Upload
shonda-sims
View
218
Download
0
Embed Size (px)
Citation preview
Copyright © 2007 Prentice-Hall. All rights reserved 1
Statement of Cash Statement of Cash FlowsFlows
Statement of Cash Statement of Cash FlowsFlows
Chapter 13
Copyright © 2007 Prentice-Hall. All rights reserved 2
Objective 1Objective 1Objective 1Objective 1
Explain the purposes of the statement of cash flows and
describe its elements
Copyright © 2007 Prentice-Hall. All rights reserved 3
Purposes of the Purposes of the Statement of Cash FlowsStatement of Cash Flows
Purposes of the Purposes of the Statement of Cash FlowsStatement of Cash Flows• Predict future cash flows• Evaluate management decisions• Predict ability to pay debts and to
pay dividends
Copyright © 2007 Prentice-Hall. All rights reserved 4
Objective 2Objective 2Objective 2Objective 2
Distinguish between operating, investing, and
financing cash flows
Copyright © 2007 Prentice-Hall. All rights reserved 5
Types of Business Types of Business ActivitiesActivities
Types of Business Types of Business ActivitiesActivities
• Operating activities• Investing activities• Financing activities
Copyright © 2007 Prentice-Hall. All rights reserved 6
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
• Transactions that make up net income
• Also affect current assets and current liabilities on the balance sheet
Copyright © 2007 Prentice-Hall. All rights reserved 7
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
• Inflows – cash receipts from earning revenues– Sale of goods or
services– Interest revenue– Dividend revenue– Other revenues
• Outflows – cash paid from incurring expenses– Salaries and wages– Payments to
suppliers for inventory
– Taxes and fines– Interest paid to
lenders– Other expenses
Focus your attention on: income statement, and changes in current assets, current liabilities
Copyright © 2007 Prentice-Hall. All rights reserved 8
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
• Transactions that increase and decrease long-term assets
Copyright © 2007 Prentice-Hall. All rights reserved 9
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
• Inflows– Selling long-term
productive assets– Selling equity
investments– Collecting of
principal on loans– Other
• Outflows– Purchase long-term
productive assets– Purchase equity
investments– Purchase debt
investments– Make loans
Focus your attention on changes in:plant assets, long-term investments, other long-term assets
Copyright © 2007 Prentice-Hall. All rights reserved 10
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
• Transactions involving obtaining cash from the owners or returning resources to them
• Also involves obtaining cash from creditors and repaying the amount borrowed
Copyright © 2007 Prentice-Hall. All rights reserved 11
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
• Inflows– Issuing stock– Issuing bonds and
notes
• Outflows– Cash dividends or
withdrawals by owner
– Purchase treasury stock
– Repay cash loans
Focus your attention on changes in:long-term debt and stockholder’s equity
Copyright © 2007 Prentice-Hall. All rights reserved 12
Avery CorporationStatement of Cash Flows
Year Ended December 31, 2008
Cash flows from Operating activities:
List activities
Net Cash Provided (Used) by Operating Activities $ xxxx
Cash Flows from Investing Activities:
List activities
Net Cash Provided (Used) for Investing Activities xxxx
Cash Flows from Financing Activities:
List activities
Net Cash Provided (Used) by Financing Activities xxxx
Net Increase (Decrease) in Cash $ xxxx
Cash Balance, beginning xxxx
Cash Balance, ending $ xxxx
Copyright © 2007 Prentice-Hall. All rights reserved 13
Noncash Investing and Noncash Investing and FinancingFinancing
Noncash Investing and Noncash Investing and FinancingFinancing
• Investing and financing activities that do not affect cash– Acquire land by issuing a note payable– Retire debt by issuing stock– Convert preferred stock to common
stock
• Report in separate schedule or in a note
Copyright © 2007 Prentice-Hall. All rights reserved 14
Format of the StatementFormat of the Statementof Cash Flowsof Cash Flows
Format of the StatementFormat of the Statementof Cash Flowsof Cash Flows
Two acceptable methods for reporting cash flows from operating activities
1. Indirect method2. Direct method
The Investing and Financing sections of the statement will not differ
