Upload
lyliem
View
214
Download
1
Embed Size (px)
Citation preview
“How Well Am I Doing?”Statement of Cash Flows
Chapter 15
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Purpose of the Statement of Cash Flows
Are cash flows sufficient to
support ongoing operations? Can we meet
our obligations to creditors?
Can we pay dividends?
Why is there a difference
between net income and net
cash flow?
Will the company have to borrow money to make
needed investments?
15-2
Cash
The term cash on the statement of cash flows refers broadly to both currency and cash equivalents.
Cash
Treasury Bills
Money Market Funds
Commercial Paper
Currency and Bank Accounts
15-3
Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts
SourcesNet Income AlwaysNet LossChanges in noncash assets DecreasesChanges in liabilities* IncreasesChanges in capital stock accounts IncreasesDividends paid to stockholders
Total sources - Total uses = Net cash flow
* Contra asset accounts, such as the Accumulated Depreciation and Amortization account, follow the rules for liabilities.
Decreases
DecreasesAlways
Uses
AlwaysIncreases
15-4
Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts
Example: Inventory is purchased on credit from
a supplier.
It is implied that cash was used to acquire the
inventory.
Increases in noncash assetnoncash assetaccounts imply usesuses of cash.
15-5
Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts
It is implied that an increase in a payable has the effect
of increasing cash available for other uses.
Increases in liabilityliability accounts imply sourcessources of cash.
Example: Inventory is purchased on credit from
a supplier.
15-6
Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts
Decreases in noncash assetsnoncash assetsaccounts imply sourcessources of cash.
Example: Accounts receivable decreases when a customer
pays their bill.
When the customer pays the bill, the company’s cash
increases.
15-7
Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts
Decreases in liabilityliability accounts imply usesuses of cash.
When the payment is made, cash decreases.
Example: A company pays a note payable held
by a creditor.
15-8
The Full-Fledged Statement of Cash Flows: Operating Activities
Operating activities are those activities that enter into the determination of
net income.
1. Transactions affecting current
assets
3. Changes in noncurrent
balance sheet accounts that
directly affect net income
2. Transactions affecting current
liabilities
15-9
The Full-Fledged Statement of Cash Flows: Investing Activities
Investing activities relate to transactions involving the acquiring or disposing of
noncurrent assets.
1. Acquiring or selling property,
plant and equipment
3. Lending money to another entity
and subsequently collecting on the
loan2. Acquiring or selling securities
15-10
Financing activities relate to transactions involving borrowing
from creditors or repaying creditors and engaging in
transactions with the company’s owners.
1. Issuing stock and purchasing treasury stock
3. Payment of dividends (note that interest on
debt is classified as an operating
activity)2. Issuing long-term debt and
repayment of debt.
The Full-Fledged Statement of Cash Flows: Financing Activities
15-11
The Full-Fledged Statement of Cash Flows: An Overview
Operating Activities:Net incomeChanges in current assetsChanges in noncurrent assets that affect net income (e.g., depreciation)Changes in current liabilities (except for debts to lenders and dividends payable)Changes in noncurrent liabilities that affect net income
Investing Activities:Changes in noncurrent assets that are not included in net income
Financing Activities:Changes in the current liabilities that are debts to lenders rather than obligations to suppliers, employees, or the governmentChanges in noncurrent liabilities that are not included in net incomeChanges in capital stock accountsDividends
15-12
The Full-Fledged Statement of Cash Flows: An Overview
Operating Activities
Investing Activities
Financing Activities
Reconciliation of the beginning cash balance
with the ending cash balance
Noncash Investing and Financing
Activities15-13
Operating Activities
Sources of cash are added to net income and uses of cash are deducted from net income.
Impact on Net Cash Provided by Operating ActivitiesSources of Cash
(Add to Net Income)Uses of Cash
(Subtract from Net Income)Current
Noncash AssetsCurrent
Liabilities
Decreases
Increases
Increases
Decreases
15-14
Other Issues: Direct Method or Indirect Method?Two Formats for Reporting Operating Activities
Reports the cash effects of each operating
activity
Starts with accrual net income and converts to cash basis
Direct Method Indirect Method
No matter which format is used, the same amount of net cash provided by operating activities is generated.
