1. Copyright © 2007 Prentice-Hall. All rights reserved 1 The Statement of Cash Flows Chapter 16

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Objective 1 Identify the purposes of the statement of cash flows

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Statement of Cash Flows How did a company acquire cash and how did it spend it? Why did cash increase/decrease during the period?

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Purposes of the Statement of Cash Flows Predict future cash flows Evaluate management decisions Predict ability to pay debts and to pay dividends

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 CashCash Cash on hand and in the bank Cash equivalents –Highly liquid investments –Can convert into cash quickly –Money-market accounts –Investments in U.S. government securities

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 Objective 2 Distinguish among operating, investing, and financing cash flows

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 Basic Cash Flows 1.Operating activities 2.Investing activities 3.Financing activities

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 Operating Activities Transactions that make up net income Also affect current assets and current liabilities on the balance sheet

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 Operating Activities Inflows – cash receipts from earning revenues –Sale of goods or services –Interest revenue –Dividend revenue –Other revenues Outflows – cash paid from incurring expenses –Salaries and wages –Payments to suppliers for inventory –Taxes and fines –Interest paid to lenders –Other expenses Focus your attention on: income statement, and changes in current assets, current liabilities

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 Investing Activities Transactions that increase and decrease long-term assets

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Investing Activities Inflows –Selling long-term productive assets –Selling equity investments –Collecting of principal on loans –Other Outflows –Purchase long-term productive assets –Purchase equity investments –Purchase debt investments –Make loans Focus your attention on changes in: plant assets, long-term investments, other long-term assets

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 Financing Activities Increases and decreases in long-term liabilities and owner’s equity

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 Financing Activities Inflows –Issuing stock –Issuing bonds and notes Outflows –Cash dividends or withdrawals by owner –Purchase treasury stock –Repay cash loans Focus your attention on changes in: long-term debt and stockholder’s equity

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 Avery Corporation Statement of Cash Flows Year Ended December 31, 2008 Cash flows from Operating activities: List activities Net Cash Provided (Used) by Operating Activities$ xxxx Cash Flows from Investing Activities: List activities Net Cash Provided (Used) for Investing Activitiesxxxx Cash Flows from Financing Activities: List activities Net Cash Provided (Used) by Financing Activitiesxxxx Net Increase (Decrease) in Cash$ xxxx Cash Balance, beginningxxxx Cash Balance, ending$ xxxx

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Noncash Investing and Financing Investing and financing activities that do not affect cash –Acquire land by issuing a note payable –Retire debt by issuing stock –Convert preferred stock to common stock Report in separate schedule or in a note

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Format of the Statement of Cash Flows Two acceptable methods for reporting cash flows from operating activities 1.Indirect method 2.Direct method The Investing and Financing sections of the statement will not differ

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 Objective 3 Prepare the statement of cash flows by the indirect method

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Indirect Method Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation / amortization/depletion 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

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 Indirect Method Cash flows from investing activities: +Sales of long-term assets - Purchases of long-term assets Net cash provided by (used for) investing activities

20. Copyright © 2007 Prentice-Hall. All rights reserved 20 Indirect Method Cash flows from financing activities: + Issuance of stock + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes or bonds payable - Payment of dividends Net cash provided by (used for) financing activities

21. Copyright © 2007 Prentice-Hall. All rights reserved 21 Indirect Method Net increase (decrease) in cash during the year + Cash at December 31, beginning = Cash at December 31, ending

22. Copyright © 2007 Prentice-Hall. All rights reserved 22 E16-20E16-20 Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation / amortization/depletion 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

23. Copyright © 2007 Prentice-Hall. All rights reserved 23 E16-20E16-20 Cash flows from operating activities: Net income$43,000 Start with net income

24. Copyright © 2007 Prentice-Hall. All rights reserved 24 E16-20E16-20 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation / amortization/depletion expense 29,000 Think of the journal entry to record depreciation. Cash is not affected. When accrual basis net income was computed, depreciation decreased net income, but did not decrease cash. This is why it is added

25. Copyright © 2007 Prentice-Hall. All rights reserved 25 E16-20E16-20 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation29,000 + Loss on sale of long-term assets - Gain on sale of long-term assets The cash received from the sale of a long-term asset is reported in the Investing Activities section. The gain or loss does not affect cash. There were no gains or losses reported on the income statement

26. Copyright © 2007 Prentice-Hall. All rights reserved 26 E16-20E16-20 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation29,000 - 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 Cash +Other Assets =Liabilities +Owner’s Equity -15,000 +15,000 15,000 Now it is time to refer to the balance sheet. Think of the accounting equation in this way: Cash + Other Assets = Liabilities + Owner’s Equity. If you have a cash transaction and a noncash asset is increasing, then cash must be decreasing. If the noncash asset is decreasing, then cash is increasing. In this exercise accounts receivable decreased, which means the company collected more cash than the recorded revenues

27. Copyright © 2007 Prentice-Hall. All rights reserved 27 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation29,000 + Decreases in accounts receivable15,000 - Increases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities Net cash provided by operating activities E16-20E16-20 Cash +Other Assets =Liabilities +Owner’s Equity +7,000 -7,000 (7,000) Inventory increased. The company bought more inventory, which requires the use of cash

