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© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-1 STATEMENT OF CASH FLOWS Chapter 13.

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Presentation on theme: "© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-1 STATEMENT OF CASH FLOWS Chapter 13."— Presentation transcript:

1 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-1 STATEMENT OF CASH FLOWS Chapter 13

2 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-2 Provides information about the cash receipts and cash payments of a business entity during the accounting period. Helps investors with questions about the companys: l Ability to generate positive cash flows. l Ability to meet its obligations and to pay dividends. l Need for external financing. l Investing and financing transactions for the period. Helps investors with questions about the companys: l Ability to generate positive cash flows. l Ability to meet its obligations and to pay dividends. l Need for external financing. l Investing and financing transactions for the period. Purpose of the Statement of Cash Flows

3 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-3

4 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-4 The Statement of Cash Flows must include the following three sections: l Cash Flows from Operating Activities l Cash Flows from Investing Activities l Cash Flows from Financing Activities The Statement of Cash Flows must include the following three sections: l Cash Flows from Operating Activities l Cash Flows from Investing Activities l Cash Flows from Financing Activities Classification of Cash Flows

5 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-5 Outflows to: l Suppliers of merchandise and services. l Employees. l Lenders for interest. l Governments for taxes. Outflows to: l Suppliers of merchandise and services. l Employees. l Lenders for interest. l Governments for taxes. Inflows from: l Sales to customers. l Interest and dividends received. Inflows from: l Sales to customers. l Interest and dividends received. Cash Flows from Operating Activities + _ Operating Activities

6 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-6 Cash Flows from Investing Activities + _ Inflows from: l Selling investments and plant assets. l Collecting of principal on loans. Inflows from: l Selling investments and plant assets. l Collecting of principal on loans. Outflows to: l Payments to acquire investments and plant assets. l Purchase debt or equity investments. l Make loans. Outflows to: l Payments to acquire investments and plant assets. l Purchase debt or equity investments. l Make loans. Investing Activities

7 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide _ Inflows from: l Short-term and long-term borrowing. l Owners (for example, from issuing stock). Inflows from: l Short-term and long-term borrowing. l Owners (for example, from issuing stock). Outflows to: l Repayments of borrowed funds. l Owners for dividends. l Purchase treasury stock. Outflows to: l Repayments of borrowed funds. l Owners for dividends. l Purchase treasury stock. Financing Activities Cash Flows from Financing Activities

8 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-8 Cash Equivalents Cash Currency l Short-term, highly liquid investments. l Readily convertible into cash. l So near maturity that market value is unaffected by interest rate changes. l Short-term, highly liquid investments. l Readily convertible into cash. l So near maturity that market value is unaffected by interest rate changes. Cash and Cash Equivalents

9 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide 13-9 The operating cash flows section can be prepared using either the direct method or the indirect method. Lets look at the Direct Method for preparing the Statement of Cash Flows.

10 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Accrual basis revenue includes sales that did not result in cash inflows. Can be computed as: Cash Received from Customers Decrease in receivables Increase in receivables + – = = Net Sales Direct Method Cash Received from Customers

11 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide – = = The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue? Decrease in receivables Increase in receivables Net Sales $900,000 Net Sales $900,000 Direct Method Cash Received from Customers Cash Received from Customers

12 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Cash Received from Customers = $870,000 Decrease in receivables $30,000 Increase in receivables – = Net Sales $900,000 Net Sales $900,000 The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis revenue? Direct Method Cash Received from Customers

13 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Now that we understand the process, lets look at some simplified formulas for computing direct method cash flows.

14 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method Interest and Dividends Received

15 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Step 1 Step 2 Direct Method Cash Paid for Merchandise

16 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide How much did Lug Lite pay for inventory in 2003? a. $900,000 b. $923,000 c. $947,000 d. $877,000 Direct Method Cash Paid for Merchandise Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000 Cash Paid for Merchandise in 2003 was $923,000. Cash Paid = $935,000 - $12,000 Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000 Cash Paid for Merchandise in 2003 was $923,000. Cash Paid = $935,000 - $12,000

17 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. Cash Paid for Expenses = + Increase in prepaid expenses -Decrease in prepaid expenses + Decrease in accrued liabilities -Increase in accrued liabilities {{ Direct Method Cash Payments for Expenses

18 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Now, lets prepare a direct method Statement of Cash Flows for Grate Big Company.

