STATEMENT OF CASH FLOWS CHAPTER 14 STATEMENT OF CASH FLOWS Managerial Accounting, Fourth Edition Wiley & Richard McDermott

Study Objectives Indicate the usefulness of the statement of cash flows. Distinguish among operating, investing, and financing activities. Prepare a statement of cash flows using the indirect method. Analyze the statement of cash flows. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Statement of Cash Flows The Statement of Cash Flows: Usefulness and Format Preparing the Statement of Cash Flows—Indirect Method Using Cash Flows to Evaluate a Company Usefulness Classifications Significant noncash activities Format Preparation Indirect and direct methods Step 1: Operating activities Step 2: Investing and financing activities Step 3: Net change in cash Free cash flow Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

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. LO 1 Indicate the usefulness of the statement of cash flows.

Classification of Cash Flows Operating Activities Investing Activities Financing Activities Income Statement Items Generally Investments and Long-Term Assets Generally Long-Term Liability and Stockholders’ Equity LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13-1 Operating activities - Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. To employees for services. To government for taxes. To lenders for interest. To others for expenses. Note: Current asset Note: Not financing LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13-1 Investing activities - Changes in investments and long-term assets Cash inflows: From sale of property, plant, and equipment. From sale of in debt or equity securities. From collection of principal on loans to other entities. Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or equity securities. To make loans to other entities. LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 13-1 Financing activities - Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock. From issuance of long-term debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock). LO 2 Distinguish among operating, investing, and financing activities.

Classification 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. LO 2 Distinguish among operating, investing, and financing activities.

We won’t learn direct method 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 We won’t learn direct method in this class LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows Illustration 13-2 LO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows Three Sources of Information: Comparative balance sheets Current income statement Additional information

Preparing the Statement of Cash Flows 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. LO 3 Prepare a statement of cash flows using the indirect method.

Note from Dr. McDermott I have never seen the method for preparing cash flow statements used by the author. I have looked at probably a dozen textbooks. It is hard enough to teach cash flow statements with traditional methods. For a beginner, the author’s method is more difficult. I will teach the traditional method.

Step 1: Set up a worksheet like this, memorize the column headings! Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 Inventories $ 189,000.00 $ 170,000.00 Land $ 100,000.00 $ 75,000.00 Equipment $ 200,000.00 $ 260,000.00 Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 Accounts payable $ 47,000.00 $ 39,000.00 Bonds payable $ 150,000.00 Common stock $ 174,000.00 $ 216,000.00 Retained earnings Net Income Dividends Additional Entries There are several important things to notice: We did not list a row for cash or cash equivalents. We listed accounts that are increased with a debit balance in the top section (Assets Except Cash and Cash Equivalents) and accounts that are increased with credits on the bottom (Contra Assets, Liabilities and Stockholder Equity. Since Accumulated Depreciation is increased with a credit, it goes in the second section. We will get to this section later.

Step 1: Set up a worksheet like this, memorize the column headings! Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 Inventories $ 189,000.00 $ 170,000.00 Land $ 100,000.00 $ 75,000.00 Equipment $ 200,000.00 $ 260,000.00 Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 Accounts payable $ 47,000.00 $ 39,000.00 Bonds payable $ 150,000.00 Common stock $ 174,000.00 $ 216,000.00 Retained earnings Net Income Dividends Additional Entries One more important thing to mention, we will break retained earnings into net income and dividends on this worksheet.

Step 2: Subtract the figures in the 2007 row from the figures in the 2008 row to get the change Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) Land $ 100,000.00 $ 75,000.00 $ (25,000.00) Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries This a good time to put in the net income and dividends paid during the year in lieu of retained earnings.

Step 3: Now determine if each transaction is a source or use of cash Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) Land $ 100,000.00 $ 75,000.00 $ (25,000.00) Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Rule: positive numbers using this format are uses of cash in the Cash Equivalents Section, negative numbers are sources of cash. The opposite is true in the Contra Asset … section.

Step 4: In column 3, make all sources of cash positive and all uses negative Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Shortcut, change the sign of the numbers in column 1 in the Assets . . . section and leave them as is in the Contra Assets . . . section

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Now we are going to focus on the adjustments column. The easiest was to make these and get the sign (positive or negative) straight is to create an “Additional Entries” section at the bottom of the form.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries In the adjustments column, debits to the accounts being adjusted from 2007 to 2008 will be shown as positive numbers and credits will be shown as negative numbers. What does this mean? Let’s wait until the next slide to find out!

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Where do we get the information for the adjustments? From the “Additional Information” given in the problem.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries The easiest way to enter this data is to pretend you are making a journal entry.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries If the account is shown above, debit or credit that account the same as you would in a journal entry for that transaction.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries If it is not shown, it probably relates to cash and is listed here.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Remember, we did not list a row for cash using this methodology.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Cash used to redeem bonds ($50,000) The first adjustment given is that bonds amounting to $50,000 were redeemed for cash of $50,000. The journal entry would be to credit cash (that is the first entry under the Additional Entries section).

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) $50,000 Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Cash used to redeem bonds ($50,000) Where does the debit go? To bonds payable. Remember when we redeem a bond we debit the account.

