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• Statement of Cash Flows• Purpose of the Statement of Cash Flows• Reports cash flows
– Cash flows from operating activities – transactions that affect net income.
– Cash flows from investing activities – transactions that affect noncurrent assets.
– Cash flows from financing activities – transactions that affect equity and debt of the entity.
1
• Noncash Investing and Financing Activities• Operating Activities, Investing Activities &
Financing Activities• Cash and Cash Equivalents• Direct Method
– Cash Received from Customers– Interest and Dividends Received– Cash Paid for Merchandise– Cash Payments for Expenses
2
Net Income
Net Income
Cash Flows from Operating
Activities
Cash Flows from Operating
Activities
Indirect Method
Changes in current assets and current liabilities as shown on the following table.
Changes in current assets and current liabilities as shown on the following table.
+ Losses and - Gains
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization.
+ Noncash expenses such as depreciation and
amortization.
4
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
CashCashLiabilitiesLiabilities
Stockholders’Stockholders’EquityEquity
NoncashNoncashAssetsAssets
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
7
CashLiabilitiesLiabilities
Stockholders’Stockholders’EquityEquity
Balance Sheet
NoncashNoncashAssetsAssets
Assets = Liabilities + Stockholders’ Equity
Cash + Noncash Assets = Liabilities + Stockholders’ Equity
Cash = Liabilities + Stockholders’ Equity – Noncash Assets
22 3311
The cash flows are determined by analyzing liabilities, The cash flows are determined by analyzing liabilities, stockholders’ equity, and noncash assets.stockholders’ equity, and noncash assets.
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
8
Start with the accrual basis net income (shown in the income statement, the Retained Earnings account, or the statement of stockholders’ equity).
Start with the accrual basis net income (shown in the income statement, the Retained Earnings account, or the statement of stockholders’ equity).
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
9
Find the net income.Find the net income.
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 202,300Dec. 31 Net income 108,000 310,300
31 Cash dividends 28,000 282,300
To statementTo statementTo statementTo statement
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
2006
10
Net income per income statementNet income per income statement $108,000$108,000
Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200Inc. in accounts receivable $ 9,000Dec. in accounts payable 3,200Dec. in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activity. $100,500
Cash flows from operating activities:
Operating Activities – Indirect MethodOperating Activities – Indirect Method
Deduct:
Add:
11
Next, we need to determine depreciation expense for the year. If it isn’t given on the income
statement, sometimes it can be found by analyzing the Accumulated Depreciation account.
Next, we need to determine depreciation expense for the year. If it isn’t given on the income
statement, sometimes it can be found by analyzing the Accumulated Depreciation account.
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
12
Determine depreciation expense.Determine depreciation expense.
ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17
Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 58,300Dec. 31 Depreciation for year 7,000 65,300
to statementto statementto statementto statement
2006
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
13
Cash flows from operating activities:
Operating Activities – Indirect MethodOperating Activities – Indirect Method
Deduct:
Add:
Net income per income statement $108,000
DepreciationDepreciation $ 7,000$ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200Inc. in accounts receivable $ 9,000Dec. in accounts payable 3,200Dec. in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Because Depreciation Expense reduced net income but did not require an outflow of cash, it is
added back to net income.
14
Select current assets and current liabilities that impact cash flow and
determine the increases and decreases.
Select current assets and current liabilities that impact cash flow and
determine the increases and decreases.
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
15
Determine the debit or credit change of each
item above.
Changes in Current AccountsChanges in Current Accounts
Change
Accounts 2006 2005 Debit Credit
Accounts receivable (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200
500
16
Changes in Current AccountsChanges in Current Accounts
Change
Accounts 2006 2005 Debit Credit
Accounts receivable (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
These debit changes are subtracted from net income in the operating activities section of the statement of cash flows. Think of these
debits as deductions from net income in arriving at net cash flow from operations.
