2Objectives Define operating, investing, and financing activities. Know the categories of inflows and outflows of cash.Classify cash flows as operating, investing, or financing.Explain the direct and indirect methods for reporting operating cash flows.Prepare a simple statement of cash flows.2224
3Objectives Compute and disclose interest paid and income taxes paid. Use a worksheet for a statement of cash flows.Compute and disclose interest paid and income taxes paid.Identify the operating cash inflows and outflows under the direct method (Appendix).Compute the operating cash flows under the direct method (Appendix).
4Purpose of a Cash Flow Statement Helps users assessA firm’s ability to generate positive cash flows from operating activities.A firm’s ability to meet its obligations and pay dividends.The reasons for the difference between net income and net cash flows.The effect of investing and financing on a firm’s financial position.Both the cash and noncash investing and financing transactions during the period.
5Operating ActivitiesOperating activities include transactions involving acquiring, selling, and delivering goods for sale, as well as providing services.Operating activities include all transactions and other events that are not investing and financing activities.Cash receipts from the sale of goods or services and collections of accounts receivable are typical cash inflows from operating activities.Cash payments to suppliers for inventory and on account, for wages, and for taxes are examples of cash outflows from operating activities.
6Investing ActivitiesInvesting activities include transactions involving noncurrent assets and short-term investments.Outflows (3) Inflows (3)Lending money and collecting principal on the loans.Acquiring and selling investments (both current and noncurrent).Acquiring and selling property, plant, and equipment.
7Financing ActivitiesFinancing activities include transactions involving liabilities & equity:Inflows (2)Issuing stock for cash (new issue or treasury stock)Borrowing money (bonds and notes)Outflows (3)Paying cash dividendsRepayments of amounts borrowedPurchase of treasury stock
8Cash and Cash Equivalents The cash flow statement is prepared using cash and cash equivalents.Cash equivalentsWithin 3 months of maturity when purchasedNo risk--treasury bonds, treasury notes, treasury bills, money market, commercial paperKnown amount of cashPurchases of cash equivalents are not reported
9Indirect and Direct Methods FASB No. 95 allows two ways for a company to calculate and report its net cash flow from operating activities on its statement of cash flows.
10Indirect and Direct Methods Even though the FASB recommends the direct method, more than 98% of companies use the indirect method.The first is called the direct method and the second is the indirect method.
12Steps in Visual Inspection Method-Indirect Method Prepare the statement’s heading and list the three major sections.Determine the net income and list it as the first item in the net cash flow from operating activities section.Add back any non-cash expenses.Adjust net income for gains and losses not related to operations.Continued
13Steps in Visual Inspection Method-Indirect Method Adjust net income for the change in deferred taxesAdjust net income for income and losses on investments carried under the equity method.Continued
14Steps in Visual Inspection Method-Indirect Method Examine all working capital accounts, except cash, short-term non-trade notes payable and dividends payable.A Debit to a noncash account is a Decrease in cash. (If the account had net debits during the year).A Credit to a noncash account is an increase in cash. (if the account had net credits during the year).Continued
15Steps in Visual Inspection Method-Indirect Method Calculate the cash provided or cash used by operating activities.Examine comparative balance sheets for changes in non-current assets.Calculate the cash provided or cash used by investing activities.Examine long-term liabilities and equity accounts.Continued
16Steps in Visual Inspection Method-Indirect Method Calculate the cash provided or cash used by financing activities.Calculate the net change in cash that occurred during the accounting period.Add the beginning cashThe total should equal the ending cash on the balance sheetList interest and taxes paid.List significant noncash investing and financing activities.