19 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example

20 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example

21 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example

22 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example Additional Information Trading Securities were purchased during 2003 at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Equipment with a book value of $30,000 was destroyed during a freak flood in There was no insurance. Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method. Additional Information Trading Securities were purchased during 2003 at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Equipment with a book value of $30,000 was destroyed during a freak flood in There was no insurance. Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method.

23 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example Additional Information Grate Bigs tax rate is 40%. The Notes Payable to Bobs Bank carry a 12% rate. The payments are due on the first day of each month. The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1. Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny Co. Additional Information Grate Bigs tax rate is 40%. The Notes Payable to Bobs Bank carry a 12% rate. The payments are due on the first day of each month. The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1. Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny Co.

24 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example Cash Received from Customers Cash Paid to Employees

25 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example Cash Paid for Inventory Cash Paid for Interest

26 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example Cash Paid for Taxes Other Operating Cash Flows

27 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Direct Method - Example Cash Flows From Operating Activities

28 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Equipment with a book value of $40,000 was sold for $43,000. Notes Payable decreased from $70,000 to $60,000 during Bonds Payable decreased from $250,000 to $150,000 during 2003.

29 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the 12/31/03 Cash balance on the Balance Sheet.

30 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Lets look at the Indirect Method that is used by over 97% of all companies.

31 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Net Income Cash Flows from Operating Activities Indirect Method Changes in current assets and current liabilities as shown on the following table. + Losses and - Gains + Noncash expenses such as depreciation and amortization.

32 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Use this table when adjusting Net Income to Operating Cash Flows. Indirect Method

33 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Lets prepare a complete Statement of Cash Flows using the Indirect Method.

34 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Joes Place has prepared the Balance Sheet as of March 31, 2003, and March 31, The Income Statement for the year ended 3/31/03 has also been prepared. Joe needs help preparing the Statement of Cash Flows. Joes Place Indirect Method - Example

35 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide The $8,000 gain was the result of selling land costing $32,000 for $40,000 during the period. Indirect Method - Example

36 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Indirect Method - Example

37 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Joes Place issued $50,000 of no par common stock to settle the $50,000 note payable. Indirect Method - Example

38 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Indirect Method - Example

39 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide With the indirect method, always start with the net income or net loss for the period. Indirect Method - Example

40 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Indirect Method - Example

41 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Accounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000) Accounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000) Indirect Method - Example

42 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Accounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000 Accounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000 Indirect Method - Example

43 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Inventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000 Inventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000 Indirect Method - Example

44 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Salaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000) Salaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000) Indirect Method - Example

45 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Add back non-cash expenses. Indirect Method - Example

46 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Subtract gains. Indirect Method - Example

47 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide The operating cash flows amount comes from the schedule just prepared. Indirect Method - Example

48 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Land originally costing $32,000 was sold for $40,000. Indirect Method - Example

49 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Dividends of $20,000 were paid to owners during the year. Indirect Method - Example

50 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Compute the net change in cash for the period. Indirect Method - Example

51 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Complete the Statement of Cash Flows by reconciling beginning cash to ending cash. Indirect Method - Example

52 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Note that the ending cash amount ties back to the Joes Place Balance Sheet at 3/31/03. Indirect Method - Example

53 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide In addition, on the face of the statement or in a supplemental schedule, disclose the $50,000 noncash financing activity. Indirect Method - Example

54 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide In addition, cash interest payments and cash tax payments must also be disclosed separately. Indirect Method - Example

55 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Cash Budgets are used by management to plan and forecast future cash flows. Managing Cash Flows

56 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. Managing Cash Flows

57 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Cash Budgeting The ending cash balance of one month becomes the beginning cash balance of the next month.

58 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide Cash Budgeting Financing is needed in June because the company must maintain a minimum cash balance of $10,000.

59 © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Slide End of Chapter 13 Chester, ol buddy, I wonder if you could help me with a little cash flow problem Im having?


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