© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Statement of Cash Flows Chapter Twelve

12-2 LO 1 Name and define the four primary sections of a statement of cash flows. LO 1

12-3 Reporting Format for the Statement of Cash Flows Operating Activities Investing Activities Financing Activities The Statement of Cash Flows must include the following three sections:

12-4 Cash Flows from Operating Activities Inflows (Receipts) Receipts from sales Commissions and fees Interest and dividends received Inflows (Receipts) Receipts from sales Commissions and fees Interest and dividends received Outflows (Payments) Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes Outflows (Payments) Payments for inventory Salaries and wages Operating expenses Interest on liabilities Taxes

12-5 Cash Flows from Investing Activities Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others

12-6 Cash Flows from Financing Activities Inflows (Receipts) Borrowing Issuing stock Inflows (Receipts) Borrowing Issuing stock Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends

12-7 Noncash Investing and Financing Transactions Significant noncash investing and financing transactions must be reported separately. Example: issuing common stock in exchange for land.

12-8 Statement of Cash Flows

12-9 LO 1 Distinguish between the direct and indirect methods of presenting the operating activities section of a statement of cash flows. LO 2

12-10 Cash flows from operating activities can be prepared using either the direct method or the indirect method. Cash Flow: Operating Activities

12-11 Operating Activities: Direct Method Assume in 2007, New South Company  earns revenue on account of $500 and collects $400 from customers  Incurs $390 of expenses on account and pays $350 to settle accounts payable Let’s look at the operating activities section of the statement of cash flows under the direct method:

12-12 Operating Activities: Direct Method

12-13 Net Income Cash Flows from Operating Activities 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.

12-14 Operating Activities: Indirect Method

12-15 Operating Activities: Indirect Method

12-16 Operating Activities: Compare Methods Revenue $500 Expenses $390 Net Inc. $110 $390 -$350 = $40 exp. owed $500 - $400 = $100 rev. owed to us

12-17 Operating Activities: Compare Methods The direct method is easy to understand and is recommended by the FASB. However, most companies use the indirect method since they use accrual accounting systems and it’s easier and less expensive for them to prepare.

12-18 Operating Activities: Indirect Method

12-19 Operating Activities: Indirect Method

12-20 Operating Activities: Indirect Method

12-21 Indirect Method Rules

12-22 Operating Activities: Indirect Method

12-23 LO 1 Prepare the investing activities section of a statement of cash flows. LO 4

12-24 Cash Flows from Investing Activities Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Inflows (Receipts) Selling property, plant, and equipment Selling investment securities Collecting loans Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others Outflows (Payments) Purchasing property, plant, and equipment Purchasing investment securities Lending to others

12-25 Investing Activities Let’s look at New South’s financial statements to determine cash flow from investing activities.

12-26 Investing Activities Because there were no purchases of marketable securities, the $1,600 increase was due to the purchase of additional securities.

Investing Activities New South sold fixtures costing $1,700 that had a book value of $400. The income statement shows a gain of $600 on the sale. How much cash was received? Cash inflow = book value + gain = $400 + $600 = $1,000

Investing Activities New South must have also purchased new store fixtures for $2,300 to balance the account.

12-29 Investing Activities New South purchased land, but used a mortgage note instead of cash. The purchase is shown on the Schedule of Noncash Investing and Financing Activities.

12-30 Investing Activities

12-31 LO 1 Prepare the financing activities section of a statement of cash flows. LO 5

12-32 Cash Flows from Financing Activities Inflows (Receipts) Borrowing Issuing stock Inflows (Receipts) Borrowing Issuing stock Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends Outflows (Payments) Repaying debt (excluding interest) Purchasing treasury stock Paying dividends

Financing activities The financing activities section of the statement of cash flows shows changes in three areas. DebtCapital Accounts Retained Earnings Notes or Bonds Stock or Treasury Stock Dividends

12-34 Financing activities Look on the balance sheet for changes in the balances of debt and equity accounts Examine each account to determine the cause of changes.

Financing Activities Let’s examine the financial statements of the New South Company to determine net cash flow from financing activities.

Financing Activities A mortgage issued to purchase land does not involve a cash flow.

Financing Activities Assuming not new bonds were issued, the $3,000 decrease in the bonds payable account must have been the result of a cash outflow to pay off bonds.

Financing Activities New South must have issued $2,000 of additional common stock.

Financing Activities A $1,500 decrease is required to balance the retained earnings account. We assume this decrease is due to the payment of dividends.

Financing Activities Because there was no indication that any treasury stock was reissued, New South must have purchased $600 of additional treasury stock. This is a cash outflow for financing activities.

12-41 Financing Activities

12-42 The Completed Statement

12-43 LO 1 Explain how the statement of cash flows could mislead decision makers. LO 6

12-44 The Financial Analyst The statement focuses attention on: Ability to generate cash from its operations. Management of current assets and current liabilities. Expenditures for long-term assets. Amount received from external financing.

12-45 LO 1 Prepare the operating activities section of a statement of cash flows under the direct method. LO 7

Operating Activities: Direct Method (Appendix) The operating activities section of the statement of cash flows can also be shown under the direct approach. Shows specific sources and uses of cash associated with operating activities. Only the operating activities section is affected by the difference.

Operating Activities: Direct Method (Appendix) 12-47

Operating Activities: Direct Method (Appendix) 12-48

Operating Activities: Direct Method (Appendix) 12-49

12-50 End of Chapter Twelve