1 CHAPTER 13 STATEMENT OF CASH FLOWS CHAPTER 13 STATEMENT OF CASH FLOWS STUDY OBJECTIVES After studying this chapter, you should be able to: 1. Indicate the usefulness of the statement of cash flows 2. Distinguish between operating, investing, and financing activities 3. Prepare a statement of cash flows using the indirect method

2 STUDY OBJECTIVE 1 USEFULNESS OF CASH FLOW STATEMENT STUDY OBJECTIVE 1 USEFULNESS OF CASH FLOW STATEMENT The cash flow statement reports CASH RECEIPTS and CASH PAYMENTS from OPERATING, FINANCING, and INVESTING activities. The cash flow statement helps users assess: 1.Ability to generate future cash flows 2.Ability to pay dividends and meet obligations 3.Why net income is different from operating cash flows 4.Cash investing and financing transactions

3 Questions the Statement of Cash Flow Answers

4 Cash inflows: –From sale of goods or services –From return on loans (interest received) and on equity securities (dividends received) Cash outflows: –To suppliers for inventory –To employees for services –To government for taxes –To lenders for interest –To others for expenses STUDY OBJECTIVE 2 OPERATING CASH FLOWS STUDY OBJECTIVE 2 OPERATING CASH FLOWS

5 Operating Activities - ALERT Some cash flows relating to investing or financing activities are classified as operating activities. For example... –Receipts of investment revenue (interest and dividends) and –Payments of interest to lenders are classified as operating activities because these items are reported in the income statement.

6 Cash inflows: –From sale of property, plant, and equipment –From sale of debt or equity securities of other entities –From collection of principal on loans to other entities Cash outflows: –To purchase property, plant, and equipment –To purchase debt or equity securities of other entities –To make loans to other entities STUDY OBJECTIVE 2 INVESTING CASH FLOWS STUDY OBJECTIVE 2 INVESTING CASH FLOWS

7 Cash inflows: –From sale of equity securities (company's own stock) –From issuance of debt (bonds and notes) Cash outflows: –To stockholders as dividends –To redeem long-term debt or reacquire capital stock STUDY OBJECTIVE 2 FINANCING CASH FLOWS STUDY OBJECTIVE 2 FINANCING CASH FLOWS

8 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. SIGNIFICANT NON-CASH ACTIVITIES The following activities are reported in a separate schedule (bottom of cash flow statement) or a note to the F/S.

9 Format of the Statement of Cash Flows Three activities: –operating – investing –financing PLUS –noncash investing and financing activities Body of Statement

10 Why Report the Causes of Changes in Cash? Because investors, creditors, and other interested parties want to know what is happening to a company’s most liquid asset: CASH

11 Statement of Cash Flows Helps Users Evaluate 1. The entity's ability to generate future cash flows. 2. The entity's ability to pay dividends and meet obligations. 3. The reasons for the difference between net income and net cash provided (used) by operating activities. 4. The investing and financing transactions during the period.

12 Statement of Cash Flows Helps Answer the Following Questions How did cash increase when there was a net loss for the period? How were the proceeds of the bond issue used? How was the expansion in the plant and equipment financed? Why were dividends not increased? How was the retirement of debt accomplished? How much money was borrowed during the year? Is cash flow greater or less than net income?

13 COMPANY NAME Statement of Cash Flows Period Covered Cash flows from operating activities (List of individual items)XX Net cash provided (used) by operating activitiesXXX Cash flows from investing activities (List of individual inflows and outflows)XX Net cash provided (used) by investing activitiesXXX Cash flows from financing activities (List of individual inflows and outflows)XX Net cash provided (used) by financing activitiesXXX Net increase (decrease) in cashXXX Cash at beginning of periodXXX Cash at end of periodXXX Noncash investing and financing activities (List of individual noncash transactions)XXX CASH FLOW STATEMENT FORMAT CASH FLOW STATEMENT FORMAT

14 Needed to prepare cash flow statement: Comparative balance sheet Current income statement Additional information. INFORMATION REQUIRED TO PREPARE CASH FLOW STATEMENT INFORMATION REQUIRED TO PREPARE CASH FLOW STATEMENT The SCF deals with cash receipts and payments, so the accrual concept is not used in the preparation of the SCF.

15 STEPS IN PREPARING CASH FLOW STATEMENT STEPS IN PREPARING CASH FLOW STATEMENT

16 STUDY OBJECTIVE 3 INDIRECT METHOD STUDY OBJECTIVE 3 INDIRECT METHOD Cash flow from operating activitiesX Cash flow from investing activities (X) Cash flow from financing activitiesX Net change in cashX Beginning cash & equivalentsX Ending cash & equivalentsxx The operating section reconciles NET INCOME with CASH FLOW FROM OPERATIONS The investing and financing sections are the same regardless of which method is used.

17 INDIRECT METHOD

18 INDIRECT METHOD For the year ended Dec 31, 2006

19 INDIRECT METHOD Using the information provided, the cash flow statement will account for every change on the comparative balance sheet. The objective: to determine net cash flow during the period, which should match the change in cash during the period

20 INDIRECT METHOD Net income145,000 Adjustments to reconcile net income to cash flow from operations Depreciation exp9,000 Loss on sale of equipment3,000 Decrease in A/R10,000 Increase in inventory(5,000) Increase in prepaid expenses(4,000) Increase in accounts payable16,000 Decrease in income taxes payable(2,000)27,000 Net cash provided by operating activities172,000 Purchase of building(120,000) Purchase of equipment(25,000) Sale of equipment4,000 Net cash used by investing activities(141,000) Issuance of common stock20,000 Payment of dividends(29,000) Net cash used by financing activities(9,000) Net increase in cash22,000 Beginning cash33,000 Ending cash55,000