12-1 STATEMENT OF CASH FLOWS Accounting, Fifth Edition 12

12-2 SELF-STUDY: Learning Objectives 1 thru 3 (Pages ): Quiz Thursday (April 21 st ) 1. 1.Indicate the usefulness of the statement of cash flows Distinguish among operating, investing, and financing activities Explain the impact of the product life cycle on a company’s cash flows. Appendix 12A: Prepare a statement of cash flows using the DIRECT method. (Pages 649 – 658) <= (In-Class) NOT-COVERED: Indirect Method (Pages 633 – 649): 1. 1.Prepare a statement of cash flows using the indirect method Use the statement of cash flows to evaluate a company. Learning Objectives

12-3 LO 1 Indicate the usefulness of the statement of cash flows. Provides information to help assess: 1.Entity’s ability to generate future cash flows. 2.Entity’s ability to pay dividends and obligations. 3.Reasons for difference between net income and net cash provided (used) by operating activities. 4.Cash investing and financing transactions during the period. Usefulness and Format Usefulness of the Statement of Cash Flows

12-4 Classification of Cash Flows LO 2 Distinguish among operating, investing, and financing activities. Usefulness and Format Income Statement Items Operating Activities Changes in Investments and Long-Term Asset Investing Activities Changes in Long-Term Liabilities and Stockholders’ Equity Financing Activities

12-5 Format of the Statement of Cash Flows

12-6 Usefulness and Format LO 2 Distinguish among operating, investing, and financing activities. Illustration 12-1 Typical receipt and payment classifications Classification of Cash Flows

12-7 Usefulness and Format LO 2 Distinguish among operating, investing, and financing activities. Illustration 12-1 Typical receipt and payment classifications Classification of Cash Flows

12-8 Illustration: Classify each of these transactions by type of cash flow activity. LO 2 Distinguish among operating, investing, and financing activities. 1. Issued 100,000 shares of $5 par value common stock for $800,000 cash. 2. Borrowed $200,000, signing a 5-year note bearing 8% interest. 3. Purchased two semi-trailer trucks for $170,000 cash. 4. Paid employees $12,000 for salaries and wages. 5. Collected $20,000 cash for services provided. Financing Investing Operating

12-9 Order of Presentation: 1.Operating activities. 2.Investing activities. 3.Financing activities. Direct Method Indirect Method NOT COVERED Usefulness and Format LO 2 Distinguish among operating, investing, and financing activities. Format of the Statement of Cash Flows

12-10 Three Sources of Information: 1.Comparative balance sheets 2.Current income statement 3.Additional information Usefulness and Format LO 3 Explain the impact of the product life cycle on a company’s cash flows. Preparing the Statement of Cash Flows

12-11 Appendix 12A LO 6 Prepare a statement of cash flows using the direct method. 1.Compute net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis. 2.Companies report only major classes of operating cash receipts and cash payments. 3.For these major classes, the difference between cash receipts and cash payments is the net cash provided by operating activities. Statement of Cash Flows-Direct Method

12-12 Appendix 12A Illustration 12A-2 LO 6 Step 1: Operating Activities Direct Method

12-13 Appendix 12A LO 6 Prepare a statement of cash flows using the direct method. Direct Method Illustration 12A-1

12-14 Appendix 12A LO 6 Prepare a statement of cash flows using the direct method. Direct Method Illustration 12A-1

12-15 LO 4 Additional information for 2014: 1.Depreciation expense was comprised of $6,000 for building and $3,000 for equipment. 2.The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash. 3.Issued $110,000 of long-term bonds in direct exchange for land. 4.A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also purchased for cash. 5.Issued common stock for $20,000 cash. 6.The company declared and paid a $29,000 cash dividend. Illustration 12A-1 Appendix 12A Direct Method

12-16 Appendix 12A Illustration 12A-4 Cash Receipts from Customers LO 6 Prepare a statement of cash flows using the direct method. For Computer Services, accounts receivable decreased $10,000. Illustration 12A-5 Direct Method Accounts Receivable 1/1/014 Balance 30,000 Sales revenue 507,000 Receipts from customers 517,000 12/31/14 Balance 20,000

12-17 Accounts Payable 12/31/14Balance 15,000 Appendix 12A Cash Payments to Suppliers LO 6 Prepare a statement of cash flows using the direct method. Illustration 12A-8 Inventory 1/1/14Balance 10,000 12/31/14Balance 15,000 Purchases155,000Cost of goods sold 150,000 Direct Method 1/1/14Balance 12,000 Purchases 155,000 12/31/14Balance 28,000 Payments to suppliers139,000 In 2014, Computer Services Company’s inventory increased $5,000 and cash payments to suppliers were $139,000.