Copyright © 2007 Prentice-Hall. All rights reserved 15
Objective 3Objective 3Objective 3Objective 3
Prepare a statement of cash flows by the indirect method
Copyright © 2007 Prentice-Hall. All rights reserved 16
Indirect MethodIndirect MethodIndirect MethodIndirect MethodCash flows from operating activities:Net incomeAdjustments to reconcile net income to net cash
provided by operating activities:+ Depreciation / amortization/depletion 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 liabilitiesNet cash provided by operating activities
Copyright © 2007 Prentice-Hall. All rights reserved 17
Indirect MethodIndirect MethodIndirect MethodIndirect Method
Cash flows from investing activities:
+Sales of long-term assets
- Purchases of long-term assets
Net cash provided by (used for) investing activities
Copyright © 2007 Prentice-Hall. All rights reserved 18
Indirect MethodIndirect MethodIndirect MethodIndirect Method
Cash flows from financing activities:
+ Issuance of stock
+ Sale of treasury stock
- Purchase of treasury stock
+ Issuance of notes or bonds payable
- Payment of notes or bonds payable
- Payment of dividends
Net cash provided by (used for) financing activities
Copyright © 2007 Prentice-Hall. All rights reserved 19
Indirect MethodIndirect MethodIndirect MethodIndirect Method
Net increase (decrease) in cash during the year
+ Cash at December 31, 2007
= Cash at December 31, 2008
Copyright © 2007 Prentice-Hall. All rights reserved 20
E13-18E13-18E13-18E13-18Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation / amortization/depletion 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
Copyright © 2007 Prentice-Hall. All rights reserved 21
E13-18E13-18E13-18E13-18
Cash flows from operating activities:
Net income $38,000
Start with net income
Copyright © 2007 Prentice-Hall. All rights reserved 22
E13-18E13-18E13-18E13-18
Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation / amortization/depletion expense
29,000
Think of the journal entry to record depreciation. Cash is not affected. When accrual basis net income was computed, depreciation decreased net income, but did not decrease cash. This is why it is added
Copyright © 2007 Prentice-Hall. All rights reserved 23
E13-18E13-18E13-18E13-18Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation 29,000
+ Loss on sale of long-term assets
- Gain on sale of long-term assets
The cash received from the sale of a long-term asset is reported in the Investing Activities section. The gain or loss does not affect cash. There were no gains or losses reported on the income statement
Copyright © 2007 Prentice-Hall. All rights reserved 24
E13-18E13-18E13-18E13-18
Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation 29,000
- 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
Cash + Other Assets = Liabilities + Owner’s Equity
-15,000+15,000
15,000Now it is time to refer to the balance sheet. Think of the accounting equation in this way: Cash + Other Assets = Liabilities + Owner’s Equity.If you have a cash transaction and a noncash asset is increasing, then cash must be decreasing. If the noncash asset is decreasing, then cash is increasing. In this exercise accounts receivable decreased, which means the company collected more cash than the recorded revenues
Copyright © 2007 Prentice-Hall. All rights reserved 25
Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation 29,000
+ Decreases in accounts receivable 15,000
- Increases in current assets other than cash
+ Increases in current liabilities
- Decreases in current liabilities
Net cash provided by operating activities
E13-18E13-18E13-18E13-18
Cash + Other Assets = Liabilities + Owner’s Equity
+7,000-7,000
( 7,000)
Inventory increased. The company bought more inventory, which requires the use of cash
Copyright © 2007 Prentice-Hall. All rights reserved 26
Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation 29,000
+ Decreases in accounts receivable 15,000
- Increases in inventory (7,000)
+ Increases in current liabilities
- Decreases in current liabilities
Net cash provided by operating activities
E13-18E13-18E13-18E13-18
Cash + Other Assets = Liabilities + Owner’s Equity
+13,000+13,000
13,000If you have a cash transaction and a liability is increasing, then cash must be increasing. If the liability is decreasing, then cash is decreasing. In this exercise accounts payable increased. The company paid less than the expense recognized