17Simple Statement of Cash Flows RYAN COMPANYStatement of Cash FlowsFor Year Ended December 31, 2007The statement’s heading
18Adjustments to Net Income Remember the adjustments to net income are:Noncash expensesGains/losses on investmentsDeferred taxesEquity incomeWorking capital changes
19Indirect Method- Ryan Corporation Added back since depreciation is not an outflow of cash.Net Cash flows From Operating Activities:Net income $14,000Adjustments for differencesbetween income flows and cashflows for operating activities:Add: Depreciation expense 8,000Decrease in accounts receivable 2,600Increase in salaries payable 800Less: Increase in inventory (2,000)Decrease in accounts payable (7,000)Net cash provided by operatingactivities $16,400Credits tononcashaccountsDebits tononcashaccountsSame number asdirect method
20Leyton Company Information Page 1140Leyton Company Information
21Simple Statement of Cash Flows-Leyton Company Net Cash Flow From Operating ActivitiesNet income $ 7,000Adjustments for differences between incomeand cash flows from operating activities:Add: Depreciation expense 2,300Increase in accounts payable 1,500Less: Increase in accounts receivable (2,700) 1,100Net cash provided by operating activities $8,100Cash Flows From Investing ActivitiesPayment for purchase of building $(12,000)Proceeds from sale of land, at cost 3,000Net cash used for investing activities (9,000)Continued
22Simple Statement of Cash Flows Net cash provided by operating activities $8,100Net cash used for investing activities (9,000)Cash Flows From Financing ActivitiesProceeds from issuance of bonds $ 7,000Payment of dividends (3,500)Net cash provided by financing activities 3,500Net increase in Cash $2,600Cash, January 1, ,000Cash, December 31, $6,600This amount should match the balance of the Cash account in the ledger.
23Sale of EquipmentGains and losses from investing activities should be eliminated from operating activities by adding losses and deducting gains from net income.Dack Company sold equipment with a cost of $2,200 and accumulated depreciation of $700 for $2,100.
24Deduct $600 from net income to reconcile net income to operating cash. Sale of EquipmentHistorical cost 2,200Less: Accumulated depreciation 700Book value $1,500Gain (not operating) ?Cash proceeds $2,100Deduct $600 from net income to reconcile net income to operating cash.
25Interest Paid and Income Taxes Paid FASB Statement Number 95 requires that a company using the indirect method also disclose its interest paid and income taxes paid.
26Interest Paid= $1,000Interest ExpenseInterest PayableBal. 01,100Cash Paid 500$100 discountamortizationwill not requirecash1,000BalJones Company had $1,100 of interest expense, including $100 amortization of bond discount. The beginning balance in Interest Payable was $0 and the ending balance was $500. How much cash was paid for interest?
27Taxes Payable/Deferred Taxes Taxes PaidTaxes Payable and Deferred Taxes can be combined to find taxes paid.Taxes Payable/Deferred Taxes= $7,050Cash Paid 2,8201,500 Bal.--Taxes Payable1,920 Bal.--Deferred Taxes2,130 Bal.--Taxes Payable2,100 Bal.--Deferred Taxes3,630 Taxes Expense= $7,050The beginning and ending balances in Taxes Payable were $1,500 and $2,130 and the beginning and ending balances in Deferred Taxes were $1,920 and $2,100. Tax Expense was $3,630. How much cash was paid?
28Direct MethodUnder the direct method, a company deducts its operating cash outflows from its operating cash inflows to determine its net cash flow from operating activities.
29Direct Method Inflows (3) Cash from customers (A/R) Cash from interest revenue (Interest Receivable)Cash from dividend revenue (Dividends Rec.)Outflows (5)Cash paid to suppliers (A/P)Cash paid for wages (Wages Payable)Other cash expenses (Prepaid/Accrued)Cash paid for interest expense (Interest Payable)Cash paid for taxes (T/P and Deferred Tax)
30Direct MethodUse T accounts to examine the 3 inflows and 5 outflows in the direct method.