9,0009,000
8,000
3,2003,200
2,200
500500
17
Changes in Current AccountsChanges in Current Accounts
Change
Accounts 2006 2005 Debit Credit
Accounts receivable (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300
Income taxes payable 7,900 8,400
9,000
8,0008,000
3,200
2,2002,200
500
These credit changes are added to net income in the operating activities section of the statement of cash
flows. Think of these credits as additions to net income in arriving at net cash flow from operations.
18
Cash flows from operating activities:
Operating ActivitiesOperating Activities——Indirect MethodIndirect Method
Add:
Net income per income statement $108,000
Depreciation $ 7,000Decrease in inventoriesDecrease in inventories 8,0008,000Increase in accrued expensesIncrease in accrued expenses 2,200 2,200 17,200
$125,200Inc. in accounts receivableInc. in accounts receivable $ 9,000$ 9,000Dec. in accounts payableDec. in accounts payable 3,2003,200Dec. in income taxes payableDec. in income taxes payable 500500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
19
Analyze the income statement to determine if there are any gains or losses from selling
investments, equipment, etc.
Analyze the income statement to determine if there are any gains or losses from selling
investments, equipment, etc.
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
20
Rundell Inc.Income Statement
For the Year Ended December 31, 2006
Sales $1,180,000Cost of merchandise sold 790,000 Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 Other operating expenses 196,000
Total operating expenses 203,000Income from operations $ 187,000Other income:
Gain on sale of land $12,000 Other expense:
Interest expense 8,000 4,0000 Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000
Gain on sale of land $12,000Gain on sale of land $12,000
21
Cash flows from operating activities:
Operating ActivitiesOperating Activities——Indirect MethodIndirect Method
Add:
Net income, per income statement $108,000
Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200Inc. in accounts receivable $ 9,000Dec. in accounts payable 3,200Dec. in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
This gain was included in net income, but did not represent an operating cash flow.
22
If there had been a loss on this sale, the loss would have been
added to net income.
If there had been a loss on this sale, the loss would have been
added to net income.
The Indirect MethodThe Indirect MethodThe Indirect MethodThe Indirect Method
23
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
ACCOUNT Dividends Payable ACCOUNT NO. 23
Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 10,00010 Cash paid 10,000 -- --
June 20 Dividends declared 14,000 14,000July 10 Cash paid 14,000 -- -- Dec. 20 Dividends declared 14,000 14,000
Total cash paidTotal cash paid $24,000$24,000Total cash paidTotal cash paid $24,000$24,000
DividendsDividends
2006
24
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
Because paying of dividends affects equity, it is a negative
$24,000 cash flow from financing activities transaction.
Because paying of dividends affects equity, it is a negative
$24,000 cash flow from financing activities transaction.
25
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 16,000Nov. 1 4,000 shares issued for cash 8,000 24,000
Sale of Common StockSale of Common Stock
2006
ACCOUNT Common Stock ACCOUNT NO. 33
26
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
ACCOUNT Paid-In Capital in Excess of Par--Common ACCT. NO. 34 Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 80,000Nov. 1 4,000 shares issued for cash 40,000 120,000
Sale of Common StockSale of Common Stock
2006
27
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
Issuing common stock affects equity; therefore, we have a total positive cash
flow of $48,000 from this financing activities transaction.
Issuing common stock affects equity; therefore, we have a total positive cash
flow of $48,000 from this financing activities transaction.
28
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
ACCOUNT Bonds Payable ACCOUNT. NO. 25 Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 150,000June 30 Retired by payment of cash
at face amount 50,000 100,000
Retirement of Bonds PayableRetirement of Bonds Payable
2006
29
Cash Flows from Cash Flows from Financing ActivitiesFinancing ActivitiesCash Flows from Cash Flows from
Financing ActivitiesFinancing Activities
This transaction is a negative cash flows from financing
activities item because long-term debt is involved.
This transaction is a negative cash flows from financing
activities item because long-term debt is involved.