Copyright © 2007 Prentice-Hall. All rights reserved 27
Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation 29,000
+ Decreases in accounts receivable 15,000
- Increases in inventory (7,000)
+ Increases in accounts payable 13,000
- Decreases in current liabilities
Net cash provided by operating activities
E13-18E13-18E13-18E13-18
Cash + Other Assets = Liabilities + Owner’s Equity
-8,000-8,000
(8,000)
Copyright © 2007 Prentice-Hall. All rights reserved 28
E13-18E13-18E13-18E13-18
Cash flows from operating activities:
Net income $38,000
Adjustments to reconcile net income to net cash provided by operating activities:
+ Depreciation 29,000
+ Decreases in accounts receivable 15,000
- Increases in inventory (7,000)
+ Increases in accounts payable 13,000
- Decreases in accrued liabilities (8,000)
Net cash provided by operating activities $80,000
Copyright © 2007 Prentice-Hall. All rights reserved 29
E13-18E13-18E13-18E13-18
Cash flows from investing activities:
+Sales of long-term assets
- Purchases of plant assets
Net cash provided by (used for) investing activities
(101,000)
Copyright © 2007 Prentice-Hall. All rights reserved 30
E13-18E13-18E13-18E13-18
Cash flows from investing activities:
+Sales of long-term assets
- Purchases of plant assets
(101,000)
Net cash provided by (used for) investing activities
$24,000
$(77,000)
Copyright © 2007 Prentice-Hall. All rights reserved 31
E13-18E13-18E13-18E13-18
Cash flows from financing activities:
+ Issuance of stock
+ Sale of treasury stock
- Purchase of treasury stock
+ Issuance of notes or bonds payable
- Payment of notes or bonds payable
- Payment of dividends
Net cash provided by (used for) financing activities
Copyright © 2007 Prentice-Hall. All rights reserved 32
E13-18E13-18E13-18E13-18
Cash flows from financing activities:
+ Issuance of stock $30,000
+ Sale of treasury stock
- Purchase of treasury stock
+ Issuance of notes or bonds payable
- Payment of notes or bonds payable
- Payment of dividends
Net cash provided by (used for) financing activities
Copyright © 2007 Prentice-Hall. All rights reserved 33
E13-18E13-18E13-18E13-18Cash flows from financing activities:
+ Issuance of stock $30,000
+ Sale of treasury stock
- Purchase of treasury stock
+ Issuance of notes or bonds payable
- Payment of notes payable (15,000)
- Payment of dividends
Net cash provided by (used for) financing activities
Copyright © 2007 Prentice-Hall. All rights reserved 34
E13-18E13-18E13-18E13-18
Cash flows from financing activities:
+ Issuance of stock $30,000
+ Sale of treasury stock
- Purchase of treasury stock
+ Issuance of notes or bonds payable
- Payment of notes payable (15,000)
- Payment of dividends (11,000)
Net cash provided by (used for) financing activities
Copyright © 2007 Prentice-Hall. All rights reserved 35
E13-18E13-18E13-18E13-18Cash flows from financing activities:
+ Issuance of stock $30,000
- Payment of notes payable (15,000)
- Payment of dividends (11,000)
Net cash provided by financing activities $4,000
Copyright © 2007 Prentice-Hall. All rights reserved 36
Seacrest Services, Inc.Statement of Cash Flows
Year Ended June 30, 2008Cash provided by operating activities $80,000Cash flows from investing activities: Acquired land ($101,000) Sold land 24,000 Net cash used for investing activities (77,000)Cash flows from financing activities:
Issued common stock $30,000Paid long-term note (15,000)Paid dividends (11,000)
Net cash provided by financing activities: 4,000Net increase in cash during the year $7,000Cash balance, June 30, 2007 20,000Cash balance, June 30, 2008 $27,000
Copyright © 2007 Prentice-Hall. All rights reserved 37
E13-18E13-18E13-18E13-18
Note:
Noncash investing and financing activities:
Acquired land by issuing a note payable $15,000
Copyright © 2007 Prentice-Hall. All rights reserved 38
E13-18 (2)E13-18 (2)E13-18 (2)E13-18 (2)
• Seacrest Services’ cash flows look fairly strong– Operations are the main source of cash– The company is investing in new plant
assets without having to borrow much– It was able to issue stock and pay off a
long-term note payable — both financing transactions
• All of these signs are favorable
Copyright © 2007 Prentice-Hall. All rights reserved 39
E13-19E13-19E13-19E13-19
Retained Earnings
45,000 Beg. Bal.
