NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 2 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila.

NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 2 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila Elworthy and Tana Kristjanson Copyright © 2014 by Nelson Education Ltd.1

After studying this chapter, you should be able to: 1.Describe the cash flow activities reported in the statement of cash flows. 2.Prepare a statement of cash flows, using the indirect method. 3.Prepare the operating activities section, using the direct method. Statement of Cash Flows Copyright © 2014 by Nelson Education Ltd.3

Statement of Cash Flows The statement of cash flows (or cash flow statement) reports a company’s cash inflows and outflows for a period. It provides useful information about a company’s ability to do the following: Copyright © 2014 by Nelson Education Ltd.5

Reporting Cash Flows The cash flow statement reports cash flows from three types of activities: 1.Cash flows from operating activities are cash flows from transactions that affect net income. Copyright © 2014 by Nelson Education Ltd.7

Reporting Cash Flows 2.Cash flows from investing activities are cash flows from transactions that affect the investments in noncurrent assets of the company. 3.Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the company. Copyright © 2014 by Nelson Education Ltd.8

Direct Method The advantage of the direct method is that it directly reports cash receipts and payments in the cash flow statement. Users find it easier to understand and to get a picture of the sources and uses of cash. It is the preferred method under both ASPE and IFRS. Copyright © 2014 by Nelson Education Ltd.15

Cash Flows from Operating Activities The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash. Copyright © 2014 by Nelson Education Ltd.16

Cash Flows from Investing Activities Cash inflows from investing activities normally arise from selling property, plant, and equipment, investments, and intangible assets. Cash outflows from investing activities normally include payments to acquire property, plant, and equipment, investments, and intangible assets. Copyright © 2014 by Nelson Education Ltd.20

Cash Flows from Financing Activities Cash inflows from financing activities normally arise from issuing debt or equity securities. Cash outflows from financing activities normally include paying cash dividends, repaying debt, and acquiring treasury stock. Copyright © 2014 by Nelson Education Ltd.21

Noncash Investing and Financing Activities Noncash investing and financing activities are transactions that do not directly affect cash. Noncash transactions are not included in the cash flow statement but instead are disclosed in the notes to the financial statements. Copyright © 2014 by Nelson Education Ltd.22

EXAMPLE EXERCISE 16-1 Classifying Cash Flows Identify whether each of the following would be reported as an operating, investing, or financing activity in the statement of cash flows. a.Purchase of a patent b.Payment of a cash dividend c.Disposal of equipment d.Cash sales e.Receipt of interest on a note receivable f.Payment of wages expense Copyright © 2014 by Nelson Education Ltd.23

Efficient Approach The indirect method of reporting cash flows from operating activities uses the logic that a change in any balance sheet account (including Cash) can be analyzed in terms of changes in other balance sheet accounts. Copyright © 2014 by Nelson Education Ltd.26

Steps for Preparing the Indirect Cash Flow Statement 1.Check on the income statement for expenses that do not effect cash. Example: depreciation. 2.Check on the income statement for gains and losses. 3.Check for changes to the current assets and current liabilities of the balance sheet. Copyright © 2014 by Nelson Education Ltd.29

Steps for Preparing the Indirect Cash Flow Statement 4.Check property, plant, and equipment for the investing activities. 5.Check long-term liabilities for the financing activities. 6.Take into account noncash transactions. 7.Statements should reconcile if there are no errors. Copyright © 2014 by Nelson Education Ltd.30

Step 1 Expenses that do not affect cash are added. Such expenses decreased net income, but did not involve cash payments and, thus, are added to net income. Examples include depreciation of fixed assets and amortization of intangible assets. Copyright © 2014 by Nelson Education Ltd.32

Step 2 Loses and gains on disposal of assets are added or deducted. The disposal (sale) of assets is an investing activity, rather than an operating activity. Losses on disposal of assets are added back to net income in order to remove them. Gains on disposal of assets are deducted from net income in order to remove them. Copyright © 2014 by Nelson Education Ltd.33

Step 3 Changes in current operating assets and liabilities are added or deducted as follows: Increases in noncash current operating assets are deducted. Decreases in noncash current operating assets are added. Copyright © 2014 by Nelson Education Ltd.34

EXAMPLE EXERCISE 16-2 Adjustments to Net Income—Indirect Method O.M.I. Corporation’s accumulated depreciation increased by $12,000, and $3,700 of patents were amortized between balance sheet dates. There were no purchases or sales of tangible or intangible assets during the year. In addition, the income statement showed a gain of $4,100 from the sale of land. Reconcile a net income of $62,000 to net cash flow from operating activities using the indirect method. Copyright © 2014 by Nelson Education Ltd.36

Operating Activities Section Step 3: Look to the current assets and current liabilities of the balance sheet for the rest of the operating activities. Add or deduct changes in current operating assets and liabilities. Copyright © 2014 by Nelson Education Ltd.41

EXAMPLE EXERCISE 16-3 Changes in Current Operating Assets and Liabilities—Indirect Method Victor Corporation’s statement of financial position data for current assets and liabilities for December 31, 2016 and 2015, are as follows: Copyright © 2014 by Nelson Education Ltd.43

EXAMPLE EXERCISE 16-3 Changes in Current Operating Assets and Liabilities—Indirect Method Copyright © 2014 by Nelson Education Ltd.44 Adjust net income of $70,000 for changes in operating assets and liabilities to arrive at cash flows from operating activities using the indirect method.