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) $50,000 Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Cash used to redeem bonds ($50,000) Debit & Credit

Step 5: Make Adjustments Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) $50,000 Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 ($42,000) Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Cash used to redeem bonds ($50,000) Common stock issued $42,000 The next adjustment is common stock being sold for $42,000 in cash.

Step 6: Add columns 3 and 4 to get the total adjusted affect Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) $ 50,000.00 $ - Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 $ (42,000.00) Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Cash used to redeem bonds Common stock issued

Step 7: Classify each transaction on where it will appear on the statement Statement of Cash Flow Worksheet   (3+4) (1) (2) (3) (4) (5) (6) Source Cash Flow Adjusted Classi- 2007 2008 Change or Use Effect Adjustmts fication Assets Except Cash & Cash Equivalents Accounts Receivable $ 76,000.00 $ 85,000.00 $ 9,000.00 Use $ (9,000.00) Operating Inventories $ 189,000.00 $ 170,000.00 $ (19,000.00) $ 19,000.00 Land $ 100,000.00 $ 75,000.00 $ (25,000.00) $ 25,000.00 Investing Equipment $ 200,000.00 $ 260,000.00 $ 60,000.00 $ (60,000.00) Contra Assets, Liabilities and Stockholder Equity Accumulated depreciation $ 32,000.00 $ 66,000.00 $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00 $ (8,000.00) $ (8,000.00) Bonds payable $ 150,000.00 $ (50,000.00) $ (50,000.00) $ 50,000.00 $ - Financing Common stock $ 174,000.00 $ 216,000.00 $ 42,000.00 $ (42,000.00) Retained earnings Net Income $ 103,000.00 Dividends $ (45,000.00) Additional Entries Cash used to redeem bonds Common stock issued

Step 8: Take the information from the worksheet and begin the Cash Flow Statement

The first entry should be net income. Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Remember there are three sections to the Statement of Cash Flows. We start with Cash flow from Operating Activities. The first entry should be net income.

Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 We want to adjust income to cash flow. The first adjustment most authors like to see is to add back deprecation. Remember depreciation is a non-cash expense. Add it to income to get cash flow. Let’s follow this format in this class. Now we go to our worksheet, and start from the top, selecting each item listed as an “Operating” item.

Classified it as operating Shown that it was an increase in amount. Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 Increase in AR $ (9,000.00) The first item on the worksheet is Accounts Receivables. We have already: Classified it as operating Shown that it was an increase in amount. Figured out that an increase in this accounts is a use rather than source of cash. See! All of our thinking has already been done. We concentrate on one thing at a time, less chance to make stupid mistakes on an exam.

Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 Increase in AR $ (9,000.00) Decrease in Inventory $ 19,000.00 Decrease in AP $ (8,000.00) Total change $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00 We will continue down the worksheet, doing essentially the same thing. Selecting Operating items and looking to see if they are uses or sources of cash. We will then sum all changes ($36,000) and add that to income to get Net Cash Provided by Operating Activities.

Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 Increase in AR $ (9,000.00) Decrease in Inventory $ 19,000.00 Decrease in AP $ (8,000.00) Total change $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00 Cash Flow Investing Sale of land $ 25,000.00 Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42,000.00 Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Lets use the worksheet to identify items for Investing and Financing. Total cash source or use from each section.

Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 Increase in AR $ (9,000.00) Decrease in Inventory $ 19,000.00 Decrease in AP $ (8,000.00) Total change $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00 Cash Flow Investing Sale of land $ 25,000.00 Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42,000.00 Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Net Increase in Cash $ 51,000.00 The last thing we do is total the three sections to get “Net Increase in Cash”

Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 Increase in AR $ (9,000.00) Decrease in Inventory $ 19,000.00 Decrease in AP $ (8,000.00) Total change $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00 Cash Flow Investing Sale of land $ 25,000.00 Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42,000.00 Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Net Increase in Cash $ 51,000.00 Cash at beginning of period $ 22,000.00 To the increase in cash add the beginning cash balance taken for the balance sheet (2007).

Statement of Cash Flows   Cash flow from Operating Activities Net Income $ 103,000.00 Adjustments to Net Income Depreciation $ 34,000.00 Increase in AR $ (9,000.00) Decrease in Inventory $ 19,000.00 Decrease in AP $ (8,000.00) Total change $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00 Cash Flow Investing Sale of land $ 25,000.00 Purchase of Equipment $ (60,000.00) Cash Used Investing $ (35,000.00) Cash Flow Financing Purchase of Bonds $ (50,000.00) Issuance of Stock $ 42,000.00 Payment of Dividends $ (45,000.00) Cash Used Financing $ (53,000.00) Net Increase in Cash $ 51,000.00 Cash at beginning of period $ 22,000.00 Cash at end of period $ 73,000.00 Add Increase in Cash to Cash at Beginning of Period and it should given you Cash at End of Period taken from the 2008 balance sheet.

Simple – Right? So how do I get an “A” on the exam? Memorize the columns in the worksheet. Enter numbers one column at a time. Concentrate on one concept at a time. Use the worksheet as the format for the Statement of Cash Flows which you will also have memorized. Recheck your work!

The End! E13-9 We will work in class on the board. Download Excel file from hyperlink on Acc 2020 Web Page (http://faculty.weber.edu/rmcdermott) The End!