1. Chapter 17-1 CHAPTER 17 STATEMENT OF CASH FLOWS Accounting Principles, Eighth Edition

2. Chapter 17-2 LO 1 Indicate the usefulness of the statement of cash flows. Provides information about an entity’s cash receipts and cash payments during a period. 1)Where did the cash come from during the period? 2) What was the cash used for during the period? 3) What was the change in the cash balance during the period? Usefulness of the Statement of Cash Flows

3. Chapter 17-3 LO 2 Distinguish among operating, investing, and financing activities. Classification of Cash Flows Income Statement Items Operating Activities Generally Long-Term Asset Items Investing Activities Generally Long-Term Liability and Equity Items Financing Activities

4. Chapter 17-4 Classification of Typical Inflows and Outflows Classification of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. Operating activities - Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. To employees for services. To government for taxes. To lenders for interest. To others for expenses. Illustration 17-1

5. Chapter 17-5 Classification of Typical Inflows and Outflows Classification of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. Investing activities - Changes in investments and long- term assets Cash inflows: From sale of property, plant, and equipment. From sale of investments in debt or equity securities. From collection of principal on loans to other entities. Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or equity securities. To make loans to other entities. Illustration 17-1

6. Chapter 17-6 Classification of Typical Inflows and Outflows Classification of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. Financing activities - Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock. From issuance of long-term debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock). Illustration 17-1

7. Chapter 17-7 Significant Noncash Activities – These DO NOT APPEAR IN SCF 1. Issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Issuance of debt to purchase assets. 4. Exchanges of plant assets. Companies report these in either a separate schedule at the bottom of the SCF or in a separate note or to the financial statements. Classification of Cash Flows LO 2 Distinguish among operating, investing, and financing activities.

8. Chapter 17-8 Reminder! Order of Presentation: 1. Operating activities. 2. Investing activities. 3. Financing activities. Direct Method Indirect Method Format of the Statement of Cash Flows LO 2 Distinguish among operating, investing, and financing activities.

9. Chapter 17-9 Indirect and Direct Methods Companies favor the indirect method for two reasons: 1.It is easier and less costly to prepare, and 2.It focuses on the differences between net income and net cash flow from operating activities. LO 2 Identify the major classifications of cash flows. Preparing the Statement of Cash Flows

10. Chapter 17-10 Format of the Statement of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. Illustration 17-2

11. Chapter 17-11 Financial Statements in the order of Preparation

12. Chapter 17-12 FASB requires us to use the Accrual Basis of Accounting. we recognize revenue/expenses when it is “earned/incurred” though we may not have received/paid CASH at the time. (hence the use of receivables & payables) This tells us what we have earned, but not what CASH has been exchanged. This tells us what we have earned, but not what CASH has been exchanged. To prepare the Statement of CASH FLOWS, we now need to look at actual CASH FLOW.

13. Chapter 17-13 Example #1 - The balance sheet does not tell us the whole story. “Cash Balance was $33,000 at the end of last year and it is $55,000 at the end of this year” “PP&E was $64,000 at the end of last year and it is $304,000 at the end of this year”. But it does not tell us how we paid for the PPE… cash or borrowing.

14. Chapter 17-14 Example #2 – The Income Statement does not tell us the whole story Remember…the accrual basis of accounting, revenues and expenses are recorded following the revenue recognition principle. We did not need to show CASH when recognizing revenues or expenses. The Income Statement says “Net Income for the year was $145,000”. But this includes things that we include in the accrual basis of accounting. Revenues do not necessarily equal cash received!!!

15. Chapter 17-15 Operating Activities The first item included in the Operating section of the Statement of Cash Flows is Net Income. However, Net Income may not be cash or operating because it: typically includes non-cash expenses and may include non-operating gains or losses. Preparing the Statement of Cash Flows – Preparing the Statement of Cash Flows – Step 1: Operating Activities

16. Chapter 17-16 Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis. Common adjustments to the Net Income (Loss) figure: LO 3 Prepare a statement of cash flows using the indirect method. Preparing the Statement of Cash Flows – Preparing the Statement of Cash Flows – Step 1: Operating Activities 1. Non-Cash expenditures, such as Depreciation or Amortization, must be added back to NI. 2. Non-operating Gains, such as gains on disposing of assets, must be subtracted from NI, 3.and similarly, losses must be added back to NI. Note that Interest Expense, though characterized as Non- Operating on the Income Statement and arguably is part of Financing, is considered an Operating Activity.

17. Chapter 17-17 LO 3 Prepare a statement of cash flows using the indirect method. Preparing the Statement of Cash Flows Demonstration Problem Indirect Method Illustration 17-4

18. Chapter 17-18 Depreciation Expense (use previous slide) Depreciation is a noncash charge. In the SCF, add it back to net income. LO 3 Prepare a statement of cash flows using the indirect method. Step 1: Operating Activities SCF Indirect Method Step 1: Operating Activities Why? Because Depreciation and Amortization reduce our NI, but do not reduce our cash! During the course of business all of these help us reduce our Net Income (and income tax), but they are non-cash items… and we want to know about CASH flow.

