2 Basic ConceptsReports the entity’s cash flows (cash receipts and cash payments) during the period
3 Purposes of the Statement of Cash Flows Predict future cash flowsEvaluate management decisionsDetermine the ability to pay dividends to stockholders’ and payments to creditorsShow the relationship of net income to the business’s cash flows
4 What is Cash? Cash on hand Cash in the bank Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delayMoney-market investments
5 Statement of Cash Flows Sections Financial AccountingStatement of Cash FlowsSections
6 Operating, Investing, and Financing Activities Operating activities create revenues, expenses, gains, and losses.Investing activities increase and decrease long-term assets.Financing activities obtain cash from investors and creditors.
7 Two Formats for Operating Activities Indirect method reconciles from net income to net cash provided by operating activitiesDirect method reports all cash receipts and cash payments from operating activitiesThe two methods have no effect on investing or financing activities.
8 Two Formats for Operating Activities Indirect MethodNet income $XXXAdjustments:Depreciation, etc XXXNet income provided by operating activities $XXXDirect MethodCollection from customers $XXXDeductions:Payment to suppliers, etc XXXNet income provided by operating activities $XXX
9 The Indirect Operating Section Financial AccountingThe Indirect Operating Section
10 Operating Activities Indirect Method Cash flows from operating activities:Net incomeAdjustments to reconcile net income to net cash provided by operating activities:+ Depreciation/amortization expense+ Loss on sale of long-term assets- Gain on sale of long-term assets- Increases in current assets other than cash+ Decreases in current assets other than cash+ Increases in current liabilities- Decreases in current liabilitiesNet cash provided by operating activitiesInvesting Activities
11 Depreciation, Depletion, Amortization Depreciation, Depletion and Amortization are not Cash transactions, thusAre ADDED back to Net Income.
12 Gain or Loss from Long-Term Assets Changes to Long-term AssetsPurchase or SaleEffect Cash (What’s the journal entry?)They appear in the Investing SectionBut... When Sold Are Reported on the Income StatementThus, we need to reverse their effectAdd back the LossSubtract out the Gain
14 Operating Activities from Indirect Method Changes in current assets and current liability accountsIncrease in another current asset decreases cashPurchase of Inventory for cashDecrease in another current asset increases cashCollections of Accounts ReceivableDecrease in a current liability decreases cashPayment of Accounts PayableIncrease in a current liability increases cashNon-Cash Expense (Accrued Expense)
15 Increase in Current Assets Decreases Cash So $2,500 in Sales are NOT cashAny increase in Current Assets either uses cashIncrease InventoryDecrease CashOr is increased by a non-cash transactionAccounts Receivable
16 Decrease in Current Assets Increases Cash If A/R decreases that means we collected CashThat cash needs to be added back to Net IncomeIf Inventory, Supplies or other current assets decrease that means we debited an expense but did not credit CashSo we add back those decreases to Net Income
17 Decrease in Current Liabilities Decreases Cash How is Accounts Payable decreased?Debit Accounts Payable $1,000Credit Cash $1,000Same for all other Payables
18 Increase in Current Liabilities Increases Cash When Payables IncreaseThey create an ExpenseBut the expense is a non-cash expenseSo, Add back to Net Income
19 The Indirect Method: Operating Activities Positive ItemsNet incomeDepreciation/amortizationLoss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilitiesNegative ItemsNet lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities
20 The Indirect Method: Investing Activities Positive ItemsSale of plant assetsSale of investments that are not cash equivalentsCollections of loans receivableNegative ItemsAcquisition of plant assetsPurchase of investments that are not cash equivalentsMaking loans to others
21 The Indirect Method: Financing Activities Positive ItemsIssuing stockSelling treasury stockBorrowing moneyNegative ItemsPayment of dividendsPurchase of treasury stockPayment of principal amounts of debts
22 Cash Flow Statement An Example Financial AccountingCash Flow StatementAn Example
25 Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands)Revenues and gains:Sales revenue $284Interest revenueDividend revenueGain on sale of plant assetsTotal revenues and gains $313
26 Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands)Expenses:Cost of goods sold $150Salary and wage expense 56Depreciation expenseOther operating expenseInterest expenseIncome tax expenseTotal expenses $272
27 Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands)Total revenues and gains $313Total expensesNet income $ 41
28 Statement of Cash Flows: Operating Activities Depreciation does not affect cash, but it decreases net income – add it back in.Sales of long-term assets are investingActivities – remove gains from net income.Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)Cash flows from operating activities:Net Income $41Adjustments to reconcile net income tonet cash provided by operating activities:A DepreciationB Gain on sale of plant (8)
29 Statement of Cash Flows: Operating Activities Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)C Increase in accounts receivable (13)C Increase in interest receivable (2)C Decrease in inventory 3C Increase in prepaid expenses (1)C Increase in accounts payable 34C Decrease is salary payable (2)C Decrease in accrued liabilities (2) 27Net cash provided by operating activities $68
30 Changes in Current Asset and Current Liability Accounts – C 1. An increase in a current asset otherthan cash indicates a decrease in cash.2. A decrease in a current asset otherthan cash indicates an increase in cash.3. A decrease in a current liabilityindicates a decrease in cash.4. An increase in a current liabilityindicates an increase in cash.
31 Statement of Cash Flows: Investing Activities Cash flows from investing activities:Acquisition of plant assets $(306)Loan to another company (11)Proceeds from sale of plant assetsNet cash used for investing activities $(255)Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
32 Statement of Cash Flows: Financing Activities Cash flows from financing activities:Proceeds from issuance of common stock $101Proceeds from issuance of long-term debt 94Payment of long-term debt (11)Payment of dividends (17)Net cash provided by financing activities $167Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
33 Statement of Cash Flows Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activitiesNet decrease in cash $ (20)Cash balance, December 31, 20xCash balance, December 31, 20x2 $ 22Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
34 Noncash Investing and Financing Activities Suppose Anchor Corporation issuedCommon stock valued at $300,000to acquire a warehouse.Warehouse Building 300,000Common Stock ,000
35 Noncash Investing and Financing Activities Acquisition of building by issuing common stock $300Acquisition of land by issuing note payablePayment of long-term debt by issuingcommon stock 100Total noncash investing and financing activities $470