12 7/e PowerPoint Author: Catherine Lumbattis COPYRIGHT © 2011 South-Western/Cengage Learning The Statement of Cash Flows

Purpose of the Statement of Cash Flows  Explains changes in cash over a period of time  Summarizes cash inflows and outflows from: Operating Activities Financing Activities Investing Activities LO1

Cash Flows and Net Income for Four Companies in 2008 Radio Shack Best Buy National Railroad Passenger Corp (Amtrak) (in thousands) Ford Motor Co Increase (Decrease) Net Income in Cash (Loss) $ (940.0) $1, ,864.0 (1,132,778.0) (13,234.0) (14,672.0) (in millions)

Cash Equivalents  Readily convertible to cash  Little risk of price change  Original maturity to investor of three months or less Examples:  Commercial paper  U.S. Treasury bills  Certain money market funds LO2

Statement of Cash Flows Format Classified by: Operating activities Investing activities Financing activities outflows inflows Cash Increase or decrease in cash and cash equivalents + Beginning Cash and Cash Equivalents = Ending Cash and Cash Equivalents = LO3

Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $ xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Statement of Cash Flows Format from balance sheets

Cash transactions concerned with acquiring and selling products and services Payment of taxes Payment of wages Operating Activities Collection of customer accounts Payment to suppliers for inventory

Cash transactions concerned with acquiring and disposing of long- term assets Purchase/sale of another company Investing Activities Sale of property, plant and equipment Capital expenditures

Cash transactions concerned with the raising and repayment of funds in the form of debt and equity Issuance/retirement of bonds Financing Activities Issuance/repurchase of stock Payment of dividends Issuance/repayment of bank note

Categorizing Cash Flow Activities Current assets and current liabilities Operating Activities Long-term liabilities or stockholders’ equity Financing Activities Long-term assets Investing Activities

Noncash Investing and Financing Activities Disclose important financing and investing activities which do not require cash Exchange stock for assets Buy assets through debt financing from supplier

Methods to Report Cash from Operating Activities  Direct Method Reports major classes of gross cash receipts and cash payments The amount of cash provided by operating activities is the same under both methods  Indirect Method Adjusts net income to remove the effect of all accruals and deferrals LO4

Statement of Cash Flows Format Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

Preparing the Statement Cash Flows: Direct Method  Step 1: Set up three master T accounts Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities  Step 2: Determine the cash flows from operating activities LO5

Bal., Jan. 1 57,000 Bal., Dec ,000 From Balance Sheet Accounts Receivable ??? Cash collections Direct Method: Operating Activities Sales on account 670,000 Review journal entries recorded during period: Accounts Receivable670,000 Sales Revenue* 670,000 To record sales on account. *from income statement

664,000 Cash collections Direct Method: Operating Activities Review journal entries recorded during period: Accounts Receivable670,000 Sales Revenue* 670,000 To record sales on account. *from income statement Bal., Jan. 1 57,000 Bal., Dec ,000 From Balance Sheet Accounts Receivable Sales on account 670,000

Direct Method: Operating Activities Review journal entries recorded during period: Cash15,000 Interest Revenue 15,000 To record interest earned and received. 15,000 Interest Interest Revenue

Bal., Jan. 1 92,000 Bal., Dec ,000 From Balance Sheet Inventory Purchases on account ?? Direct Method: Operating Activities 390,000 Cost of goods sold Review journal entries recorded during period: Cost of goods sold* 390,000 Inventory 390,000 To record cost of goods sold. *from income statement

Bal., Jan. 1 92,000 Bal., Dec ,000 From Balance Sheet Inventory Purchases on account 382,000 Direct Method: Operating Activities 390,000 Cost of goods sold Review journal entries recorded during period: Cost of goods sold* 390,000 Inventory 390,000 To record cost of goods sold. *from income statement

31,000 Bal., Jan. 1 38,000 Bal., Dec. 31 From Balance Sheet Accounts Payable Cash payments ??? Direct Method: Operating Activities 382,000 Purchases Review journal entries recorded during period: Inventory382,000 Accounts Payable 382,000 To record purchases on account.

