1. Financial Accounting, Seventh Edition
Chapter 13
Statement of Cash Flows

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

3. Consolidated Statement of Cash Flows Why are these numbers different?
APPLE, Inc
Consolidated Statement of Cash Flows
As of September 29,2012
Net Income
$41,733 millions
Net Cash Flow from Operating activities
$50,856 millions
Why are these numbers different?

4. Cash Cash Equivalents Meaning of Cash and Cash Equivalents
Deposits in Bank Accounts (Checking/Savings)
Currency
Cash Equivalents
Short-term, highly liquid investments.
Readily convertible into cash.
So near maturity that market value is unaffected by interest rate changes (typically, less than 3 months)
How much Cash and Cash Equivalents did APPLE Company have on Sep 29, 2012?
$10,746 MILLIONS

5. Usefulness and Format Classification of Cash Flows
Operating Activities
Investing Activities
Financing Activities
Income Statement Items
Generally Long-Term Asset Items
Generally Long-Term Liability and Equity Items

6. Operating Activities
Operating activities include cash received and paid related to selling goods and rendering services and are directly related to the company’s primary day-to-day business activities.

7. Investing Activities Cash Flows Involving…
1. Acquisition and disposing of property, plant, and equipment and intangible assets
2. Purchase and sale of other company’s stocks, bonds, and other non cash-equivalent securities. Does NOT include purchase and sale of Treasury Stock.
3. Lending and subsequent collection of money (only principal).

8. Financing Activities
Cash Flows Involving….
1. Obtaining capital from owners / stockholders 2. Paying dividends to owners/stockholders 3. Borrowing from creditors 4. Repaying amounts borrowed from creditors (only principal) 5. Purchase and reissue of Treasury Stock.

9. Format of the Statement of Cash Flows
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.

10. Knowledge Check: The declaration of dividends by the board of directors would be reported on a statement of cash flows as a(an):
cash inflow under the financing activities
cash outflow under the financing activities
cash outflow under the investing activities
activity that would not be reported on a statement of cash flows

11. Usefulness and Format Format of the Statement of Cash Flows
Order of Presentation:
Operating activities.
Investing activities.
Financing activities.
The cash flows from operating activities section always appears first, followed by the investing and financing sections.
Direct Method
Indirect Method

12. Format of the Statement of Cash Flows

13. Example of a Statement of Cash Flows
1. Borrowed $100,000 from a bank by signing a 10%, one-year note.
2. Paid $50,000 to purchase land
3. Earned $150,000 of revenue, of which $55,000 was charged to store credit cards.
4. Paid $40,000 of wages
5. Sold Available for Sale Securities for $25,000
6. Paid a $5,000 cash dividend
7. Paid back the bank loan from transaction (1) plus $10,000 of interest.

14. Knowledge Check: Gloria Company reported the following transactions for 2011: 1. Sold equipment for $22, Received $2,000 in dividends on investments 3. Acquired a building with a market value of $250,000 by issuing ,000 shares of common stock. 4. Made a loan of $2,000 to a customer. 5. Paid back Notes payable for $5,000, and paid interest of $1, Reacquired 300 shares of its own common stock at $20 per share 7. Purchased equipment costing $30,000, by making a cash down payment of $20,000 and signing a note for the remaining $10,000. The net cash flow from investing activities in the Statement of Cash Flows is:
$2,000 $0
($12,000)
($10,000)

15. Knowledge Check: Gloria Company reported the following transactions for 2011: 1. Sold equipment for $22, Received $2,000 in dividends on investments 3. Acquired a building with a market value of $250,000 by issuing 20,000 shares of common stock. 4. Made a loan of $2,000 to a customer. 5. Paid back Notes payable for $5,000, and paid interest of $1, Reacquired 300 shares of its own common stock at $20 per share 7. Purchased equipment costing $30,000, by making a cash down payment of $20,000 and signing a note for the remaining $10,000. The net cash flow from financing activities in the Statement of Cash Flows is:
($9,000)
($13,000)
($11,000)
($12,000)

16. Knowledge Check: Upon Reviewing Lisa Company’s Statement of cash Flows, the following was noted: Cash Flows from Operating Activities: $75,000 Cash Flows from Investing Activities: $(135,000) Cash Flows from Financing Activities: $125,000 From this information, the most likely explanation is that Lisa is:
Using Cash from operations and selling long term assets to pay back debt
Using Cash from operations and borrowing to purchase long term assets
Using profits for expansion and growth
Using cash from investors to provide for operations

17. Usefulness and Format Preparing the Statement of Cash Flows
Three Sources of Information:
Comparative balance sheets
Current income statement
Additional information

18. Usefulness and Format Indirect and Direct Methods
Companies favor the indirect method for two reasons:
It is easier and less costly to prepare, and
It focuses on the differences between net income and net cash flow from operating activities.

19. Preparing the Statement of Cash Flows
Indirect Method
Operating Activities
Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis.
Common adjustments to Net Income (Loss):
Add back non-cash expenses.
Deduct gains and add losses.
Changes in noncash current assets and current liabilities.

20. Adjustments to Net Income
Step 1: Add back noncash expenses
Non Cash Expenses (such as Depreciation, Depletion, Amortization Expense, Bad Debts Expense) reduces Net Income, but does NOT reduce Cash. So these expenses must be added back to Net Income to determine Cash Flow from Operating Activities.

21. Adjustments to Net Income
Step 2: Make adjustments for Losses / Gains
Because companies report as a source of cash in the investing / financing activities section the actual amount of cash received from the sale:
Any loss on sale is added to net income in the operating section.
Any gain on sale is deducted from net income in the operating section.