19. Chapter 17-19 Gain/Loss on Sale of Equipment (use previous slide) We did not receive actual CASH in profit/gain and we did not give CASH in our losses. Gains on sale of assets increased our NI, but it is not a cash item. Loss on the sale of assets decreased our NI, but is not a cash item. Any loss on sale is added to net income in the operating section. Any gain on sale is deducted from net income in the operating section. LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities SCF Indirect Method Step 1: Operating Activities

20. Chapter 17-20 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities Illustration 17-7 Loss on Sale of Equipment SCF Indirect Method Step 1: Operating Activities A look at the SCF

21. Chapter 17-21 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities SCF Indirect Method Step 1: Operating Activities SCF Indirect Method Step 1: Operating Activities Changes to Noncash Current Asset Accounts General Rule: Changes to non-cash asset and liability accounts need to be adjusted. Increases in current asset accounts need to be deducted from NI on SCF Decreases in current asset accounts need to be added to NI on SCF

22. Chapter 17-22 The Operating Activities section also includes changes to Current Assets (except Cash) and Current Liabilities. Preparing the Statement of Cash Flows – Preparing the Statement of Cash Flows – Step 1: Operating Activities – Cheat Sheet + + + _ _ _

23. Chapter 17-23 LO 3 Prepare a statement of cash flows using the indirect method. Preparing the Statement of Cash Flows Indirect Method Illustration 17-4 Demonstration Problem

24. Chapter 17-24 Current Asset Example: Accounts Receivable: Year 2007 was $30,000 Year 2008 was $20,000 Preparing the Statement of Cash Flows – Preparing the Statement of Cash Flows – Step 1: Operating Activities Current Asset Example: Inventory: Year 2007 was $15,000 Year 2008 was $10,000 Here we are looking at the end result… if we create the entry in our minds what would it look like?

25. Chapter 17-25 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities Changes to Prepaid Expenses SCF Indirect Method Step 1: Operating Activities Current Asset Example: Prepaid Expenses: Year 2007 was $5,000 Year 2008 was $1,000 You do the entry!

26. Chapter 17-26 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities Illustration 17-9 Changes to Noncash Current Asset Accounts SCF Indirect Method Step 1: Operating Activities

27. Chapter 17-27 Changes to Noncash Current Liability Accounts When Accounts Payable increases, this means the company received more in goods than it actually paid for. The increase is added to net income to determine net cash provided by operating activities. When Income Tax Payable decreases, this means the income tax expense reported on the income statement was less than the amount of taxes paid during the period. The decrease is subtracted from net income to determine net cash provided by operating activities. LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities SCF Indirect Method Step 1: Operating Activities

28. Chapter 17-28 LO 3 Prepare a statement of cash flows using the indirect method. Preparing the Statement of Cash Flows Additional information for 2008: 1. The company declared and paid a $29,000 cash dividend. 2. Issued $110,000 of long-term bonds in direct exchange for land. 3. A building costing $120,000 and equipment costing $25,000 were purchased for cash. 4. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash. 5. Issued common stock for $20,000 cash. 6. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment. Illustration 17-4 Demonstration Problem 2007 2008

29. Chapter 17-29 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities Changes to Liability Accounts SCF Indirect Method Step 1: Operating Activities Accounts Payable: Year 2007 was $12,000 Year 2008 was $28,000 You do the entry!

30. Chapter 17-30 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities Illustration 17-10 Changes to Noncash Current Liability Accounts SCF Indirect Method Step 1: Operating Activities

31. Chapter 17-31 LO 3 Prepare a statement of cash flows using the indirect method. Operating Activities Illustration 17-11 Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method SCF Indirect Method Step 1: Operating Activities

32. Chapter 17-32 From the additional information, the company purchased land of $110,000 by issuing long-term bonds. This is a significant noncash investing and financing activity that merits disclosure in a separate schedule. LO 3 Prepare a statement of cash flows using the indirect method. Step 2: Investing and Financing Activities Land 1/1/08 Balance 20,000 Issued bonds 110,000 12/31/08 Balance 130,000 Bonds Payable 1/1/08 Balance 20,000 For land 110,000 12/31/08 Balance 130,000

33. Chapter 17-33 From the additional information, the company acquired an office building for $120,000 cash. This is a cash outflow reported in the investing section. LO 3 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities 1/1/08 Balance 40,000 Office building 120,000 12/31/08 Balance 160,000 Building

34. Chapter 17-34 LO 3 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities Illustration 17-13 Partial statement

35. Chapter 17-35 The additional information explains that the equipment increase resulted from two transactions: (1) a purchase of equipment of $25,000, and (2) the sale for $4,000 of equipment costing $8,000. LO 3 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities 1/1/08 Balance 10,000 Purchase 25,000 12/31/08 Balance 27,000 Equipment sold 8,000 Cash4,000 Accumulated depreciation1,000 Loss on sale of equipment3,000 Equipment8,000 Journal Entry Equipment

36. Chapter 17-36 LO 3 Prepare a statement of cash flows using the indirect method. Statement of Cash Flows Illustration 17-13 Indirect Method

37. Chapter 17-37 The additional information notes that the increase in common stock resulted from the issuance of new shares. LO 3 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities 1/1/08 Balance 50,000 Shares sold 20,000 12/31/08 Balance 70,000 Common Stock

38. Chapter 17-38 LO 3 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities Illustration 17-13 Partial statement