31,000 Bal., Jan. 1 38,000 Bal., Dec. 31 From Balance Sheet Accounts Payable Direct Method: Operating Activities 382,000 Purchases Cash payments 375,000 Review journal entries recorded during period: Accounts Payable375,000 Cash 375,000 To record cash payments on account.

9,000 Bal., Jan. 1 7,000 Bal., Dec. 31 From Balance Sheet Salaries and Wages Payable Cash payments ??? Direct Method: Operating Activities 60,000 Expense Review journal entries recorded during period: Salaries and Wages Expense60,000 Salaries and Wages Payable 60,000 To record salaries and wages.

9,000 Bal., Jan. 1 7,000 Bal., Dec. 31 From Balance Sheet Salaries and Wages Payable Direct Method: Operating Activities 60,000 New unpaid wages Cash payments 62,000 Review journal entries recorded during period: Salaries and Wages Payable62,000 Cash 62,000 To record cash paid to employees.

Direct Method: Operating Activities There is no effect on cash flow from depreciation. Review journal entries recorded during period: Depreciation Expense40,000 Accumulated Depreciation 40,000 To record depreciation.

Bal., Jan. 1 18,000 Bal., Dec ,000 From Balance Sheet Prepaid Insurance Cash payments ?? Direct Method: Operating Activities 12,000 Expense Review journal entries recorded during period: Insurance Expense12,000 Prepaid Insurance 12,000 To record expiration of insurance.

Bal., Jan. 1 18,000 Bal., Dec ,000 From Balance Sheet Prepaid Insurance Direct Method: Operating Activities 12,000 Expense Cash payments 6,000 Review journal entries recorded during period: Prepaid Insurance6,000 Cash 6,000 To record cash paid for insurance.

Bal., Jan. 1 0 Bal., Dec From Balance Sheet Interest Expense Direct Method: Operating Activities 15,000 Expense Cash payments 15,000 Review journal entries recorded during period: Interest Expense15,000 Cash 15,000 To record interest expense.

5,000 Bal., Jan. 1 8,000 Bal., Dec. 31 From Balance Sheet Cash payments ??? Direct Method: Operating Activities 50,000 Expense Review journal entries recorded during period: Income Taxes Expense50,000 Income Taxes Payable 50,000 To record income taxes. Income Taxes Payable

5,000 Bal., Jan. 1 8,000 Bal., Dec. 31 From Balance Sheet Salaries and Wages Payable Direct Method: Operating Activities 50,000 Expense Cash payments 47,000 Review journal entries recorded during period: Income Taxes Payable47,000 Cash 47,000 To record cash paid in taxes.

Cash Flows from Operating Activities Net cash inflows 174, ,000 Inventory purchases 62,000 Salaries and wages 6,000 Insurance 15,000 Interest 47,000 Taxes Cash receipts from : Cash payments for: Sales on account 664,000 Interest 15,000 Master T Account for Cash Flows from Operating Activities

Preparing the Statement of Cash Flows: Direct Method  Step 3: Determine the cash flows from investing activities

Bal., Jan. 1 90,000 Bal., Dec ,000 From Balance Sheet Long-Term Investments Direct Method: Investing Activities Cash payments 30,000 Review journal entries recorded during period: Long-Term Investments30,000 Cash 30,000 To record purchase of investments.

Direct Method: Investing Activities No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the statement of cash flows. Review journal entries recorded during period: Land50,000 Notes Payable 50,000 To record acquisition of land in exchange for note.

Bal., Jan ,000 Bal., Dec ,000 From Balance Sheet Property and Equipment Direct Method: Investing Activities Acquisitions 75,000 Review journal entries recorded during period: Property and equipment75,000 Cash 75,000 To record acquisition of equipment for cash. Disposals 35,000

75,000 Bal., Jan ,000 Bal., Dec. 31 From Balance Sheet Accumulated Depreciation Direct Method: Investing Activities 40,000 Depreciation Exp. Disposals 15,000 Book value of equipment sold was $20,000. Original cost of equipment was $35,000.

