1. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1 The Statement of Cash Flows Chapter 12

2. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 2 Objective 1 Identify the purposes of the statement of cash flows.

3. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 3 Reports the entity’s cash flows (cash receipts and cash payments) during the period Basic Concepts

4. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 4 Purposes of the Statement of Cash Flows 1.Predict future cash flows 2.Evaluate management decisions 3.Determine the ability to pay dividends to stockholders’ and payments to creditors 4.Show the relationship of net income to the business’s cash flows

5. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 5 What is Cash? Cash on hand Cash in the bank Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delay Money-market investments U.S. Government Treasury bills

6. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 6 Objective 2 Distinguish among operating, investing, and financing cash flows.

7. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 7 Operating, Investing, and Financing Activities Operating activities create revenues, expenses, gains, and losses. Investing activities increase and decrease long-term assets. Financing activities obtain cash from investors and creditors.

8. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 8 Two Formats for Operating Activities Indirect method reconciles from net income to net cash provided by operating activities Direct method reports all cash receipts and cash payments from operating activities The two methods have no effect on investing or financing activities.

9. Two Formats for Operating Activities Indirect Method Net income$XXX Adjustments: Depreciation, etc. XXX Net income provided by operating activities$XXX Direct Method Collection from customers$XXX Deductions: Payment to suppliers, etc. XXX Net income provided by operating activities$XXX ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

10. 10 Objective 3 Prepare a statement of cash flows by the indirect method.

11. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 11 The Indirect Method: Operating Activities Positive Items Net income Depreciation/amortization Loss on sale of long-term assets Decreases in current assets other than cash Increases in current liabilities Negative Items Net loss Gain on sale of long-term assets Increases in current assets other than cash Decreases in current liabilities

12. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 12 The Indirect Method: Investing Activities Positive Items Sale of plant assets Sale of investments that are not cash equivalents Collections of loans receivable Negative Items Acquisition of plant assets Purchase of investments that are not cash equivalents Making loans to others

13. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 13 The Indirect Method: Financing Activities Positive Items Issuing stock Selling treasury stock Borrowing money Negative Items Payment of dividends Purchase of treasury stock Payment of principal amounts of debts

14. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 14 Comparative Balance Sheets Assets Current: Cash Accounts receivable Interest receivable Inventory Prepaid expenses Long-term receivable Plant assets, net Total $ 22 93 3 135 8 11 453 $725 $ 42 80 1 138 7 – 219 $487 $ (20) 13 2 (3) 1 11 234 $238 (In thousands)20x220x1Inc/dec) Anchor Corporation – December 31

15. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 15 Comparative Balance Sheets Liabilities Current: Accounts payable Salary payable Accrued liabilities Long-term debt Stockholders’ equity Common stock Retained earnings Total $91 34 1 160 359 110 $725 $ 57 6 3 77 258 86 $487 $ 34 (2) 83 101 24 $238 (In thousands)20x220x1Inc/dec) Anchor Corporation – December 31

16. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 16 Income Statement Revenues and gains: Sales revenue$284 Interest revenue 12 Dividend revenue 9 Gain on sale of plant assets 8 Total revenues and gains$313 Anchor Corporation Year Ended December 31, 20x2 (In thousands)

17. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 17 Expenses: Cost of goods sold$150 Salary and wage expense56 Depreciation expense18 Other operating expense17 Interest expense16 Income tax expense 15 Total expenses$272 Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands)

18. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 18 Total revenues and gains$313 Total expenses 272 Net income$ 41 Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands)

19. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 19 Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands) Cash flows from operating activities: Net Income $41 Adjustments to reconcile net income to net cash provided by operating activities: ADepreciation18 BGain on sale of plant(8) Statement of Cash Flows: Operating Activities Depreciation does not affect cash, but it decreases net income – add it back in. Sales of long-term assets are investing Activities – remove gains from net income.

20. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 20 CIncrease in accounts receivable(13) CIncrease in interest receivable(2) CDecrease in inventory3 CIncrease in prepaid expenses(1) CIncrease in accounts payable34 CDecrease is salary payable(2) CDecrease in accrued liabilities (2) 27 Net cash provided by operating activities$68 Statement of Cash Flows: Operating Activities Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

21. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 21 Changes in Current Asset and Current Liability Accounts – C 1. An increase in a current asset other than cash indicates a decrease in cash. 2. A decrease in a current asset other than cash indicates an increase in cash. 3. A decrease in a current liability indicates a decrease in cash. 4. An increase in a current liability indicates an increase in cash.

22. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 22 Statement of Cash Flows: Investing Activities Cash flows from investing activities: Acquisition of plant assets$(306) Loan to another company(11) Proceeds from sale of plant assets 62 Net cash used for investing activities$(255) Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

23. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 23 Statement of Cash Flows: Financing Activities Cash flows from financing activities: Proceeds from issuance of common stock$101 Proceeds from issuance of long-term debt94 Payment of long-term debt(11) Payment of dividends (17) Net cash provided by financing activities$167 Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

24. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 24 Statement of Cash Flows Net cash provided by operating activities$ 68 Net cash used for investing activities (255) Net cash provided by financing activities 167 Net decrease in cash$ (20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2$ 22 Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

25. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 25 Computing Acquisition and Sales of Plant Assets Anchor had plant assets, net of depreciation, of $219,000 at the beginning of the year and $453,000 at year end. The acquisition of plant assets amounted to $306,000 during the year.

26. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 26 Computing Acquisition and Sales of Plant Assets The income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets. What is the book value of the assets sold? Beginning balance + Acquisitions – Depreciation – Book value of assets sold = Ending balance

27. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 27 Computing Acquisition and Sales of Plant Assets $219,000 + 306,000 – 18,000 – X = $453,000 How much are the proceeds from the sale of plant assets? X = $219,000 + 306,000 – 18,000 – 453,000 X = $54,000 (book value)

28. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 28 Computing Acquisition and Sales of Plant Assets Book value + Gain – Loss = Sale proceeds $54,000 + $8,000 – 0 = $62,000

29. Computing Acquisition and Sales of Plant Assets Plant Assets (Net) Beginning bal. 219,000 Acquisitions 306,000 Ending bal. 453,000 Depreciation18,000 Book val.54,000 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

30. 30 Computing Acquisition and Sales of Investments Beginning balance + Purchases – Book value of investment sold = Ending balance

31. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 31 Computing Loans and Their Collections Beginning balance + New loans made – Collections = Ending balance

32. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 32 Computing Issuances and Payments of Long-Term Debt Beginning balance was $77,000. New debt amounting to $94,000 was incurred during the year. The ending balance for the Long-Term Debt account was $160,000. How much was the payment?

33. Computing Issuances and Payments of Long-Term Debt Long-Term Debt Beginning bal. 77,000 New debt 94,000Payments11,000 Ending bal. 160,000 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

34. 34 Computing Issuances of Stock: Purchases of Treasury Stock Beginning balance of common stock + Issuance of new stock = Ending balance Beginning balance of treasury stock + Purchase of treasury stock = Ending balance

35. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 35 Computing Dividend Payments Retained earnings beginning balance + Net income – Dividends declared = Ending balance $86,000 + $41,000 – X = $110,000 X = $110,000 – $86,000 – $41,000 X = $17,000

36. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 36 Noncash Investing and Financing Activities Suppose Anchor Corporation issued Common stock valued at $300,000 to acquire a warehouse. Warehouse Building300,000 Common Stock300,000

37. Noncash Investing and Financing Activities Noncash Investing and Financing Activities:(000) Acquisition of building by issuing common stock$300 Acquisition of land by issuing note payable 70 Payment of long-term debt by issuing common stock100 Total noncash investing and financing activities$470 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

38. 38 Learning Objective 4 Prepare a statement of cash flows by the direct method.

39. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 39 The Direct Method The FASB has expressed a preference for the direct method Provides clearer information about the sources and uses of a company’s operating cash

40. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 40 Cash flows from operating activities: Receipts: Collections from customers$271 Interest received on notes receivable10 Dividends received on investments in stock 9 Total cash receipts$290 Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) The Direct Method

41. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 41 Payments: To suppliers$133 To employees58 For interest16 For income tax 15 Total payments 222 Net cash provided by operating activities $ 68 The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands)

42. Net cash provided by operating activities$ 68 Net cash used for investing activities(255) Net cash provided by financing activities 167 Net decrease in cash$(20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2$ 22 The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

43. 43 Cash Flows from Operating Activities Cash collections from customers Cash receipts of interest Cash receipts of dividends Payments to suppliers Payments to employees Payments for interest and income tax expense

44. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 44 Purchases of plant assets; investments in, and loans to, other companies Proceeds from the sale of plant assets and investments; and the collections of loans Cash Flows from Investing Activities

45. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 45 Proceeds from the issuance of stock and debt Payment of debt and purchases of the company’s own stock Payment of cash dividends Cash Flows from Financing Activities

46. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 46 Computing Cash Collections from Customers Beginning accounts receivable balance + Sales on account – Collections = Ending accounts receivable balance

47. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 47 Computing Payments to Suppliers Step 1: How much were the purchases? Beginning inventory + Purchases – Cost of goods sold = Ending Inventory $138,000 + X – $150,000 = $135,000 X = $150,000 – $138,000 + $135,000 X = $147,000

48. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 48 Computing Payments to Suppliers Accounts Payable Payments for inventory Beg. balance 57,000 Purchases147,000 End. balance 91,000

49. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 49 Computing Payments to Suppliers Step 2: How much did the business pay for this inventory? Beginning Accounts Payable + Purchases – Payments = Ending Accounts Payable $57,000 + $147,000 – X = $91,000 X = $57,000 + $147,000 – $91,000 X = $113,000

50. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 50 Computing Payments for Operating Expenses Beginning prepaid expense + Payments – Expiration of prepaid expense = Ending balance Beginning accrued liabilities + Accrual of expense at year end – Payments = Ending balance Accrual of other operating expenses at year end + Expiration of prepaid expense + Payments = Ending balance

51. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 51 Computing Payments to Employees Salary Payable was $6,000 at the beginning of the year and $4,000 at year end. During the year, Salary Expense was $56,000. How much did the business pay? $58,000

52. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 52 Measuring Cash Adequacy: Free Cash Flow The amount of cash available from operations after paying for planned investments in plant, equipment, and other long-term assets. Net cash flow from operating activities – Cash outflow earmarked for investments in plant, equipment, and other long-term assets

53. ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 53 End of Chapter 12