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1 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

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Presentation on theme: "1 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall."— Presentation transcript:

1 1 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

2 The Statement of Cash Flows Chapter 12 2 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

3 Identify the purposes of the statement of cash flows 3 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

4 Timing of the Financial Statements Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall (a point in time) Balance Sheet For the year ended (a period of time) Income Statement Balance Sheet Statement of Stockholders’ Equity Statement of Cash Flows (a point in time) Balance Sheet

5 Purposes of Cash Flow Statements Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 5 Predicts future cash flows Evaluates management decisions Determines ability to pay dividends & interest Shows relations of net income to cash flows

6 Distinguish among operating, investing and financing cash flows 6 Copyright ©2 010 Pearson Education Inc. Publishing as Prentice Hall.

7 Cash Flow Categories ? Create revenue, expenses, gains and losses ? Relate to long-term assets ? Obtain cash from investors and creditors 7 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

8 Relationship to Balance Sheet Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 8 Current assets Current liabilities Long-term assets Long-term liabilities Owners’ equity Operating cash flows Financing cash flows Investing cash flows

9 Formats for Cash Flow Statement Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 9 Reconciles from net income to cash provided by operating activities Indirect Reports all cash receipts and cash payments from operating activities Direct

10 Prepare a statement of cash flows by the indirect method 10 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

11 Finding Needed Amounts: Operating Activities From the income statement ▫Net income ▫Depreciation, depletion and amortization expense ▫Gains and losses on sales of long-term asset From the comparative balance sheets ▫Increase or decrease in each current asset (other than cash) ▫Increase or decrease in each current liability 11 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

12 Operating Activities Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 12 Net Income Depreciation, Depletion & Amortization Gains on sales of long-term assets Losses on sales of long-term assets Increases in current assets Decreases in current liabilities Decreases in current assets Increases in current liabilities

13 Exercise 12-16A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 13 ASale of long-term investment BIssuance of long-term note payable to borrow cash CIncrease in prepaid expenses DPayment of cash dividend ELoss on sale of equipment FDecrease in merchandise inventory GAcquisition of equipment by issuance of a note payable HIncrease in accounts payable IAmortization of intangible assets JNet income

14 Exercise 12-16A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 14 KPayment of long-term debt LAccrual of salary expense MCash sale of land NPurchase of long-term investment OAcquisition of building by cash payment PPurchase of treasury stock QIssuance of common stock for cash RDecrease in accrued liabilities SDepreciation of equipment

15 Cash Flow Template: Operating Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 15 Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation/depletion/amortization expense + Loss on sale of long-term assets - Gain on sale of long-term assets - Increases in current assets other than cash + Decreases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities = Net cash provided by operating activities

16 Cash Flow Template: Investing Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 16 Cash Flows from Investing Activities +Sales of long-term assets -Purchases of long-term assets +Collections of notes receivable -Loans to others =Net cash provided by (used for) investing activities

17 Computing Purchases and Sales of Plant Assets Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 17 Plant Assets, Net Beginning balance + Acquisitions - Depreciation - Book value of assets sold = Ending Balance Sale proceeds = Book value of assets sold + Gain - Loss

18 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 18 Plant Assets, Net Beginning balance Acquisitions Depreciation Book value of assets sold Ending balance

19 Computing Purchases and Sales of Investments Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 19 Investments Beginning balance + Purchases - Book value of investments sold = Ending Balance Investments Beginning balance Purchases Book value of investments sold Ending balance

20 Loans and Collections Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 20 Notes Receivable Beginning balance + New Loans made - Collections = Ending Balance Notes Receivable Beginning balance New loans made Collections Ending balance

21 Cash Flow Template: Financing Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 21 Cash Flows from Financing Activities +Issuance of stock -Purchase of treasury stock +Borrowing -Payment of notes and bonds payable - Payment of dividends Net cash provided by (used in) financing activities

22 Computing Issuance and Payments of Long-Term Debt Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 22 Long-Term Debt (Notes payable, Bonds payable) Beginning balance + Issuance of new debt - Payment of debt = Ending Balance Long-Term Debt Beginning balance Payments of debt Issuance of new debt Ending balance