31Cash From CustomersSales RevenueAccounts Receivable30,00042,000Bal. 037,00042,000Bal ,000Smith Company made cash sales of $30,000 and credit sales of $42,000. How much cash was collected from customers?$67,000
32Dividends and Interest Collected Interest ReceivableDividends ReceivableBal ,000Revenue 42,000Bal ,000BalRevenue 4,000Bal ,000Ives Company earned interest revenue of $42,000 & dividend revenue of $4,000. Interest Receivable had a beginning balance of $30,000 and an ending balance of $12,000. Dividends receivable had a beginning balance of $0 and an ending balance of $1,000. How much cash from interest and dividends was collected?
33Dividends and Interest Collected Interest Receivable=4,000=72,000Dividends ReceivableBal ,000Revenue 42,000Bal ,00060,000BalRevenue 4,000Bal ,0003,000=4,000=72,000Ives Company earned interest revenue of $42,000 and dividend revenue of $4,000. During the year $60,000 of interest and $3,000 of dividends was collected.
34Cash Paid to Suppliers 62,000 Accounts Payable Inventory 62,000 $47,70010,30012,10059,800Bal. 12,500Bal. 11,00051,000 Cost of goods sold49, Purchases 49,50059,800Copeland Company had beginning and ending balances in Accounts Payable of $10,300 and $12,100, respectively. The beginning and ending balances in inventory were $12,500 and $11,000 respectively. The cost of goods sold was $51,000. How much cash was paid to suppliers?
35Prepaid/Accrued Expenses Cash ExpensesPrepaid and accrued expenses can be combined to calculate the cash paid. Cash operating expenses exclude depreciation, amortization and depletion.Prepaid/Accrued Expenses=$372,000Prepaid Bal ,000Prepaid Bal ,00060,000 Accrued Bal.300,000 Cash operating expenses32,000 Accrued Bal.=$372,000Wolverine Company had beginning and ending balances in accrued expenses of $60,000 and $32,000, respectively. It had beginning and ending balances in prepaid expenses of $20,000 and $12,000, respectively. It had cash operating expenses of $300,000. How much cash was paid for expenses?
36Prepaid/Accrued Expenses Wolverine Company paid $320,000 for expenses. Cash ExpensesPrepaid/Accrued ExpensesPrepaid Bal ,000Cash paid 320,000Prepaid Bal ,00060,000 Accrued Bal.300,000 Cash operating expenses32,000 Accrued Bal.Wolverine Company paid $320,000 for expenses.
37Cash Paid to EmployeesSalaries PayableCash paid 13,0000 Bal.14,000 Salaries expense1,000 Bal.Smith Company had beginning and balances in Salaries Payable of $0 and $1,000. respectively. Salary expense for the year was $14,000. How much cash was paid to employees?
38Ryan Corporation’s Income Statement Direct MethodRyan Corporation’s Income StatementSales revenue (cash and A/R) $70,000Less:Cost of goods sold (cash and A/P) $(29,000)Salaries expense (cash and S/P) (13,000)Depreciation expense (8,000) (50,000 )Income before income taxes $20,000Income tax expense (cash) (6,000 )Net income $14,000
39Cash From Customers- Ryan Company Sales RevenueAccounts Receivable70,000Bal. 22,60072,60070,000Bal ,000Accounts receivable decreased by $2,600 for Ryan Company. How much cash was collected from customers?$72,600
40Direct Method Remember to check for these cash flows. Inflows (3) Cash from customers (A/R)Cash from interest revenue (Interest Receivable)Cash from dividend revenue (Dividends Rec.)Outflows (5)Cash paid to suppliers (A/P)Cash paid for wages (Wages Payable)Other cash expenses (Prepaid/Accrued)Cash paid for interest expense (Interest Payable)Cash paid for taxes (T/P and Deferred Tax)
41Cash Paid to Suppliers- Ryan Company Accounts PayableInventoryCash paid$38,00010,3003,300Bal. 9,000Bal. 11,00029,000 Cost of goods sold31, Purchases 31,000Ryan Company had beginning and ending balances in Accounts Payable of $10,300 and $3,300, respectively. The beginning and ending balances in inventory were $9,000 and $11,000 respectively. The cost of goods sold was $29,000. How much cash was paid to suppliers?
