23-1 Intermediate Accounting 14th Edition 23 Statement of Cash Flows Kieso, Weygandt, and Warfield

23-2 LO 1 Describe the purpose of the statement of cash flows. Primary purpose: To provide information about a company’s cash receipts and cash payments during a period. Secondary objective: To provide cash-basis information about the company’s operating, investing, and financing activities. Section 1 - Preparation of the Statement of Cash Flows

23-3 LO 1 Describe the purpose 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 meet obligations. 3.Reasons for difference between net income and net cash flow from operating activities. 4.Cash and noncash investing and financing transactions. Usefulness of the Statement of Cash Flows

23-4 Income Statement Transactions Operating Activities Changes in Investments and Long-Term Asset Items Investing Activities Changes in Long-Term Liabilities and Stockholders’ Equity Financing Activities Classification of Cash Flows LO 2 Identify the major classifications of cash flows.

23-5 Illustration 23-1 Classification of Typical Cash Inflows and Outflows Classification of Cash Flows LO 2 Identify the major classifications of cash flows.

23-6 Illustration 23-1 Classification of Typical Cash Inflows and Outflows Classification of Cash Flows LO 2 Identify the major classifications of cash flows.

23-7 The basis recommended by the FASB for the statement of cash flows is actually “cash and cash equivalents.” Cash equivalents are short-term, highly liquid investments that are both:  Readily convertible to known amounts of cash, and  So near their maturity that they present insignificant risk of changes in value (e.g., due to changes in interest rates). Generally, only investments with original maturities of three months or less qualify under this definition. LO 2 Identify the major classifications of cash flows. Classification of Cash Flows

23-8 Format of the Statement of Cash Flows Presentation: 1.Operating activities. 2.Investing activities. 3.Financing activities. Direct Method Indirect Method Report inflows and outflows from investing and financing activities separately. LO 2 Identify the major classifications of cash flows.

23-9 Format of the Statement of Cash Flows Illustration 23-2 LO 2 Identify the major classifications of cash flows.

23-10 Three Sources of Information: 1.Comparative balance sheets. 2.Current income statement. 3.Selected transaction data. Steps in Preparation Three Major Steps: Step 1. Determine change in cash. Step 2. Determine net cash flow from operating activities. Step 3. Determine net cash flows from investing and financing activities. LO 2 Identify the major classifications of cash flows.

23-11 First Example Illustration: Tax Consultants Inc. started on January 1, 2011, when it issued 60,000 shares of $1 par value common stock for $60,000 cash. The company rented its office space, furniture, and equipment, and performed tax consulting services throughout the first year. The comparative statements of financial position at the beginning and end of the year 2011 appear in Illustration Illustration 23-4 shows the income statement and additional information for Tax Consultants. LO 2 Identify the major classifications of cash flows.

23-12 First Example Illustration 23-3 Comparative Balance Sheets, Tax Consultants Inc., Year 1 Illustration 23-4 Income Statement, Tax Consultants Inc., Year 1

23-13 First Example Step 1: Determine the Change in Cash Illustration 23-3 LO 2 Identify the major classifications of cash flows.

23-14 First Example  Company must determine revenues and expenses on a cash basis.  Eliminate the effects of income statement transactions that do not result in an increase or decrease in cash.  Convert net income to net cash flow from operating activities through either a direct method or an indirect method. Step 2: Determine the Net Cash Flow from Operating Activities LO 3 Differentiate between net income and net cash flow from operating activities.

23-15 Deducts operating cash disbursements from operating cash receipts. LO 4 Contrast the direct and indirect methods of calculating net cash flow from operating activities. “Net cash provided by operating activities” is the equivalent of cash basis net income. Illustration 23-6 First Example Direct Method

23-16 LO 4 First Example Accounts Receivable 1/1/11Balance0 Revenues125,000 Receipts from customers89,000 12/31/11Balance36,000 Direct Method Illustration 23-7 Illustration 23-6

23-17 First Example Accounts Payable 1/1/11Balance0 Operating expenses85,000 12/31/11Balance5,000 Payments for expenses80,000 Direct Method LO 4 Illustration 23-6

23-18 First Example Income Tax Payable 1/1/11Balance0 Tax expense6,000 12/31/11Balance0 Payments for taxes6,000 Direct Method LO 4 Illustration 23-6

23-19 First Example Indirect Method LO 4 Illustration 23-8 Computation of Net Cash Flow from Operating Activities, Year 1—Indirect Method Common adjustments to Net Income (Loss):  Depreciation and amortization expense.  Gain or loss on disposition of long-term assets.  Change in current assets and current liabilities.

23-20 First Example Step 3: Determine Net Cash Flows from Investing and Financing Activities Illustration 23-3 No long-term assets, thus no investing activities. LO 5 Determine net cash flows from investing and financing activities.

23-21 First Example Step 3: Determine Net Cash Flows from Investing and Financing Activities Illustration 23-3 LO 5 Determine net cash flows from investing and financing activities. Purchase of common stock for $60,000 (Financing).

23-22 First Example Net income of $34,000 (Operating). Dividends paid of $(14,000) (Financing). LO 5 Step 3: Determine Net Cash Flows from Investing and Financing Activities Illustration 23-3

23-23 First Example Statement of Cash Flows Illustration 23-9 LO 6 Prepare a statement of cash flows.

23-24 E23-6: Norman Company’s financial statements for the year ended December 31, 2012, contained the following condensed information. Operating Activities — Indirect Method LO 4

23-25 E23-6: Prepare the operating activities section of the statement of cash flows using the indirect method (Step 2). Operating Activities — Indirect Method LO 4 Advance slide to uncover solution

23-26 Adjustments to Net Income LO 8 Discuss special problems in preparing a statement of cash flows.  Amortization of limited-life intangible assets.  Amortization of bond discount or premium. Depreciation and Amortization Postretirement Benefit Costs  Company must adjust net income by the difference between cash paid and the expense reported.

23-27 Adjustments to Net Income LO 8 Discuss special problems in preparing a statement of cash flows.  A loss is added to net income to compute net cash flow from operating activities because the loss is a non-cash charge in the income statement.  Company reports a gain in the statement of cash flows as part of the cash proceeds from the sale of equipment under investing activities, thus it deducts the gain from net income to avoid double-counting—once as part of net income and again as part of the cash proceeds from the sale. Loss and Gains

23-28 Adjustments to Net Income LO 8 Discuss special problems in preparing a statement of cash flows.  Cash is not affected by recording the expense.  The company must increase net income by the amount of compensation expense from share options in computing net cash flow from operating activities. Stock Options

23-29 Adjustments to Net Income LO 8 Discuss special problems in preparing a statement of cash flows. Companies should report either as investing activities or as financing activities cash flows from extraordinary transactions and other events whose effects are included in net income, but which are not related to operations. Extraordinary Items

23-30 Accounts Receivable (Net) LO 8 Discuss special problems in preparing a statement of cash flows. Because an increase in Allowance for Doubtful Accounts results from a charge to bad debt expense, a company should add back an increase in Allowance for Doubtful Accounts to net income to arrive at net cash flow from operating activities. Indirect Method Illustration Accounts Receivable Balances, Redmark Co.

23-31 Significant Non-Cash Transactions LO 8 Discuss special problems in preparing a statement of cash flows. Common non-cash transactions that a company should disclose: 1.Acquisition of assets by assuming liabilities (including finance lease obligations) or by issuing equity securities. 2.Exchanges of non-monetary assets. 3.Refinancing of long-term debt. 4.Conversion of debt or preference shares to ordinary shares. 5.Issuance of equity securities to retire debt.