EXAMPLE EXERCISE 16-4 Cash Flows from Operating Activities—Indirect Method Ideas Inc. reported the following data: Net income $120,000 Depreciation expense 15,000 Loss on disposal of equipment 17,000 Increase in accounts receivable 5,000 Decrease in accounts payable 2,500 Increase in dividends payable 3,000 Prepare the Cash Flows from Operating Activities section of the statement of cash flows using the indirect method. Copyright © 2014 by Nelson Education Ltd.46

Investing Activities Section Copyright © 2014 by Nelson Education Ltd.51 How much cash was involved in the sale of the land? The sale of land for cash of $72,000 is reported as an inflow of cash in the Investing Activities section.

EXAMPLE EXERCISE 16-5 Land Transactions on the Statement of Cash Flows Alpha Corporation purchased land for $125,000. Later in the year, the company sold land with a carrying value of $165,000 for $200,000. Show the effects of these transactions on the statement of cash flows, using the indirect method. Copyright © 2014 by Nelson Education Ltd.53

Financing Activities Section Copyright © 2014 by Nelson Education Ltd.56 The increase was from issuing $4,000 common shares for $12 per share. The cash inflow of $48,000 is reported in the Financing Activities section.

Financing Activities Section Copyright © 2014 by Nelson Education Ltd.57 This decrease is from retiring the bonds by a cash payment for their face amount. The cash outflow of $50,000 is reported in the Financing Activities section.

Step 6: Take into account noncash transactions. There are no noncash transactions mentioned in the Rundell example, other than amortization, which has been dealt with. Step 7: Your statement should reconcile. (See Exhibit 6.) Copyright © 2014 by Nelson Education Ltd.60

The Direct Method The final amount reported in the Cash Flows from Operating Activities section will be the same whether the direct or indirect approach is used. The methods differ in how the data are obtained, analyzed, and reported. The Cash Flows from Investing and Financing Activities sections are the same under the direct and indirect methods. Copyright © 2014 by Nelson Education Ltd.66

Cash Received from Customers Rundell Ltd. reports sales of $1,180,000 for 2015. To determine the cash received from customers, sales are adjusted by any increase or decrease in accounts receivable. Copyright © 2014 by Nelson Education Ltd.67

Cash Received from Customers The increase of $9,000 in Accounts Receivables during 2015 indicates that sales on accounts exceeded cash received from customers by $9,000. Copyright © 2014 by Nelson Education Ltd.70

EXAMPLE EXERCISE 16-6 Cash Received from Customers—Direct Method Sales reported on the statement of income were $350,000. The accounts receivable balance declined $7,200 over the year. Determine the amount of cash received from customers to be included in the operating section under the direct method. Copyright © 2014 by Nelson Education Ltd.71

Cash Payments for Merchandise Rundell Ltd. reports cost of merchandise sold of $790,000. To determine the cash payment for merchandise, the $790,000 is adjusted for any increase or decrease in inventories and accounts payable (assuming the accounts payable are owed to merchandise suppliers). Copyright © 2014 by Nelson Education Ltd.73

Cash Payments for Merchandise The $8,000 decrease in inventories indicates that the merchandise sold exceeded the cost of merchandise purchased by $8,000. The $3,200 decrease in accounts payable indicates that cash payments were $3,200 more than the purchases on account. Copyright © 2014 by Nelson Education Ltd.77

EXAMPLE EXERCISE 16-7 Cash Payments for Merchandise—Direct Method Cost of goods sold reported on the statement of income was $145,000. The accounts payable balance increased $4,000, and the inventory balance increased by $9,000 over the year. Determine the amount of cash paid for merchandise to be included in the operating section under the direct method. Copyright © 2014 by Nelson Education Ltd.78

Cash Payments for Operating Expenses Rundell Ltd. reports total operating expenses of $203,000, which includes amortization expense of $7,000. To determine cash payments for operating expenses, the other operating expenses (excluding amortization) of $196,000 are adjusted for any increase or decrease in accrued expenses payable. Copyright © 2014 by Nelson Education Ltd.80

Interest Expense Rundell Ltd. reports interest expense of $8,000. To determine the cash payments for interest, the $8,000 is adjusted for any increases or decreases in interest payable. Copyright © 2014 by Nelson Education Ltd.83

Cash Payments for Income Taxes Rundell Ltd. reports income tax expense of $83,000. To determine the cash payments for income taxes, the $83,000 is adjusted for any increases or decreases in income taxes payable. Copyright © 2014 by Nelson Education Ltd.85

Cash Payments for Income Taxes The $500 decrease in income taxes payable indicates that the cash payments for income taxes were $500 more than the amount reported for income tax expense during 2015. Copyright © 2014 by Nelson Education Ltd.89

Free Cash Flow Free cash flow is a measure of operating cash flow available for corporate purposes after providing sufficient capital asset additions to maintain current productive capacity and dividends. Copyright © 2014 by Nelson Education Ltd.91

Free Cash Flow Positive free cash flow is considered favourable. A company that has free cash flow is able to fund internal growth, retire debt, pay dividends, and enjoy financial flexibility. Copyright © 2014 by Nelson Education Ltd.93

NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 2 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila.

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NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 2 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila.

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Presentation on theme: "NETA POWERPOINT PRESENTATIONS TO ACCOMPANY VOLUME 2 Accounting Second Canadian Edition BY WARREN/REEVE/DUCHAC/ELWORTHY/KRISTJANSON/TOBER Adapted by Sheila."— Presentation transcript:

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