© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Chapter 22 Statement of Cash Flows Revisited

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-2 Investing ActivitiesOperating ActivitiesFinancing Activities Sale of operational assets Sale of investments Collections of loans Cash received from revenues Issuance of stock Issuance of bonds and notes CASH INFLOWS Business CASH OUTFLOWS Purchase of operational assets Purchase of investments Loans to others Cash paid for expenses Payment of dividends Repurchase of stock Repayment of debt

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-3 Role of the Statement of Cash Flows The Statement helps users assess...  a firm’s ability to generate cash.  a firm’s ability to meet its obligations.  the reasons for differences between income and associated cash flows.  the effect of cash and noncash investing and financing activities on a firm’s financial position. The Statement helps users assess...  a firm’s ability to generate cash.  a firm’s ability to meet its obligations.  the reasons for differences between income and associated cash flows.  the effect of cash and noncash investing and financing activities on a firm’s financial position.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-4 Statement of Cash Flows is required by SFAS No lists inflows and outflows of cash and cash equivalents by category.... explains the change in cash during the period.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-5 Cash and Cash Equivalents Resources immediately available to pay obligations. Short-term, highly liquid investments. Readily convertible into known, fixed amounts of cash. So near maturity that there is insignificant risk of market value fluctuation from interest rate changes.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-6 Primary Elements of the Statement of Cash Flows (SCF)

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-7 Cash Flows From Operating Activities Inflows Receipts from customersReceipts from customers Interest receivedInterest received Dividends receivedDividends received Refunds from suppliersRefunds from suppliers Revenues received in advanceRevenues received in advanceInflows Receipts from customersReceipts from customers Interest receivedInterest received Dividends receivedDividends received Refunds from suppliersRefunds from suppliers Revenues received in advanceRevenues received in advanceOutflows Payments to suppliersPayments to suppliers Payments to employeesPayments to employees Interest paymentsInterest payments Income tax paymentsIncome tax payments Payments on operating leasesPayments on operating leasesOutflows Payments to suppliersPayments to suppliers Payments to employeesPayments to employees Interest paymentsInterest payments Income tax paymentsIncome tax payments Payments on operating leasesPayments on operating leases

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-8 Cash Flows From Investing Activities Inflows Proceeds from plant assets salesProceeds from plant assets sales Proceeds from sales and maturities of debt and equity securitiesProceeds from sales and maturities of debt and equity securities Collections of loan principalCollections of loan principal Sale of real estateSale of real estateInflows Proceeds from plant assets salesProceeds from plant assets sales Proceeds from sales and maturities of debt and equity securitiesProceeds from sales and maturities of debt and equity securities Collections of loan principalCollections of loan principal Sale of real estateSale of real estateOutflows Payments to purchase plant assetsPayments to purchase plant assets Purchases of debt and equity securitiesPurchases of debt and equity securities Loans to othersLoans to others Payments to purchase real estatePayments to purchase real estateOutflows Payments to purchase plant assetsPayments to purchase plant assets Purchases of debt and equity securitiesPurchases of debt and equity securities Loans to othersLoans to others Payments to purchase real estatePayments to purchase real estate

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide 22-9 Cash Flows From Financing Activities Inflows Proceeds from debt for specific investing activitiesProceeds from debt for specific investing activities Proceeds from loans from financial institutionsProceeds from loans from financial institutions Proceeds from issuance of stockProceeds from issuance of stockInflows Proceeds from debt for specific investing activitiesProceeds from debt for specific investing activities Proceeds from loans from financial institutionsProceeds from loans from financial institutions Proceeds from issuance of stockProceeds from issuance of stockOutflows Dividends paid to stockholdersDividends paid to stockholders Principal payments on loans from financial institutionsPrincipal payments on loans from financial institutions Principal payments on capital leasesPrincipal payments on capital leasesOutflows Dividends paid to stockholdersDividends paid to stockholders Principal payments on loans from financial institutionsPrincipal payments on loans from financial institutions Principal payments on capital leasesPrincipal payments on capital leases

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide SFAS No. 95 Requirements Noncash Activities Disclosure is required for significant noncash investing and financing activities. Disclosure should appear in a supporting schedule to the Statement of Cash Flows or in the Notes to the Financial Statements. Disclosure is required for significant noncash investing and financing activities. Disclosure should appear in a supporting schedule to the Statement of Cash Flows or in the Notes to the Financial Statements.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide SFAS No. 95 Requirements Noncash Activities Common noncash activities include: Retirement of bonds by issuing stock. Settlement of debt by transferring assets. Acquiring an asset by issuing a note payable. Incurrence of capitalized lease obligations.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Preparing the Statement of Cash Flows

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Preparing the Statement of Cash Flows Reconcile beginning cash to ending cash is required. Disclose significant noncash activities, taxes paid, & interest paid.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Let’s look at the Direct Method for preparing the Cash Flows from Operating Activities section.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Analyzing Sales Revenue The key information is cash collected from customers. Can be computed two ways: Obtained from cash receipts journal. Obtained from accrual sales information. Collections Accrual-basis + Decrease in net A/R on Account Revenues - Increase in net A/R = {

