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Chapter 13-1 CHAPTER 14 STATEMENT OF CASH FLOWS Managerial Accounting, Fourth Edition Wiley & Richard McDermott.

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Presentation on theme: "Chapter 13-1 CHAPTER 14 STATEMENT OF CASH FLOWS Managerial Accounting, Fourth Edition Wiley & Richard McDermott."— Presentation transcript:

1 Chapter 13-1 CHAPTER 14 STATEMENT OF CASH FLOWS Managerial Accounting, Fourth Edition Wiley & Richard McDermott

2 Chapter Indicate the usefulness of the statement of cash flows Distinguish among operating, investing, and financing activities Prepare a statement of cash flows using the indirect method Analyze the statement of cash flows. Study Objectives

3 Chapter 13-3 The Statement of Cash Flows: Usefulness and Format Preparing the Statement of Cash Flows— Indirect Method Using Cash Flows to Evaluate a Company UsefulnessClassifications Significant noncash activities FormatPreparation Indirect and direct methods Step 1: Operating activities Step 2: Investing and financing activities Step 3: Net change in cash Free cash flow Statement of Cash Flows

4 Chapter 13-4 LO 1 Indicate the usefulness of the statement of cash flows. Provides information to help assess: 1. Entity’s ability to generate future cash flows. 2. Entity’s ability to pay dividends and obligations. 3. Reasons for difference between net income and net cash provided (used) by operating activities. 4. Cash investing and financing transactions during the period. Usefulness of the Statement of Cash Flows

5 Chapter 13-5 LO 2 Distinguish among operating, investing, and financing activities. Classification of Cash Flows Income Statement Items Operating Activities Generally Investments and Long-Term Assets Investing Activities Generally Long-Term Liability and Stockholders’ Equity Financing Activities

6 Chapter 13-6 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 13-1 Note: Current asset Note: Not financing

7 Chapter 13-7 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 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 13-1

8 Chapter 13-8 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 13-1

9 Chapter 13-9 Significant Noncash Activities 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 activities in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements. Classification of Cash Flows LO 2 Distinguish among operating, investing, and financing activities.

10 Chapter Order of Presentation: 1. Operating activities. 2. Investing activities. 3. Financing activities. The cash flows from operating activities section always appears first, followed by the investing and financing sections. Direct Method Indirect Method Format of the Statement of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. We won’t learn direct method in this class

11 Chapter Format of the Statement of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. Illustration 13-2

12 Chapter Three Sources of Information: 1. Comparative balance sheets 2. Current income statement 3. Additional information Preparing the Statement of Cash Flows

13 Chapter 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 3 Prepare a statement of cash flows using the indirect method. Preparing the Statement of Cash Flows

14 Chapter Note from Dr. McDermott I have never seen the method for preparing cash flow statements used by the author. I have never seen the method for preparing cash flow statements used by the author. I have looked at probably a dozen textbooks. I have looked at probably a dozen textbooks. It is hard enough to teach cash flow statements with traditional methods. It is hard enough to teach cash flow statements with traditional methods. For a beginner, the author’s method is more difficult. For a beginner, the author’s method is more difficult. I will teach the traditional method. I will teach the traditional method.

15 Chapter Step 1: Set up a worksheet like this, memorize the column headings! Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, Inventories $ 189, $ 170, Land $ 100, $ 75, Equipment $ 200, $ 260, Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, Accounts payable $ 47, $ 39, Bonds payable $ 200, $ 150, Common stock $ 174, $ 216, Retained earnings Net Income Dividends Additional Entries There are several important things to notice: 1.We did not list a row for cash or cash equivalents. 2.We listed accounts that are increased with a debit balance in the top section (Assets Except Cash and Cash Equivalents) and accounts that are increased with credits on the bottom (Contra Assets, Liabilities and Stockholder Equity. 3.Since Accumulated Depreciation is increased with a credit, it goes in the second section. We will get to this section later.

16 Chapter Step 1: Set up a worksheet like this, memorize the column headings! Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, Inventories $ 189, $ 170, Land $ 100, $ 75, Equipment $ 200, $ 260, Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, Accounts payable $ 47, $ 39, Bonds payable $ 200, $ 150, Common stock $ 174, $ 216, Retained earnings Net Income Dividends Additional Entries One more important thing to mention, we will break retained earnings into net income and dividends on this worksheet.