73,000 End. Bal.
62,000 Net income
107,000 Bal.?34,000
You start with $45,000. Net income increases retained earnings. If no dividends had been
declared, the retained earnings balance should have been $107,000. Since the balance is $73,000,
we declared dividends for the difference
Copyright © 2007 Prentice-Hall. All rights reserved 40
Exercise 13-19Exercise 13-19Exercise 13-19Exercise 13-19Plant Assets
103,000
107,000
16,000 Depreciation 27,000
?114,000
CashLoss on sale of assets 1,000 Plant assets (net) 7,000
6,000
7,000
You start with $103,000, depreciation reduces the carrying value of the asset. Purchasing new assets increases the carrying value. If no assets were sold, the balance should have been $114,000. Since the balance is $107,000, the company sold $7,000 of
assetsRemember the journal entry that was prepared when
you sold an asset? In this case, you know the amounts for two of the accounts. The debit to cash
must be $6,000
Copyright © 2007 Prentice-Hall. All rights reserved 41
Objective 4Objective 4Objective 4Objective 4
Prepare a statement of cash flows by the direct method
Copyright © 2007 Prentice-Hall. All rights reserved 42
Direct MethodDirect MethodDirect MethodDirect MethodCash flows from operating activities:Receipts: Collections from customers Interest received Dividends received Total cash receiptsPayments: To suppliers To employees For interest For income tax Total cash paymentsNet cash provided by operating activities
Copyright © 2007 Prentice-Hall. All rights reserved 43
E13-26E13-26E13-26E13-26
Sales – increase in accounts receivable$24,623 - 183 = $24,440
Receipts From Customers
Sales Revenue+ Decrease in Accounts Receivable
- Increase in Accounts Receivable
If accounts receivable is increasing, then our customers are
charging more and paying less
Copyright © 2007 Prentice-Hall. All rights reserved 44
E13-26E13-26E13-26E13-26Payments to Suppliers
Cost of Goods Sold
+ Increase in Inventory
+ Decrease in Accounts Payable
- Decrease in Inventory
- Increase in Accounts Payable
Cost of goods sold + increase in inventory - increase in accounts payable18,048 + 651 – 183 = $18,516
If inventory increases, you’re going to have to
pay cash for it
If accounts payable increases, you are
charging more, paying less
Copyright © 2007 Prentice-Hall. All rights reserved 45
E13-26E13-26E13-26E13-26Payments for Operating Expenses
Operating Expense
+ Increase in Prepaids
+ Decrease in Accrued Liabilities
- Decrease in Prepaids
- Increase in Accrued Liabilities
Operating expenses – increase in accrued liabilities$4,883 – 90 = $4,793
If accrued liabilities increase, you are charging
more, paying less
Copyright © 2007 Prentice-Hall. All rights reserved 46
E13-26E13-26E13-26E13-26
Acquisitions of property and equipment:
Property & Equipment
Beg bal 3,428
End bal 4,345
1,186
269 Depreciation
3,159
You start with $3,428, but depreciation reduces the carrying value of the asset. If nothing else had happened this period, the balance should have
been $3,159. Since the ending balance is $4,345, we must have bought additional assets
Copyright © 2007 Prentice-Hall. All rights reserved 47
E13-26E13-26E13-26E13-26
Borrowing:
Long-term liabilitiesBeg bal 464
End bal 478
14
Copyright © 2007 Prentice-Hall. All rights reserved 48
E13-26E13-26E13-26E13-26
Proceeds from issuance of common stock:
Common stockBeg bal 446
End bal 676
230
Copyright © 2007 Prentice-Hall. All rights reserved 49
E13-26E13-26E13-26E13-26
Payment of cash dividends:
Retained earningsBeg bal 3,788
End bal 4,531
Net inc. 886
1434,674
You start with $3,788. Net income increases retained earnings. If no dividends had been
declared, the retained earnings balance should have been $4,674. Since the balance is $4,531, we
declared dividends for the difference