Cash Flows from Investing Activities 80,000 Net cash outflows 30,000 Purchase of investments 75,000 Purchase of property and equipment Cash receipts from: Cash payments for: Sale of machine 25,000 Master T Account for Cash Flows from Investing Activities

Preparing the Statement of Cash Flows: Direct Method  Step 4: Determine the cash flows from financing activities

Direct Method: Financing Activities No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the statement of cash flows. Review journal entries recorded during period: Land50,000 Notes Payable 50,000 To record acquisition of land in exchange for note.

Direct Method: Financing Activities Review journal entries recorded during period: Loss on Retirement of Bonds (Retained Earnings) 3,000 Bonds Payable 60,000 Cash 63,000 To record retirement of bonds. 260,000 Bal., Jan ,000 Bal., Dec. 31 From Balance Sheet Bonds Payable Retirement 60,000

75,000 Bal., Jan ,000 Bal., Dec. 31 From Balance Sheet Capital Stock Direct Method: Financing Activities Review journal entries recorded during period: Cash25,000 Capital Stock 25,000 To record issuance of stock in exchange for cash. 25,000 Stock issued

193,000 Bal., Jan ,000 Bal., Dec. 31 From Balance Sheet Direct Method: Financing Activities Cash dividends 67,000 Review journal entries recorded during period: Retained Earnings67,000 Cash 67,000 To record cash dividends paid. 120,000 Net income 2010 Retained Earnings

Cash Flows from Financing Activities 105,000 Net cash outflows 63,000 Retirement of bonds 67,000 Payment of cash dividends Cash receipts from: Cash payments for: Issuance of stock 25,000 Master T Account for Cash Flows from Financing Activities

Indirect Method: Operating Activities Income Statement Cash Flows from Operating Activities Conversion of accrual to cash basis LO6

Bal. Jan. 1 57,000 Bal. Dec ,000 Accounts Receivable Net increase 6,000 Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease $6,000

Bal. Jan. 1 92,000 Bal. Dec ,000 Inventory 8,000 Net decrease Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase $8,000

31,000 Bal. Jan. 1 38,000 Bal. Dec. 31 Accounts Payable 7,000 Net increase Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Increase $7,000

9,000 Bal. Jan. 1 7,000 Bal. Dec. 31 Salaries and Wages Payable Net decrease 2,000 Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Increase $2,000

Bal. Jan. 1 18,000 Bal. Dec ,000 Prepaid Insurance 6,000 Net decrease Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Decrease in prepaid insurance 6,000 Decrease $6,000

5,000 Bal. Jan. 1 8,000 Bal. Dec. 31 Income Taxes Payable 3,000 Net increase Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Decrease in prepaid insurance 6,000 Increase in income taxes payable 3,000 Increase $3,000

Indirect Method: Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Decrease in prepaid insurance 6,000 Increase in income taxes payable 3,000 Gain on sale of machine (5,000) Depreciation expense 40,000 Loss on retirement of bonds 3,000 Add back noncash expense Gain is not part of operating activities Report entire outflow as a financing activity

Cash Flow Adequacy  Measures company’s ability to meet principal and interest obligations  Creditors concerned with cash available to repay debts after company has replaced and updated its existing base of long-term assets Cash Flow from Operating Activities – Capital Expenditures Average Amount of Debt Maturing over Next Five Years LO7

Appendix Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows

Indirect Method: Using a Work Sheet Enter account balances LO8

Indirect Method: Using a Work Sheet Record investing and financing activities

Indirect Method: Using a Work Sheet Enter net income

Indirect Method: Using a Work Sheet Enter noncash revenues or expenses

Indirect Method: Using a Work Sheet Extend current assets and current liabilities

Indirect Method: Using a Work Sheet Total columns

Indirect Method: Using a Work Sheet Determine net cash inflow (outflow)

End of Chapter 12