1. 24-1

2. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing activities. McGraw-Hill© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

3. 24-3 Statement of Cash Flows Reviewed by creditors to determine how the firm will pay principal and interest on debts. Reviewed by investors to determine if the corporation will have the cash to pay dividends. Reviewed by management for information about cash to pay employees, suppliers, and other obligations.

4. 24-4 Sources and Uses of Cash The statement of cash flows reports: cash inflows Sources of cash cash outflows Uses of cash

5. 24-5 Sources and Uses of Cash Cash inflows and outflows are classified under three headings: Operating Activities Investing Activities Financing Activities Distinguish between operating, investing, and financing activities Objective 1

6. 24-6 Sources of CashUses of Cash Operating Activities Sale of merchandise Sale of services Interest income Dividend income Miscellaneous income Pay for merchandise Pay taxes Pay salaries and wages Pay interest expense Pay for other expenses

7. 24-7 Sources of CashUses of Cash Investing Activities Sale of land, buildings, or equipment. Principal payments collected on receivable for long-term assets. Sale of investment in bonds or other securities. Pay for purchase of land, buildings, or equipment. Pay for the purchase of investments in bonds or other securities.

8. 24-8 Sources of CashUses of Cash Financing Activities Issuance of common stock. Issuance of preferred stock. Issuance of bonds payable. Borrowing through signing a note payable. Resale of treasury stock. Pay cash dividends on common stock. Pay cash dividends on preferred stock. Repay bond indebtedness. Repay notes payable or other borrowing. Purchase treasury stock.

9. The Statement of Cash Flows Section 2: Cash Flows from Operating Activities Chapter 24 Section Objectives 2.Compute cash flows from operating activities. McGraw-Hill© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

10. 24-10 To prepare the statement of cash flows, you need four items. Income statement Schedule of operating expenses Statement of retained earnings Comparative balance sheet Statement of Cash Flows

11. 24-11 The schedule of operating expenses is a schedule that supplements the income statement. ANSWER: It shows the selling and general and administrative expenses in greater detail. QUESTION: What is the schedule of operating expenses? Compute cash flows from operating activities Objective 2

12. 24-12 Reconciles the beginning and ending cash balances. Ties together: income statement, changes in the noncash items on the balance sheet, changes in the noncash items on the statement of retained earnings. Can be prepared in two different ways: direct method indirect method Statement of Cash Flows This chapter illustrates the indirect method.

13. 24-13 The indirect method of preparing the statement of cash flows treats net income as the primary source of cash from operating activities and adjusts net income for changes in noncash items. ANSWER: QUESTION: What is the indirect method of preparing the statement of cash flows?

14. 24-14 Cash Flows from Operating Activities Net income + or – Adjustments for noncash items on income statement +Decreases in current assets – Increases in current assets +Increases in current liabilities – Decreases in current liabilities Indirect Method = Net cash provided by operating activities

15. 24-15 Depreciation expense. Amortization of premium on bonds payable. Gain or loss on sale of equipment. Adjustments for Noncash Items on the Income Statement

16. 24-16 Operating assets and liabilities are current assets and current liabilities. ANSWER: QUESTION: What are operating assets and liabilities? Changes are usually related to routine business operations and are reflected in net income.

17. 24-17 Increase in Accounts Receivable More sales on account were recorded than were collected. Sales were included in net income but cash has not been received. To obtain cash flows from operating activities, the increase in accounts receivable is subtracted from net income.

18. 24-18 Decreases in Prepaid Expenses Less was paid for prepaid expenses than was charged to expense in arriving at net income. Net income does not reflect cash paid for prepaid expenses. To obtain cash flows from operating activities, the decrease in prepaid expenses is added to net income.

19. 24-19 More supplies were paid for than were used. Net income does not reflect all cash paid for supplies. To obtain cash flows from operating activities, the increase in supplies is deducted from net income. Increase in Supplies

20. 24-20 Decreases in noncash current assets are added to net income to arrive at cash flows from operating activities. Inventory is an example of a noncash current asset. Decrease in Noncash Current Assets

21. 24-21 More inventory was sold than was purchased. Sale of inventory was reflected in net income as cost of goods sold, but cash was not paid to replace the inventory. Net income reflects higher costs than actual cash outflows. To obtain cash flows from operating activities, a decrease in inventory is added to net income. Decrease in Merchandise Inventory