42Cash Paid to Employees- Ryan Company Ryan Company had beginning and balances in Salaries Payable of $200 and $1,000. respectively. Salary expense for the year was $13,000. How much cash was paid to employees?Salaries PayableCash paid 12,200200 Bal.13,000 Salaries expense1,000 Bal.Ryan Company had no change in the Taxes Payable and Deferred Taxes accounts.
43Direct Method-Ryan Company Cash flows From Operating Activities:Cash Inflows:Cash received from customers $72,600Cash inflows from operatingactivities $72,600Cash Outflows:Cash paid to suppliers $(38,000)Cash paid to employees (12,200)Cash paid for income taxes (6,000)Cash outflows for operatingactivities (56,200)Net cash provided by operating activities $16,400
44Reconciliation of Net Income to Cash Provided by Operations- Direct Method In other words, the indirect method is required even when using the direct method.When the direct method is used, a schedule to reconcile net income to cash provided by operations is required.Yes.
45Worksheet Method Steps 1-3: Setting up the worksheet Step 1: Prepare the column headings on a worksheet. Then enter the account title Cash on the first line of the account titles column and list the beginning balance, ending balance, and the change in cash in the respective columns.Step 2: Enter the titles of all the remaining accounts from the balance sheets on the worksheet and list each beginning and ending account balance, and the change in the account balance directly below the cash information.
46Leave sufficient room below each heading. Worksheet MethodSteps 1-3: Setting up the worksheetStep 3: Directly below these accounts, add the following headings:A. Net Cash Flow From Operating ActivitiesB. Cash Flows From Investing ActivitiesC. Cash Flows From Financing ActivitiesD. Investing and Financing Activities Not Affecting CashLeave sufficient room below each heading.Continued
47Worksheet Method Step 4: Completion of the worksheet Continued Account for all the changes in the noncash accounts. Reconstruct the journal entries that caused the changes in the noncash accounts directly on the worksheet. Use these general rules: (A) Start with net income. (B) Account for the changes in the current assets (except cash) and current liability accounts. (C) Account for the changes in the noncurrent accounts.Continued
48Worksheet Method Step 5: Record the net change in cash Make a final worksheet entry to record the net change in cash. The difference between the total cash inflows and outflows must be equal to the change in the Cash account.Step 6: Prepare the final worksheet entryPrepare the statement of cash flows and the accompanying schedule from the information developed on the worksheet.
51Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsFirst, let’s reconstruct the original entry.During the year the company sold land that cost $2,200 for $3,900.
52Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsNow, we can analyze the entry to help us with recording it on the worksheet.Cash 3,900Land 2,200Gain on Sale of Land 1,700Cash Flows From Investing Activities: Proceeds From Sale of Land 3,900Land 2,200Net Cash Flow From Operating Activities: Gain 1,700
53Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsDuring the year, an earthquake (extraordinary event) occurred that destroyed a building owned by the company with a cost of $10,000 and a book value of $5,200. The company received after-tax proceeds of $3,100 from its insurance company.This is a tougher one.
54Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsCash 3,100Accumulated Depreciation: Buildings 4,800Extraordinary loss 2,100Buildings 10,000Now, we can reconstruct the entry.Cash Flows From Investing Activities: Proceeds From Building Destroyed by Earthquake 3,100Accumulated Depreciation: Buildings 4,800Net Cash Flow From Operating Activ. 2,100Buildings 10,000
55Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsLet’s reconstruct both entries related to the bond issue and prepare them for the worksheet.On January 1, the company issued bonds payable with a face value of $10,000, receiving proceeds of $9,000. The company amortized $100 of the discount during the year.
56Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsCash 9,000Discount on Bonds Payable 1,000Bonds Payable, 10% 10,000Cash Flows From Financing Activities: Proceeds From Issuance of Bonds 9,000Discount on Bonds Payable 1,000Bonds Payable, 10% 10,000Continued
57Analyzing Complex Transactions Worksheet MethodAnalyzing Complex TransactionsBond Discount Amortization 100Discount on Bonds Payable 100Cash Flows From Operating Activities: Bond Discount Amortization 100Discount on Bonds Payable 100
58Analyzing Complex Transactions Special TopicsAnalyzing Complex TransactionsHere is another situation that was not part of the chapter’s comprehensive problem.A company sold equipment with a cost of $2,200 and accumulated depreciation of $700 for $2,100.
59Analyzing Complex Transactions Now reconstruct the entry. Special TopicsAnalyzing Complex TransactionsCash 2,100Accumulated Depreciation 700Equipment 2,200Gain on Sale of Equipment 600Cash Flows From Investing Activities: Proceeds From Sale of Equipment 2,100Accumulated Depreciation 700Equipment 2,200Net Cash Flow From Operating Activities: Gain on Sale of Equip. 600Now reconstruct the entry.
60Partial Cash Investing and Financing Activities A company acquired land for $10,000 by paying $1,000 down and signing a $9,000 note payable.
61Partial Cash Investing and Financing Activities Land 10,000Cash 1,000Notes Payable 9,000Make the worksheet entry in journal entry format.Land 10,000Cash Used For Investing Activities: Purchased Land 1,000Note Payable 9,000Reconstruct the entry for the worksheet.
62Partial Cash Investing and Financing Activities …and the issuing of the note is shown as a $9,000 financing activity.The purchase of the land is shown as a $9,000 investing activity…Schedule of Noncash Transactions
63Partial Cash Investing and Financing Activities A company acquired land for $18,000 by paying $15,000 down and signing a $3,000 note payable.Cash Flows From Investing ActivitiesPurchase of land by issuance of note and cash $(18,000 )Less: Issuance of note ,000Cash payment for purchase of land $15,000
64Partial Cash Investing and Financing Activities Land 10,000Cash 1,000Notes Payable 9,000Make the worksheet entry in journal entry format.Land 10,000Cash Used For Investing Activities: Purchased Land 1,000Notes Payable 9,000Reconstruct the entry for the worksheet.
65Temporary and Long-Term Investments On November 28, 2007, Dougherty Company purchased 1,000 shares of Bear Company common stock for $40,000 as a temporary investment in available-for-sale securities. On December 31, 2007, the fair value of the stock was $42 per share.(1) Reconstruct the two entries related to this investment.(2) Make the worksheet entry in journal format.
66Temporary and Long-Term Investments Temporary Investment in Available-for- Sale Securities 40,000Cash 40,000(1)Temporary Investment in Available-forSale Securities 40,000 Cash Flows From InvestingActivities: Payment for Purchase of Temporary Investment 40,000(2)Continued
67Temporary and Long-Term Investments Allowance for Change in Value ofInvestment 2,000Unrealized Increase in Value ofAvailable-for-Sale Securities 2,000(1)Allowance for Change in Value ofInvestment 2,000Unrealized Increase in Value ofAvailable-for-Sale Securities 2,000(2)No change! The debit portion appears only in the upper portion of the worksheet.
68Temporary and Long-Term Investments On January 16, 2008, Dougherty Company sold its investment in Bear Company stock for $45,000.Cash 45,000Temporary Investment inAvailable-for-Sale Securities 40,000Gain on Sale of Temporary Invest. 5,000Unrealized Increase in Value ofAvailable-for-Sale Securities 2,000Allowance for Change in Valueof Investment 2,000
69Temporary and Long-Term Investments Cash Flows From Investing Activities:Proceeds From Sale of TemporaryInvestment 45,000Temporary Investment inAvailable-for-Sale Securities 40,000Net Cash Flow From OperatingActivities: Gain on Sale of TemporaryInvestment 5,000The second entry is unchanged.
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