17 Chapter Step 2: Subtract the figures in the 2007 row from the figures in the 2008 row to get the change Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Inventories $ 189, $ 170, $ (19,000.00) Land $ 100, $ 75, $ (25,000.00) Equipment $ 200, $ 260, $ 60, Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Common stock $ 174, $ 216, $ 42, Retained earnings Net Income $ 103, Dividends $ (45,000.00) Additional Entries This a good time to put in the net income and dividends paid during the year in lieu of retained earnings.

18 Chapter Step 3: Now determine if each transaction is a source or use of cash Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use Inventories $ 189, $ 170, $ (19,000.00) Source Land $ 100, $ 75, $ (25,000.00) Source Equipment $ 200, $ 260, $ 60, Use Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source Accounts payable $ 47, $ 39, $ (8,000.00) Use Bonds payable $ 200, $ 150, $ (50,000.00) Use Common stock $ 174, $ 216, $ 42, Source Retained earnings Net Income $ 103, Source Dividends $ (45,000.00) Use Additional Entries Rule: positive numbers using this format are uses of cash in the Cash Equivalents Section, negative numbers are sources of cash. The opposite is true in the Contra Asset … section.

19 Chapter Step 4: In column 3, make all sources of cash positive and all uses negative Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries Shortcut, change the sign of the numbers in column 1 in the Assets... section and leave them as is in the Contra Assets... section

20 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries Now we are going to focus on the adjustments column. The easiest was to make these and get the sign (positive or negative) straight is to create an “Additional Entries” section at the bottom of the form.

21 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries In the adjustments column, debits to the accounts being adjusted from 2007 to 2008 will be shown as positive numbers and credits will be shown as negative numbers. What does this mean? Let’s wait until the next slide to find out!

22 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries Where do we get the information for the adjustments? From the “Additional Information” given in the problem.

23 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries The easiest way to enter this data is to pretend you are making a journal entry.

24 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries If the account is shown above, debit or credit that account the same as you would in a journal entry for that transaction.

25 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries If it is not shown, it probably relates to cash and is listed here.

26 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries Remember, we did not list a row for cash using this methodology.

27 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries Cash used to redeem bonds ($50,000) The first adjustment given is that bonds amounting to $50,000 were redeemed for cash of $50,000. The journal entry would be to credit cash (that is the first entry under the Additional Entries section).

28 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00)$50,000 Common stock $ 174, $ 216, $ 42, Source$ 42, Retained earnings Net Income $ 103, Source $ 103, Dividends $ (45,000.00) Use $ (45,000.00) Additional Entries Cash used to redeem bonds ($50,000) Where does the debit go? To bonds payable. Remember when we redeem a bond we debit the account.

29 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00)$50,000 Common stock $ 174, $ 216, $ 42, Source $ 42, Retained earnings Net Income $ 103, Source Dividends $ (45,000.00) Use Additional Entries Cash used to redeem bonds ($50,000) Debit & Credit

30 Chapter Step 5: Make Adjustments Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00)$50,000 Common stock $ 174, $ 216, $ 42, Source $ 42,000.00($42,000) Retained earnings Net Income $ 103, Source Dividends $ (45,000.00) Use Additional Entries Cash used to redeem bonds ($50,000) Common stock issued $42,000 The next adjustment is common stock being sold for $42,000 in cash.

31 Chapter Step 6: Add columns 3 and 4 to get the total adjusted affect Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Land $ 100, $ 75, $ (25,000.00) Source $ 25, Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) $ 50, $ - Common stock $ 174, $ 216, $ 42, Source $ 42, $ (42,000.00) $ - Retained earnings Net Income $ 103, Source Dividends $ (45,000.00) Use Additional Entries Cash used to redeem bonds $ (50,000.00) Common stock issued $ 42,000.00