28. Copyright © 2007 Prentice-Hall. All rights reserved 28 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation29,000 + Decreases in accounts receivable15,000 - Increases in inventory(7,000) + Increases in current liabilities - Decreases in current liabilities Net cash provided by operating activities E16-20E16-20 Cash +Other Assets =Liabilities +Owner’s Equity +13,000 13,000 If you have a cash transaction and a liability is increasing, then cash must be increasing. If the liability is decreasing, then cash is decreasing. In this exercise accounts payable increased. The company paid less than the expense recognized

29. Copyright © 2007 Prentice-Hall. All rights reserved 29 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation29,000 + Decreases in accounts receivable15,000 - Increases in inventory(7,000) + Increases in accounts payable13,000 - Decreases in current liabilities Net cash provided by operating activities E16-20E16-20 Cash +Other Assets =Liabilities +Owner’s Equity -8,000 (8,000)

30. Copyright © 2007 Prentice-Hall. All rights reserved 30 E16-20E16-20 Cash flows from operating activities: Net income$43,000 Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation29,000 + Decreases in accounts receivable15,000 - Increases in inventory(7,000) + Increases in accounts payable13,000 - Decreases in accrued liabilities(8,000) Net cash provided by operating activities 85,000

31. Copyright © 2007 Prentice-Hall. All rights reserved 31 E16-20E16-20 Cash flows from investing activities: +Sales of long-term assets - Purchases of long-term assets Net cash provided by (used for) investing activities

32. Copyright © 2007 Prentice-Hall. All rights reserved 32 E16-20E16-20 Cash flows from investing activities: +Sales of long-term assets - Purchases of plant assets(101,000) Net cash provided by (used for) investing activities

33. Copyright © 2007 Prentice-Hall. All rights reserved 33 E16-20E16-20 Cash flows from investing activities: +Sales of long-term assets $24,000 - Purchases of plant assets(101,000) Net cash provided by (used for) investing activities

34. Copyright © 2007 Prentice-Hall. All rights reserved 34 E16-20E16-20 Cash flows from investing activities: +Sales of long-term assets $24,000 - Purchases of plant assets(101,000) Net cash Used for investing activities$(77,000)

35. Copyright © 2007 Prentice-Hall. All rights reserved 35 E16-20E16-20 Cash flows from financing activities: + Issuance of stock + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes or bonds payable - Payment of dividends Net cash provided by (used for) financing activities

36. Copyright © 2007 Prentice-Hall. All rights reserved 36 E16-20E16-20 Cash flows from financing activities: + Issuance of stock$30,000 + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes or bonds payable - Payment of dividends Net cash provided by (used for) financing activities

37. Copyright © 2007 Prentice-Hall. All rights reserved 37 E16-20E16-20 Cash flows from financing activities: + Issuance of stock$30,000 + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes payable(15,000) - Payment of dividends Net cash provided by (used for) financing activities

38. Copyright © 2007 Prentice-Hall. All rights reserved 38 E16-20E16-20 Cash flows from financing activities: + Issuance of stock$30,000 + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes payable(15,000) - Payment of dividends(11,000) Net cash provided by (used for) financing activities

39. Copyright © 2007 Prentice-Hall. All rights reserved 39 E16-20E16-20 Cash flows from financing activities: + Issuance of stock$30,000 - Payment of notes payable(15,000) - Payment of dividends(11,000) Net cash provided by financing activities $4,000

40. Copyright © 2007 Prentice-Hall. All rights reserved 40 Vitamin Plus, Inc. Statement of Cash Flows Year Ended June 30, 2006 Cash inflows from operating activities$85,000 Cash flows from investing activities: Acquired land($101,000) Sold land24,000 Net cash flows from investing activities(77,000) Cash flows from financing activities: Issued common stock$30,000 Paid long-term note(15,000) Paid dividends(11,000) Net cash flows from financing activities:4,000 Net increase in cash during the year$12,000 Cash balance, June 30, 200720,000 Cash balance, June 30, 2008$32,000

41. Copyright © 2007 Prentice-Hall. All rights reserved 41 E16-20E16-20 Note: Noncash investing and financing activities: Acquired land by issuing a note payable$15,000

42. Copyright © 2007 Prentice-Hall. All rights reserved 42 E16-20 (2) Vitamins Plus’ cash flows look fairly strong –Operations are the main source of cash –The company is investing in new plant assets without having to borrow much –It was able to issue stock and pay off a long- term note payable — both financing transactions All of these signs are favorable

43. Copyright © 2007 Prentice-Hall. All rights reserved 43 E16-21E16-21 Retained Earnings 45,000 Beg. Bal. 70,000 End. Bal. 60,000 Net income 105,000 Bal. ? 35,000 You start with $45,000. Net income increases retained earnings. If no dividends had been declared, the retained earnings balance should have been $105,000. Since the balance is $70,000, we declared dividends for the difference

44. Copyright © 2007 Prentice-Hall. All rights reserved 44 Exercise 16.21 Plant Assets 103,000 107,000 16,000 Depreciation 27,000 ? 114,000 Cash Gain on sale of assets4,000 Plant assets (net) 7,000 11,000 7,000 You start with $103,000, depreciation reduces the carrying value of the asset. Purchasing new assets increases the carrying value. If no assets were sold, the balance should have been $114,000. Since the balance is $107,000, the company sold $7,000 of assets Remember the journal entry that was prepared when you sold an asset? In this case, you know the amounts credited. The debit to cash was $11,000

45. Copyright © 2007 Prentice-Hall. All rights reserved 45 End of Chapter 16