+ Decrease in Income Tax Payable- Increase in Income Tax Payable

Learning Objective SevenAnalyze cash flows


Free Cash Flow


Free Cash Flow

Net Cash Provided by Operating Activities

Cash Payments Earmarked for Investments in Property, Plant and

Equipment (PPE)

Cash realization ratio


Cash realization

rate

Net Cash Provided by Operating Activities

Net Income

÷

How much of net profits actually generates cash?

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Chapter 11 Notes