23 Computing Issuance of Stock and Purchases of Treasury Stock Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 23 Common Stock Beginning balance + Issuance of new stock = Ending Balance Common Stock Beginning balance Issuance of new stock Ending balance Treasury Stock Beginning balance + Purchase of treasury stock = Ending Balance Treasury Stock Beginning balance Ending balance Purchase of treasury stock

24 Computing Dividends Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 24 Retained Earnings Beginning balance + Net income - Dividends declared = Ending Balance Retained Earnings Beginning balance Dividends declared Net income Ending balance

25 Noncash Investing and Financing Activities Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 25 Noncash investing and financing activities: Acquisition of building by issuing common stock $$$$ Acquisition of land by issuing note payable $$$$ Payment of long-term debt by issuing stock $$$$ Bonds converted into common stock $$$$ Stock dividends distributed $$$$ Total noncash investing and financing activities $$$$$

26 Exercise 12-20A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 26 December 31, Current assets: Cash $125,000$50,800 Accounts receivable 41,00057,000 Inventory 94,00073,000 Prepaid expenses 9,2008,700 Current liabilities: Accounts payable $32,000$18,000 Accrued liabilities 82,00057,000

27 Exercise 12-20A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 27 December 31, Current assets:Change Cash $125,000$50,800 Accounts receivable 41,00057,000 Inventory 94,00073,000 Prepaid expenses 9,2008,700 Current liabilities: Accounts payable $32,000$18,000 Accrued liabilities 82,00057,000

28 Exercise 12-20A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 28 Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation expense + Decrease in accounts receivable - Increase in inventory - Increase in prepaid expenses + Increase in accounts payable + Increase in accrued liabilities = Net cash provided by operating activities

29 Exercise 12-20A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 29 Cash Flows from Investing Activities +Sales of land -Purchases of plant assets =Net cash used for investing activities Cash Flows from Financing Activities +Issuance of common stock -Payment of note payable -Payment of dividends =Net cash provided by financing activities

30 Exercise 12-20A Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 30 Cash Flows from Investing Activities +Sales of land -Purchases of plant assets =Net cash used for investing activities Cash Flows from Financing Activities +Issuance of common stock -Payment of note payable -Payment of dividends =Net cash provided by financing activities Net increase in cash Cash balance, December 31, 2011 Cash balance, December 31, 2012 Net cash provided by operating activities

31 Exercise 12-20A Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 31 Non-cash Investing & Financing Activities Acquisition of plant assets by signing note payable

32 Prepare a statement of cash flows by the direct method 32 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

33 The Direct Method Preferred by the Financial Accounting Standards Board ▫Provides clearer information about the sources and uses of cash Very few companies use ▫Takes more computations Only affects operating activities 33 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

34 Operating Cash Flows: Direct Method Receipts: ▫Collections from customers ▫Interest and dividends Payments ▫To suppliers ▫To employees ▫For interest and income taxes 34 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

35 Computing Operating Cash Flows Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 35 Receipts Income Statement AccountBalance Sheet Account From CustomersSales revenue+ Decrease in Accounts Receivable - Increase in Accounts Receivable Of interestInterest revenue+ Decrease in Interest Receivable - Increase in Interest Receivable

36 Computing Operating Cash Flows Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 36 Payments Income Statement AccountBalance Sheet Account To suppliersCost of goods sold + Increase in Inventory+ Decrease in Accounts Payable - Decrease in Inventory- Increase in Accounts Payable Operating expenses + Increase in Prepaids+ Decrease in Accrued Liabilities - Decrease in Prepaids- Increase in Accrued Liabilities To employees Salary expense + Decrease in Salary Payable - Increase in Salary Payable

37 Computing Operating Cash Flows Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall. 37 Payments Income Statement AccountBalance Sheet Account For interestInterest expense + Decrease in Interest Payable - Increase in Interest Payable For income taxes Income tax expense + Decrease in Income Tax Payable - Increase in Income Tax Payable

38 38 Copyright © 2012 Pearson Education Inc. Publishing as Prentice Hall.

39 39


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