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Analyzing Sales Review Question Accounts Receivable was $40,000 on 1/1/03 and $52,000 on 12/31/03. If total sales revenue for 2003 was $800,000, then how much cash was received from customers? a.$800,000 b.$760,000 c.$812,000 d.$788,000 Accounts Receivable was $40,000 on 1/1/03 and $52,000 on 12/31/03. If total sales revenue for 2003 was $800,000, then how much cash was received from customers? a.$800,000 b.$760,000 c.$812,000 d.$788,000

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Analyzing Sales Review Question Accounts Receivable was $40,000 on 1/1/03 and $52,000 on 12/31/03. If total sales revenue for 2003 was $800,000, then how much cash was received from customers? a.$800,000 b.$760,000 c.$812,000 d.$788,000 Accounts Receivable was $40,000 on 1/1/03 and $52,000 on 12/31/03. If total sales revenue for 2003 was $800,000, then how much cash was received from customers? a.$800,000 b.$760,000 c.$812,000 d.$788,000 A/R increased $12,000 during Subtract increase in A/R during the year from total revenues to arrive at cash collected from customers. $800,000 - $12,000 = $788,000 A/R increased $12,000 during Subtract increase in A/R during the year from total revenues to arrive at cash collected from customers. $800,000 - $12,000 = $788,000

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Gains and Losses on Sale of Assets Gains and losses do not appear on the Statement of Cash Flows using the Direct Method.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Cost of Goods Sold Payments can be found in the purchases journal. assuming accounts payable is used to purchase inventory. Payments can be inferred: { Cash Cost + Inventory Increase paid for of - Inventory Decrease Inventory Goods + A/P Decrease Purchases Sold - A/P Increase =

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Cost of Goods Sold Review Question Examine the following information and determine how much was paid for inventory in a.$900,000 b.$923,000 c.$947,000 d.$877,000 Examine the following information and determine how much was paid for inventory in a.$900,000 b.$923,000 c.$947,000 d.$877,000

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Examine the following information and determine how much was paid for inventory in a.$900,000 b.$923,000 c.$947,000 d.$877,000 Examine the following information and determine how much was paid for inventory in a.$900,000 b.$923,000 c.$947,000 d.$877,000 Cost of Goods Sold Review Question Inventory increased $35,000 in Accounts Payable increased $12,000 in Inventory Increases - Accounts Payable Increases $900,000 +$35,000 - $12,000 = $923,000 Inventory increased $35,000 in Accounts Payable increased $12,000 in Inventory Increases - Accounts Payable Increases $900,000 +$35,000 - $12,000 = $923,000

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Salaries Expense Payments can be pulled from the payroll journal. Cash paid to employees can be computed from the accrual-basis expense. Cash paid to Accrual-basis + Decrease in Payable Employees Expense - Increase in Payable = {

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Salaries Expense Question Salary Expense for 2004 was $700,000. Salary Payable was $35,000 on 12/31/03 and $10,000 on 12/31/04. How much cash was paid to employees in 2004? a.$700,000 b.$735,000 c.$725,000 d.$675,000 Salary Expense for 2004 was $700,000. Salary Payable was $35,000 on 12/31/03 and $10,000 on 12/31/04. How much cash was paid to employees in 2004? a.$700,000 b.$735,000 c.$725,000 d.$675,000

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Salary Expense for 2004 was $700,000. Salary Payable was $35,000 on 12/31/03 and $10,000 on 12/31/04. How much cash was paid to employees in 2004? a.$700,000 b.$735,000 c.$725,000 d.$675,000 Salary Expense for 2004 was $700,000. Salary Payable was $35,000 on 12/31/03 and $10,000 on 12/31/04. How much cash was paid to employees in 2004? a.$700,000 b.$735,000 c.$725,000 d.$675,000 Salaries Expense Question Salary Payable decreased $25,000 during the year. Add the decrease in Salary Payable to Salary Expense to arrive at cash paid to employees. $700,000 + $25,000 = $725,000 Salary Payable decreased $25,000 during the year. Add the decrease in Salary Payable to Salary Expense to arrive at cash paid to employees. $700,000 + $25,000 = $725,000

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Estimated Expenses Depreciation, Amortization, and Depletion Expenses Depreciation, Amortization, and Depletion Expenses Operating cash flows are not involved.Operating cash flows are not involved. They are not disclosed in the SCF using the direct method.They are not disclosed in the SCF using the direct method. Depreciation, Amortization, and Depletion Expenses Depreciation, Amortization, and Depletion Expenses Operating cash flows are not involved.Operating cash flows are not involved. They are not disclosed in the SCF using the direct method.They are not disclosed in the SCF using the direct method.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Deferred Revenue Receipts can be found in the cash receipts journal. Receipts can also be inferred: + Increase in Deferred Cash Accrual-basis Revenues Collections Revenue - Decrease in Deferred Revenues = {

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Direct Method Prepaid Expenses Payments can be found in the cash disbursements journal. Payments can be inferred: + Increase in Prepaid Cash Accrual-basis Expenses Payments Expense - Decrease in Prepaid Expenses = {

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Let’s do an example of a direct method Statement of Cash Flows.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Using the direct method, prepare a Statement of Cash Flows for the year ended Examine the following information...