22. 24-22 Increases in Current Liabilities Increases in current liabilities are added to net income to obtain the cash flows from operating activities. Increase in sales tax payable Increase in payroll taxes payable Increase in interest payable

23. 24-23 Decreases in current liabilities are subtracted from net income. If current liabilities decrease as a result of operations, some of the net income reported was not a cash flow. Decrease in Current Liabilities

24. 24-24 Summary of Effects of Changes in Current Assets and Current Liabilities. Add to Deduct from Net Income Net Income Increase in current asset x Decrease in current asset x Increase in current liability x Decrease in current liability x

25. 24-25 If the income statement reflects a net loss, the first line of the statement of cash flows is the net loss. All adjustments for noncash income and expense, current assets, and current liabilities are made to the net loss figure. Effect of Net Loss on Cash Flows from Operations

26. The Statement of Cash Flows Section 3: Cash Flows from Investing and Financing Activities Chapter 24 Section Objectives 3. Compute cash flows from investing activities. 4.Compute cash flows from financing activities. 5.Prepare a statement of cash flows. McGraw-Hill© 2009 The McGraw-Hill Companies, Inc. All rights reserved.

27. 24-27 Investing activities involve the acquisition or disposal of assets that are not consumed in routine operations within one year. Cash Flows from Investing Activities Compute cash flows from investing activities Objective 3

28. 24-28 Cash payments for purchases of property, plant, and equipment. Cash payments for purchases of stocks and bonds of other corporations. Cash Outflows from Investing Activities

29. 24-29 Cash Inflows from Investing Activities Sale of property, plant, and equipment. Sale of investments in securities of other corporations. Principal received on mortgages or notes held in connection with the sale of plant and equipment.

30. 24-30 Sales price (cash inflow) $8,000 Asset cost $6,000 Cash Inflows from Investing Activities In 2010 Household Productions, Inc. sold equipment for $8,000 cash. Gain on sale $4,000 Accumulated depreciation (2,000) (4,000) Statement of cash flows shows the $8,000 received as a cash inflow from investing activities. The $4,000 gain was subtracted from net income in the Cash Flows from Operating Activities section.

31. 24-31 Equity transactions Debt transactions Cash Flows from Financing Activities Compute cash flows from financing activities Objective 4

32. 24-32 Original issue of capital stock. Resale of treasury stock. Issue of bonds and notes payable. Cash Inflows from Financing Activities

33. 24-33 Purchase of treasury stock. Retirement of preferred stock. Payment of cash dividends. Repayment of debt obligations: Bonds payable Notes payable Mortgages Cash Outflows from Financing Activities Interest expense is an outflow from operating activities (not financing activities).

34. 24-34 Cash flows from three types of business activities are combined to arrive at the net change in cash and cash equivalents: Operating Investing Financing The net change is combined with the beginning balance of cash and cash equivalents to reconcile to the ending balance of cash and cash equivalents. Prepare a statement of cash flows Objective 5

35. 24-35 Household Productions, Inc. Statement of Cash Flows (Partial) Year Ended December 31, 2010 Net cash provided by operating activities 37,958.00 Net cash provided by investing activities 3,500.00 Net cash used in financing activities (7,000.00) Net Increase in Cash and Cash Equivalents 34,458.00 Cash and cash equivalents, January 1, 2010 80,773.00 Cash and cash equivalents, December 31, 2010 115,231.00 Agrees with amount reported on balance sheet

36. 24-36 Recall that there are two methods of preparing the statement of cash flows. The two methods relate to the Cash Flows from Operating Activities section only. This chapter illustrates the indirect method. Direct and Indirect Methods Most corporations use the indirect method.

37. 24-37 Under the direct method all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction. ANSWER: QUESTION: What is the direct method of preparing the statement of cash flows? Net income is not the starting point in the direct method.

38. 24-38 The FASB suggests the following classifications: Cash collected from customers Interest and dividends received Cash paid to employees and suppliers Interest paid Income taxes paid Direct Method

39. 24-39 If the indirect method is used, the notes accompanying the statement must include: Interest paid Income tax paid Disclosures Required in the Statement of Cash Flows Operating Activities Investing and Financing Activities Noncash activities are disclosed on the statement. Examples include: Issuing bonds payable for land Converting bonds payable into common stock

40. 24-40 Thank You for using College Accounting, 12th Edition Price Haddock Farina