15-15
A Full-Fledged Statement of Cash Flows: An Example
Let’s revisit the comparative
balance sheet account balances for Ed’s Pizza Hut.
Ed's Pizza HutComparative Balance Sheet Account Balances
3/31/2008 3/31/2007 ChangeDR (CR) DR (CR) Incr. (Decr.)
Cash 71,000$ 90,000$ (19,000)$ Accounts Receivable 23,000 40,000 (17,000) Inventory 322,000 300,000 22,000 Land 68,000 100,000 (32,000) Equipment 112,000 84,000 28,000 Accumulated Depr. (45,000) (39,000) 6,000 Accounts Payable (38,000) (27,000) 11,000 Salaries Payable (9,000) (14,000) (5,000) Note Payable - Joe Doe - (50,000) (50,000) Common Stock (500,000) (450,000) 50,000 Retained Earnings (4,000) (34,000) (30,000)
-$ -$
15-16
A Full-Fledged Statement of Cash Flows: An Example
note due to Joe Doe.
There was a net loss for the year of $27,000. Depreciation charges for the year were $6,000. During the year, Ed sold land originally costing
$32,000 for $32,000. During the year, Ed purchased equipment for
$28,000. During the year, Ed paid dividends of $3,000 to
the stockholders. Ed issued $50,000 of common stock to settle the
note due to Joe Doe.
Let’s also refresh our memory regarding the following additional information.
15-17
Operating ActivitiesNet Loss (27,000)$ Add: Decrease in A/R 17,000
Increase in A/P 11,000 Increase in Depr. Charges 6,000
Less: Increase in Inventory (22,000) Decrease in Salaries Payable (5,000)
Net Cash Provided by Operating Activities (20,000) Investing Activities
Proceeds from sale of Land 32,000 Purchase of equipment (28,000)
Net Cash Provided by Investing Activities 4,000 Financing Activities
Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending 71,000
Ed's Pizza HutStatement of Cash Flows
For the Period Ending 3/31/2008 In addition, on the face of the
statement or in a supplemental
schedule, disclosethe issuance of $50,000 of stock to a creditor, a
noncash financing activity.
Example – Indirect Method
15-18
Free Cash Flows
Free Cash Flow =Net Cash Provided by Operating Activities - Capital
Expenditures - Dividends
Free cash flow measures a company’s ability to fund its capital expenditures and dividends from
its net cash provided by operating activities.
15-19
Computing Net Cash Provided by Operating Activities
The direct method computes net cash provided by operating activities by reconstructing the
income statement on a cash basis from top to bottom.
Net cash provided by operating activities under the direct method will
always agree with the amount computed using the indirect method.
15-20
Similarities and Differences in Handling DataAdd (+) or
Deduct (-) to Adjust to a Cash Basis
Sales revenue (as reported)
Increases in accounts receivable -Decreases in accounts receivable +
Cost of goods sold (as reported)
Increase in merchandise inventory +Decrease in merchandise inventory -Increase in accounts payable -Decrease in accounts payable +
Operating expenses (as reported)
Increase in prepaid expenses +Decrease in prepaid expenses -Increase in accrued liabilities -Decrease in accrued liabilities +Period's depreciation, depletion and amortization charges
-
Income tax expense (as reported)
Increase in accrued taxes payable -Decrease in accrued taxes payable +Increase in deferred income taxes -Decrease in deferred income taxes +
Adjustments to a cash basis:
Revenue or Expense Item
Adjustments to a cash basis:
Adjustments to a cash basis:
Adjustments to a cash basis:
Adjustments for accounts that affect revenue are the
same in the direct and indirect methods.
Adjustments for accounts that affect expenses are
handled in opposite ways for the direct and indirect
methods.
15-21
The Direct Method: An Example
Operating ActivitiesCash received from customers 1,017,000$ Cash paid for purchases (761,000) Cash paid for operating expenses (276,000) Net Cash Provided by Operating Activities (20,000) Investing Activities
Proceeds from sale of land 32,000 Purchase of equipment (28,000)
Net Cash Provided by Investing Activities 4,000 Financing Activities
Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending 71,000$
Ed's Pizza HutStatement of Cash Flows
For the Period Ending 3/31/2008 Notice that the net cash
provided by operating
activities agreeswith that
computed using the indirect
method.
15-22