30
ACCOUNT Building ACCOUNT NO. 18 Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 200,000Dec. 27 Purchased for cash 60,000 260,000
2006
Cash Flows from Cash Flows from Investing ActivitiesInvesting ActivitiesCash Flows from Cash Flows from
Investing ActivitiesInvesting Activities
Purchased a BuildingPurchased a Building
31
Cash Flows from Cash Flows from Investing ActivitiesInvesting ActivitiesCash Flows from Cash Flows from
Investing ActivitiesInvesting Activities
Purchasing a building involves a noncurrent asset, so this is a
negative cash flows from investing activities item.
Purchasing a building involves a noncurrent asset, so this is a
negative cash flows from investing activities item.
Purchased a BuildingPurchased a Building
32
Cash Flows from Cash Flows from Investing ActivitiesInvesting ActivitiesCash Flows from Cash Flows from
Investing ActivitiesInvesting Activities
ACCOUNT Land ACCOUNT NO. 16 Balance Date Item Debit Credit Debit Credit
Jan. 1 Balance 125,000June 8 Sold for $72,000 cash 60,000 65,000Oct. 12 Purchased for $15,000 cash 15,000 80,000
Land TransactionsLand Transactions
2006
33
Cash Flows from Cash Flows from Investing ActivitiesInvesting ActivitiesCash Flows from Cash Flows from
Investing ActivitiesInvesting Activities
The first transaction, the sale of land, results in a positive cash flow from investing activities because
land is a noncash asset.
The first transaction, the sale of land, results in a positive cash flow from investing activities because
land is a noncash asset.
Land TransactionsLand Transactions
34
Cash Flows from Cash Flows from Investing ActivitiesInvesting ActivitiesCash Flows from Cash Flows from
Investing ActivitiesInvesting Activities
The $12,000 gain was recorded earlier on previous slide as an operating activity. The
purchase of land also is an investing activity.
The $12,000 gain was recorded earlier on previous slide as an operating activity. The
purchase of land also is an investing activity.
Land TransactionsLand Transactions
35
Rundell Inc.Statement of Cash Flows
For the Year Ended December 31, 2006
Cash flows from operating activities:Net income $108,000Add: Depreciation $ 7,000 Decrease in inventor. 8,000 Increase in accrued exp. 2,200 17,200
$125,000Deduct: Increase in A/R $9,000 Decrease in accts. Pay. 3,200
Decrease in ITP 500 Gain on sale of land 12,000 24,700Net cash flow from operating act. $100,500
Cash flows from investing activities:Cash from sale of land $72,000Less: Cash paid to pur. land $15,000
Cash paid for bldg. 60,000 75,000(3,000)Cash flows from financing activities:
Cash received from sale of c.s. $48,000Less: Cash paid to retire b. $50,000 Cash paid for divid. 24,000 74,000Net cash flow for financing (26,000)
Increase in cash $71,500Cash at beginning of year 26,000Cash at end of year $97,500
Refer to Exhibit 6 in your textbook to see the formal
statement of cash flows using the indirect approach.
Refer to Exhibit 6 in your textbook to see the formal
statement of cash flows using the indirect approach.
36
Indirect Method - Example
Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended
3/31/03 has also been prepared. Joe needs help preparing the Statement of
Cash Flows.
Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended
3/31/03 has also been prepared. Joe needs help preparing the Statement of
Cash Flows.
Joe’s Place
38
Joe's PlaceIncome Statement
For the Year Ending 3/31/03
Revenues 727,000$ Operating Expenses (748,000) Depreciation Expense (6,000) Gain on Sale of Land 8,000 Net Loss (19,000)$
Joe's PlaceIncome Statement
For the Year Ending 3/31/03
Revenues 727,000$ Operating Expenses (748,000) Depreciation Expense (6,000) Gain on Sale of Land 8,000 Net Loss (19,000)$
The $8,000 gain was the result of selling land
costing $32,000 for $40,000 during the period.
The $8,000 gain was the result of selling land
costing $32,000 for $40,000 during the period.