32 Chapter Step 7: Classify each transaction on where it will appear on the statement Statement of Cash Flow Worksheet (3+4) (1)(2)(3) (4)(5)(6) SourceCash Flow AdjustedClassi Changeor UseEffect AdjustmtsEffectfication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76, $ 85, $ 9, Use $ (9,000.00) Operating Inventories $ 189, $ 170, $ (19,000.00) Source $ 19, Operating Land $ 100, $ 75, $ (25,000.00) Source $ 25, Investing Equipment $ 200, $ 260, $ 60, Use $ (60,000.00) Investing Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32, $ 66, $ 34, Source $ 34, Operating Accounts payable $ 47, $ 39, $ (8,000.00) Use $ (8,000.00) Operating Bonds payable $ 200, $ 150, $ (50,000.00) Use $ (50,000.00) $ 50, $ -Financing Common stock $ 174, $ 216, $ 42, Source $ 42, $ (42,000.00) $ -Financing Retained earnings Net Income $ 103, Source Operating Dividends $ (45,000.00) Use Financing Additional Entries Cash used to redeem bonds $ (50,000.00) Financing Common stock issued $ 42, Financing

33 Chapter Step 8: Take the information from the worksheet and begin the Cash Flow Statement

34 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Remember there are three sections to the Statement of Cash Flows. We start with Cash flow from Operating Activities. The first entry should be net income.

35 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, We want to adjust income to cash flow. The first adjustment most authors like to see is to add back deprecation. Remember depreciation is a non-cash expense. Add it to income to get cash flow. Let’s follow this format in this class. Now we go to our worksheet, and start from the top, selecting each item listed as an “Operating” item.

36 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, Increase in AR $ (9,000.00) The first item on the worksheet is Accounts Receivables. We have already: Classified it as operating Shown that it was an increase in amount. Figured out that an increase in this accounts is a use rather than source of cash. See! All of our thinking has already been done. We concentrate on one thing at a time, less chance to make stupid mistakes on an exam.

37 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, Increase in AR $ (9,000.00) Decrease in Inventory $ 19, Decrease in AP $ (8,000.00) Total change $ 36, Net Cash Provided Op Activities $ 139, We will continue down the worksheet, doing essentially the same thing. Selecting Operating items and looking to see if they are uses or sources of cash. We will then sum all changes ($36,000) and add that to income to get Net Cash Provided by Operating Activities.

38 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, Increase in AR $ (9,000.00) Decrease in Inventory $ 19, Decrease in AP $ (8,000.00) Total change $ 36, Net Cash Provided Op Activities $ 139, Cash Flow Investing Sale of land $ 25, Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42, Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Lets use the worksheet to identify items for Investing and Financing. Total cash source or use from each section.

39 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, Increase in AR $ (9,000.00) Decrease in Inventory $ 19, Decrease in AP $ (8,000.00) Total change $ 36, Net Cash Provided Op Activities $ 139, Cash Flow Investing Sale of land $ 25, Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42, Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Net Increase in Cash $ 51, The last thing we do is total the three sections to get “Net Increase in Cash”

40 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, Increase in AR $ (9,000.00) Decrease in Inventory $ 19, Decrease in AP $ (8,000.00) Total change $ 36, Net Cash Provided Op Activities $ 139, Cash Flow Investing Sale of land $ 25, Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42, Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Net Increase in Cash $ 51, Cash at beginning of period $ 22, To the increase in cash add the beginning cash balance taken for the balance sheet (2007).

41 Chapter Statement of Cash Flows Cash flow from Operating Activities Net Income $ 103, Adjustments to Net Income Depreciation $ 34, Increase in AR $ (9,000.00) Decrease in Inventory $ 19, Decrease in AP $ (8,000.00) Total change $ 36, Net Cash Provided Op Activities $ 139, Cash Flow Investing Sale of land $ 25, Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42, Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Net Increase in Cash $ 51, Cash at beginning of period $ 22, Cash at end of period $ 73, Add Increase in Cash to Cash at Beginning of Period and it should given you Cash at End of Period taken from the 2008 balance sheet.

42 Chapter Simple – Right? So how do I get an “A” on the exam? So how do I get an “A” on the exam? Memorize the columns in the worksheet. Memorize the columns in the worksheet. Enter numbers one column at a time. Enter numbers one column at a time. Concentrate on one concept at a time. Concentrate on one concept at a time. Use the worksheet as the format for the Statement of Cash Flows which you will also have memorized. Use the worksheet as the format for the Statement of Cash Flows which you will also have memorized. Recheck your work! Recheck your work!

43 Chapter E13-9 We will work in class on the board. We will work in class on the board. Download Excel file from hyperlink on Acc 2020 Web Page (http://faculty.weber.edu/rmcdermott) Download Excel file from hyperlink on Acc 2020 Web Page (http://faculty.weber.edu/rmcdermott)http://faculty.weber.edu/rmcdermott


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