22. = + Liabilities Equity Assets Adjustments to Net Income
Step 3: Make adjustments for Changes in Noncash Assets and Liabilities
Liabilities
Equity
Assets = +

23. Preparing the Statement of Cash Flows
Summary of Conversion from Net Income to Net Cash Provided by Operating Activities using the Indirect Method

24. Juicy Juice Company’s Financial Statements
Use the following information to prepare the Statement of Cash Flows for Juicy Juice Company.
Juicy Juice Company
Balance Sheet
As of December 31
Assets
2012
2011
Cash
$ 40,600
$ 36,700
Accounts receivable
32,800
37,000
Interest receivable
100
Inventory
65,400
52,300
Prepaid insurance
2,900
3,200
Equipment
113,500
127,500
Accumulated depreciation
(22,000)
(14,000)
Total assets
$233,300
$242,700
Liabilities
Accounts payable
$ 27,900
$ ,400
Wages payable
16,500
15,000
Interest payable
2,600
4,200
Income tax payable
8,100
5,400
Unearned revenue
15,100
18,300
Long-term loan payable
60,000
73,000
Equities
Common stock
59,100
47,000
Retained earnings
44,000
37,400
Total liabilities and equity
Juicy Juice Company
Income Statement
For the Year Ended December 31, 2012
Sales revenue
$546,000
Cost of goods sold
291,300
Gross profit
$254,700
Operating expenses:
Rent expense
5,900
Wages expense
67,800
Advertising expense
3,000
Depreciation expense
11,400
Insurance expense
19,000
Total operating expenses
107,100
Operating income
$147,600
Interest income
100
Loss on sale of equipment
(2,000)
Interest expense
(8,900)
Income before taxes
136,800
Income tax expense
39,800
Net income
$97,000
Additional Data for 2012:
Sold equipment costing $14,000 for $ ?
Paid back Long Term Loan Payable $?
Issued Common Stock for cash $?
Paid Cash dividends, $?

25. Operating Activities Section of Juicy Juice Company’s Statement of Cash Flows

26. Knowledge Check Question: A company's income statement showed the following: net income, $124,000; depreciation expense, $30,000; and gain on sale of plant assets, $14,000. An examination of the company's current assets and current liabilities showed the following changes as a result of operating activities: accounts receivable decreased $9,400; merchandise inventory increased $18,000; prepaid expenses decreased $6,200; accounts payable increased $3,400. Calculate the net cash provided by operating activities.
$139,000.
$141,000.
$145,800.
$155,000.

27. Investing Activities for Juicy Juice Company
The Additional Data section notes that Juicy Juice Company sold some equipment. Determine the cash proceeds from the sale.

28. Financing Activities for Juicy Juice Company
The Additional Data section notes that the company paid back some of its Long Term Loan Payable. Determine the cash payment.

29. Financing Activities for Juicy Juice Company
The additional data section notes that the company issued some new shares for cash. Determine the cash proceeds.

30. Financing Activities for Juicy Juice Company
The Additional Data section reported that the company paid cash dividends. Determine the cash paid for dividends.

31. Knowledge Check: Equipment costing $100,000 with accumulated depreciation of $40,000 is sold at a loss of $10,000. What amount would be reported under “Cash Flows from Investing Activities?
$40,000
$50,000
$60,000
$70,000

32. Knowledge Check: Lance Company’s financial statements showed that the Retained Earnings account had a balance of $30,100 on December 31, 2010, and a balance of $41,500 on December 31, The net income for the year 2011 was $25,800. If the only change affecting retained earnings are net income and cash dividends paid, calculate the cash dividends paid during 2011.
$10,100
$45,800
$14,400
$15,700

33. APPLE, Inc. Consolidated Statement of Cash Flows
As of September 29, 2012
(all amounts in millions)
Operating Activities:
Net Income
$ 41,733
Adjustments:
Depreciation and Amortization
3,277
Share based compensation expense
1,740
Deferred Income Tax expense
4,405
Changes in Operating Assets and Liabilities:
Accounts Receivable
(5,551)
Inventories
(15)
Vendor non trade receivables
(1,414)
Other current and noncurrent assets
(3,162)
Accounts Payable
4,467
Deferred Revenue
2,824
Other current and noncurrent liabilities
2,552
Cash generated by operating activities
$ 50,856

34. Increase in Cash and Cash Equivalents $ 931
APPLE, Inc. Consolidated Statement of Cash Flows (as of September 29, 2012)
Investing Activities:
Purchasing of Marketable Securities
$(151,232)
Proceeds from maturities of marketable securities
13,035
Proceeds from sale of marketable securities
99,770
Payments made in connection with business acquisitions
(350)
Payments for acquisition of property, plant and equipment
(8,295)
Payments for acquisition of intangible assets
(1,107)
Other
(48)
Cash used in investing activities
$(48,227)
Financing Activities:
Proceeds from issuance of common stock
665
Excess tax benefits from equity awards
1,351
Dividends and dividend equivalent rights paid
(2,488)
Taxes paid related to net share settlement of equity awards
(1,226)
Cash used in financing activities
$(1,698)
Increase in Cash and Cash Equivalents
$ 931

35. What was Apple’s Free Cash Flow in 2012?
Using Cash Flows to Evaluate a Company
Free Cash Flow
Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends.
What was Apple’s Free Cash Flow in 2012?

36. Why is Accounting Important??
BERNARD J. EBBERS Former chairman and chief executive of WorldCom
Mr. Ebbers was accused of securities fraud, conspiracy and causing the company to make false filings with the Securities Exchange Commission (SEC). For example, WORLDCOM deliberately misclassified operating cash flows (payments for leased telecommunications lines) as investing cash flows.
Guilty on all counts. Sentenced to 25 years to life. (He was 68 years old when he was sentenced).

37. End of Chapter 13 The three keys to success: One, Get up early;
Two, Work hard;
Three, Find oil.
J. Paul Getty