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Additional Information for 2003: Trading Securities were purchased at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Uninsured equipment with a book value of $30,000 was destroyed during a freak flood. Bond premium amortization was $1,000. Additional Information for 2003: Trading Securities were purchased at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Uninsured equipment with a book value of $30,000 was destroyed during a freak flood. Bond premium amortization was $1,000.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Additional Information for 2003: Grate Big holds a 25% investment in Tiny Co. and uses the Equity Method. Grate Big received $10,000 in dividends from Tiny Co. Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month. Additional Information for 2003: Grate Big holds a 25% investment in Tiny Co. and uses the Equity Method. Grate Big received $10,000 in dividends from Tiny Co. Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Additional Information for 2003: The Bonds Payable carry a 9% interest rate. Interest is payable semiannually on July 1 and on January 1. The company sold stock during the year for $50,000 cash. Additional Information for 2003: The Bonds Payable carry a 9% interest rate. Interest is payable semiannually on July 1 and on January 1. The company sold stock during the year for $50,000 cash.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Cash Received from Customers Cash Paid to Employees

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Cash Paid for Inventory Cash Paid for Interest

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Cash Paid for Taxes Other Operating Cash Flows

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Direct Method Example Cash Flows From Operating Activities

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Grate Big Company Statement of Cash Flows For the Period Ending December 31, 2003 Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the ending Cash balance on the Balance Sheet.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Supplemental Schedule

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Now, let’s look at the Indirect Method for preparing the Cash Flows from Operating Activities section.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Operating Cash Flows Indirect Method Net cash flows from operating activities are determined byNet cash flows from operating activities are determined by starting with net income.starting with net income. adjusting for items that reconcile net income to operating cash flows.adjusting for items that reconcile net income to operating cash flows. Individual operating cash flows are not disclosed. Net cash flows from operating activities are determined byNet cash flows from operating activities are determined by starting with net income.starting with net income. adjusting for items that reconcile net income to operating cash flows.adjusting for items that reconcile net income to operating cash flows. Individual operating cash flows are not disclosed.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Indirect Method Working Capital Accounts Note: Cash and cash equivalents, short-term investments in securities available for sale, dividends payable, and short-term payables to financial institutions are excluded from this category.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Indirect Method Other Reconciling Items Add to net income: Depreciation, depletion, and amortization expenses Losses Noncash expenses Subtract from net income: Bond premium amortization Gains Noncash revenues

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Let’s do an Indirect Method Statement of Cash Flows.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example Prepare a Statement of Cash Flows for the period ending December 31, 2003, using the Indirect Method. Refer to the following information...

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example Additional Information for 2003: Trading Securities were purchased at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Uninsured equipment with a book value of $30,000 was destroyed during a freak flood. Bond premium amortization was $1,000. Additional Information for 2003: Trading Securities were purchased at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Uninsured equipment with a book value of $30,000 was destroyed during a freak flood. Bond premium amortization was $1,000.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example Additional Information for 2003: Grate Big holds a 25% investment in Tiny Co. and uses the Equity Method. Grate Big received $10,000 in dividends from Tiny Co. Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month. Additional Information for 2003: Grate Big holds a 25% investment in Tiny Co. and uses the Equity Method. Grate Big received $10,000 in dividends from Tiny Co. Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example Additional Information for 2003: The Bonds Payable carry a 9% interest rate. Interest is payable semiannually on July 1 and on January 1. The company sold stock during the year for $50,000 cash. Additional Information for 2003: The Bonds Payable carry a 9% interest rate. Interest is payable semiannually on July 1 and on January 1. The company sold stock during the year for $50,000 cash.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide With the indirect method, start with Net Income and reconcile to Cash Flows from Operating Activities. Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example Dividends received from investees that are accounted for using the Equity Method are added to Net Income as a reconciling item.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Noncash expenses and losses Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Noncash revenues and gains Statement of Cash Flows Indirect Method Example

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Statement of Cash Flows Indirect Method Example Note that the net undistributed earnings from the subsidiary (Tiny Co.) is $30,000 ($40,000 - $10,000). This is the same amount by which the investment account increased in 2003.

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide Grate Big Company Statement of Cash Flows For the Period Ending December 31, 2003

© 2004 The McGraw-Hill Companies, Inc. McGraw-Hill/Irwin Slide End of Chapter 22 I love this job! Lots of cash flow!