Indirect Method - Example
39
Joe’s Place issued $50,000 of no par common stock to
settle the $50,000 note payable.
Joe’s Place issued $50,000 of no par common stock to
settle the $50,000 note payable.
Indirect Method - Example
41
With the indirect method, always start with the net income or net
loss for the period.
With the indirect method, always start with the net income or net
loss for the period.
Indirect Method - Example
43
Accounts receivable decreased.
3/31/03 3/31/02
$23,000 - $40,000 = $(17,000)
Accounts receivable decreased.
3/31/03 3/31/02
$23,000 - $40,000 = $(17,000)
Indirect Method - Example
45
Accounts payable increased.
3/31/03 3/31/02
$38,000 - $27,000 = $11,000
Accounts payable increased.
3/31/03 3/31/02
$38,000 - $27,000 = $11,000
Indirect Method - Example
46
Inventory increased.
3/31/03 3/31/02
$350,000 - $300,000 = $50,000
Inventory increased.
3/31/03 3/31/02
$350,000 - $300,000 = $50,000
Indirect Method - Example
47
Salaries payable decreased.
3/31/03 3/31/02
$ 9,000 - $14,000 = $(5,000)
Salaries payable decreased.
3/31/03 3/31/02
$ 9,000 - $14,000 = $(5,000)
Indirect Method - Example
48
The operating cash flows amount comes
from the schedule just prepared.
The operating cash flows amount comes
from the schedule just prepared.
Indirect Method - Example
51
Land originally costing $32,000 was sold for $40,000.
Land originally costing $32,000 was sold for $40,000.
Indirect Method - Example
52
Dividends of $20,000 were paid to owners during the year.
Dividends of $20,000 were paid to owners during the year.
Indirect Method - Example
53
Compute the net change in cash for the period.
Compute the net change in cash for the period.
Indirect Method - Example
54
Complete the Statement of Cash Flows by reconciling beginning
cash to ending cash.
Complete the Statement of Cash Flows by reconciling beginning
cash to ending cash.
Indirect Method - Example
55
Note that the ending cash amount ties back to the Joe’s
Place Balance Sheet at 3/31/03.
Note that the ending cash amount ties back to the Joe’s
Place Balance Sheet at 3/31/03.
Indirect Method - Example
56
In addition, on the face of the statement or in a
supplemental schedule, disclose the
$50,000 noncash financing activity.
In addition, on the face of the statement or in a
supplemental schedule, disclose the
$50,000 noncash financing activity.
Indirect Method - Example
57
In addition, cash interest payments and
cash tax payments must also be disclosed
separately.
In addition, cash interest payments and
cash tax payments must also be disclosed
separately.
Indirect Method - Example
58
Cash Budgets are used by management to plan and forecast future cash flows.
Cash Budgets are used by management to plan and forecast future cash flows.
Force m anagem ent to coordinate activities.
Provide m anagers w ith advance notice of available resources.
Provide targets useful in evaluating perform ance.
Provide advance w arnings of potential cash shortages.
A C ash Budget can be used to:
Managing Cash Flows
59
Managing Cash Flows
• Increase collection of accounts receivables.
• Keep inventory low.• Delay payment of liabilities.• Plan timing of major expenditures.• Invest idle cash.
• Increase collection of accounts receivables.
• Keep inventory low.• Delay payment of liabilities.• Plan timing of major expenditures.• Invest idle cash.
60
Cash Budgeting
Cash BudgetMay June July August
Beginning cash balance 27,500$ 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 neededFinancing repayments - Ending cash balance 15,000$
Cash BudgetMay 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 neededFinancing repayments - Ending cash balance 15,000$
The ending cash balance of one month becomes the beginning cash balance of the next month.
The ending cash balance of one month becomes the beginning cash balance of the next month.
61
Cash BudgetingCash BudgetMay 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$
Cash BudgetMay 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 company must maintain a minimum cash balance of $10,000.
Financing is needed in June because the company must maintain a minimum cash balance of $10,000.
62