12-18 Appendix 12A LO 6 Prepare a statement of cash flows using the direct method. Illustration 12A-9 Direct Method Cash Payments to Suppliers In 2014, Computer Services Company’s inventory increased $5,000 and cash payments to suppliers were $139,000.

12-19 Appendix 12A Illustration 12A-10 Cash Payments for Operating Expenses LO 6 Prepare a statement of cash flows using the direct method. Cash payments for operating expenses were $115,000. Illustration 12A-11 Direct Method

12-20 Appendix 12A Cash Payments for Interest LO 6 Prepare a statement of cash flows using the direct method. In 2014, Computer Services’ had interest expense of $42,000. Interest Payable 1/1/14Balance 0 12/31/14Balance 0 Interest expense42,000 Cash paid for interest 42,000 Direct Method

12-21 Appendix 12A Cash Payments for Income Taxes LO 6 Prepare a statement of cash flows using the direct method. Cash payments for income taxes were $49,000. Illustration 12A-13 Income Tax Payable 1/1/14Balance 8,000 12/31/14Balance 6,000 Income tax expense47,000 Cash paid for taxes49,000 Direct Method

12-22 Appendix 12A LO 6 Prepare a statement of cash flows using the direct method. Illustration 12A-14 Operating activities section of the statement of cash flows Direct Method

12-23 Appendix 12A Increase in Equipment. (1) Equipment purchased for $25,000, and (2) equipment sold for $4,000, cost $8,000, book value $7,000. LO 6 Prepare a statement of cash flows using the direct method. Step 2: Investing and Financing Activities Accumulated Depreciation 1/1/14Balance 1,000 12/31/14Balance 3,000 Depreciation expense3,000 Equipment sold1,000 Direct Method Equipment 1/1/14Balance 10,000 12/31/14Balance 27,000 Purchases25,000 Cost of equipment sold 8,000 Illustration 12A-15

12-24 Appendix 12A LO 6 Prepare a statement of cash flows using the direct method. Step 2: Investing and Financing Activities Cash 4,000 Accumulated depreciation 1,000 Loss on sale of equipment 3,000 Equipment 8,000 Direct Method Increase in Equipment. (1) Equipment purchased for $25,000, and (2) equipment sold for $4,000, cost $8,000, book value $7,000.

12-25 Company purchased land of $110,000 by exchanging bonds for land. This is a significant noncash investing and financing activity that merits disclosure in a separate schedule. LO 4 Prepare a statement of cash flows using the indirect method. Step 2: Investing and Financing Activities Land 1/1/14 Balance 20,000 Issued bonds 110,000 12/31/14 Balance 130,000 Bonds Payable 1/1/14 Balance 20,000 For land 110,000 12/31/14 Balance 130,000

12-26 From the additional information, the company acquired an office building for $120,000 cash. This is a cash outflow reported in the investing section. LO 4 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities 1/1/14 Balance 40,000 Office building 120,000 12/31/14 Balance 160,000 Building

12-27 Appendix 12A Increase in Land. Land increased $110,000. The company purchased land of $110,000 by issuing bonds. LO 6 Prepare a statement of cash flows using the direct method. Step 2: Investing and Financing Activities Significant noncash investing and financing transaction. Increase in Bonds Payable. Bonds Payable increased $110,000. The company acquired land by exchanging bonds for land. Significant noncash investing and financing transaction. Increase in Building. Acquired building for $120,000 cash. Investing transaction. Direct Method

12-28 Investing and Financing Activities Illustration Partial statement LO 4

12-29 The increase in common stock resulted from the issuance of new shares. LO 4 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities 1/1/14 Balance 50,000 Shares sold 20,000 12/31/14 Balance 70,000 Common Stock

12-30 Retained earnings increased $116,000 during the year. This increase can be explained by two factors: (1) Net income of $145,000 increased retained earnings, and (2) Dividends of $29,000 decreased retained earnings. LO 4 Prepare a statement of cash flows using the indirect method. Investing and Financing Activities 1/1/14 Balance 48,000 Net income 145,000 12/31/14 Balance 164,000 Dividends 29,000 Retained Earnings

12-31 Appendix 12A Increase in Common Stock. Increase in Common Stock of $20,000. Increase resulted from the issuance of new shares of stock. LO 6 Prepare a statement of cash flows using the direct method. Step 2: Investing and Financing Activities Increase in Retained Earnings. The $116,000 net increase in Retained Earnings resulted from net income of $145,000 and the declaration and payment of a cash dividend of $29,000. Financing transaction (cash dividend). Financing transaction. Direct Method

12-32 LO 4 Investing and Financing Activities Illustration Partial statement

12-33 Appendix 12A Direct Method