1. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-1 CHAPTER 12 Part A Preparing and Using the Statement of Cash Flows

2. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-2 BASIC CONCEPTS The statement of cash flows –Reports the entity’s cash flows--cash receipts and cash payments--during the period –Shows where cash came from and how it was spent –Covers a span of time

3. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-3 Income Statement Income Statement of Retained Earnings Statement of Retained Earnings Statement of Cash Flows Statement of Cash Flows Balance Sheet Balance Sheet Balance Sheet Balance Sheet December 31, 20X1 (a point in time) For the Year Ended December 31, 20X2 a period of time December 31, 20X2 (a point in time)

4. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-4 OVERVIEW To predict future cash flows –Past cash receipts and payments are good predictors of future cash receipts and payments To evaluate management decisions The statement of cash flows is designed to serve the following purposes:

5. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-5 To determine the company’s ability to pay dividends to stockholders and interest and principle to creditors To show the relationship of net income to the business’s cash flows OVERVIEW

6. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-6 CASH AND CASH EQUIVALENTS On the statement of cash flows, cash includes cash equivalents –Highly liquid short-term investments that can be converted into cash with little delay Money-market investments Investments in U. S. Government Treasury bills

7. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-7 OPERATING, INVESTING, AND FINANCING ACTIVITIES A business engages in three types of business activities –Operating –Investing –Financing Each set of activities includes both cash inflows (receipts) and cash outflows (payments)

8. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-8

9. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-9 OPERATING ACTIVITIES Operating activities create –Revenues and expenses –Gains and losses The largest cash inflow from operations is the collection of cash from customers Smaller inflows are receipts of interest on loans and dividends on stock investments

10. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-10 Operating cash outflows include payments to suppliers and employees and payments for interest and taxes A large positive operating cash flow is a good sign –In the long run, operations must be the main source of a business’s cash OPERATING ACTIVITIES

11. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-11 INVESTING ACTIVITIES Investing activities increase and decrease the business’s long-term assets The purchase or sale of land, a building, or equipment is an investing activity, as is the purchase of an investment in the stock of another company

12. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-12 The acquisition of plant assets dominates Anchor Corporation’s investing activities Investing activities require analysis of the long-term asset accounts INVESTING ACTIVITIES

13. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-13 FINANCING ACTIVITIES Financing activities obtain from investors and creditors the cash needed to launch and sustain the business Financing activities include –Issuing stock –Borrowing money –Buying or selling treasury stock –Paying dividends to stockholders

14. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-14 Financing activities require analysis of the long-term liability accounts and the owners’ equity accounts FINANCING ACTIVITIES

15. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-15 Collections from customers Operating Activities Payments to suppliers Investing Activities Financing Activities Receipts of interest and dividends on investments Other operating receipts Payments to employees Payments of interest and income tax Other operating disbursements Sale of plant assets Sale of investments that are not cash equivalents Receipts on loans receivable Acquisition of plant assets Purchase of investments that are not cash equivalents Making loans Issuing stock Selling treasury stock Borrowing money Payment of dividends Purchase of treasury stock Payment of principal amounts of debts

16. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-16 INTEREST AND DIVIDENDS Cash receipts of interest and dividends and cash payments of interest are reported as operating activities on the cash-flow statement because they affect the computation of net income Dividend payments are reported in the financing activities section of the cash- flow statement because they go to the entity's owners

17. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-17 FORMAT OF THE STATEMENT OF CASH FLOWS The direct method –Lists cash receipts from specific operating activities and cash payments for each major operating activity –Is clearly preferred by the FASB as expressed in FASB Statement No. 95 The FASB approved two formats for reporting cash flows from operating activities:

18. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-18 The indirect method starts with net income and reconciles to cash flows from operating activities The following exhibit gives an overview of the process of converting from accrual-basis income to the cash basis FORMAT OF THE STATEMENT OF CASH FLOWS

19. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-19 Revenues Net Income Adjust Revenues to Cash Receipts Cash Flows from Operating Activities Expenses Adjust Expenses to Cash Payments Accrual-Basis Accounting Cash-Basis Accounting Converting from the Accrual Basis to the Cash Basis for the Statement of Cash Flows The direct method is easier to understand, and it provides more information for decision making

20. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-20 The two ways of presenting the statement of cash flows arrive at the same subtotals for all three categories of activities and for the net change in cash They differ only in the manner of reporting cash flows from operating activities FORMAT OF THE STATEMENT OF CASH FLOWS

21. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-21 DIRECT METHOD Anchor Corporation has assembled the summary of 20X2 transactions in the following exhibit –Some transactions affect the income statement (item 1), some the statement of cash flows (item 2), and others (item 5) affect both –The statement of cash flows reports only those transactions with cash effects ( those with an asterisk in the exhibit)

22. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-22 Operating Activities: 1. Sales on credit, $284,000 *2. Collections from customers, $271,000 3. Interest revenue on notes receivable, $12,000 *4. Collection of interest receivable, $10,000 *5. Cash receipt of dividend revenue on investments in stock, $9,000 6. Cost of goods sold, $150,000 7. Purchases of inventory on credit, $147,000 *8. Payments to suppliers, $133,000 9. Salary and wage expense, $56,000 *10. Payments of salary and wages, $58,000 11. Depreciation expense, $18,000 12. Other operating expense, $17,000 *13. Interest expense and payments, $16,000 *14. Income tax expense and payments, $15,000 Investing Activities: *15. Cash payments to acquire plant assets, $306,000 *16. Loan to another company, $11,000 *17. Proceeds from sale of plant assets, $62,000, including $8,000 gain Financing Activities: *18. Proceeds from issuance of common stock, $101,000 *19. Proceeds from issuance of long-term debt, $94,000 *20. Payments of long-term debt, $11,000 *21. Declaration and payment of cash dividends, $17,000 Operating Activities: 1. Sales on credit, $284,000 *2. Collections from customers, $271,000 3. Interest revenue on notes receivable, $12,000 *4. Collection of interest receivable, $10,000 *5. Cash receipt of dividend revenue on investments in stock, $9,000 6. Cost of goods sold, $150,000 7. Purchases of inventory on credit, $147,000 *8. Payments to suppliers, $133,000 9. Salary and wage expense, $56,000 *10. Payments of salary and wages, $58,000 11. Depreciation expense, $18,000 12. Other operating expense, $17,000 *13. Interest expense and payments, $16,000 *14. Income tax expense and payments, $15,000 Investing Activities: *15. Cash payments to acquire plant assets, $306,000 *16. Loan to another company, $11,000 *17. Proceeds from sale of plant assets, $62,000, including $8,000 gain Financing Activities: *18. Proceeds from issuance of common stock, $101,000 *19. Proceeds from issuance of long-term debt, $94,000 *20. Payments of long-term debt, $11,000 *21. Declaration and payment of cash dividends, $17,000

23. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-23 To prepare the statement of cash flows, follow these three steps: –Identify the activities that increased cash or decreased cash--those items with asterisks in the exhibit –Classify each increase and decrease in cash as either an operating activity, an investing activity, or a financing activity –Identify the cash effect of each transaction DIRECT METHOD

24. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-24 Cash flows from operating activities are listed first because they are the largest and most important source of cash for most businesses Operating activities include –Cash collections from customers Cash sales and collections of accounts receivable CASH FLOWS FROM OPERATING ACTIVITIES

25. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-25 –Cash receipts of interest –Cash receipts of dividends –Payments to suppliers Includes all cash payments for inventory and operating expenses except employee compensation, interest, and income taxes Suppliers are those entities that provide the business with its inventory and essential services CASH FLOWS FROM OPERATING ACTIVITIES

26. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-26 –Payments to employees Includes disbursements for salaries, wages, commissions, and other forms of employee compensation –Payments for interest expense and income tax expense Interest payments show the cash cost of borrowing money Income tax payments are reported separately from the other expenses CASH FLOWS FROM OPERATING ACTIVITIES

27. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-27 –Depreciation, depletion, and amortization expense These expenses are not listed on the statement of cash flows (direct method) because they do not affect cash CASH FLOWS FROM OPERATING ACTIVITIES

28. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-28 CASH FLOWS FROM INVESTING ACTIVITIES Investing activities refer to the acquisition and disposition of long-term assets Investing activities include –Cash payments to acquire plant assets and investments and loans to other companies These cash payments acquire a noncash asset –Proceeds from the sale of plant assets and investments, and the collections of loans

29. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-29 CASH FLOWS FROM FINANCING ACTIVITIES Financing activities include –Proceeds from issuance of stock and debt –Payment of debt and purchases of the company’s own stock –Payment of cash dividends A stock dividend has no effect on cash and is not reported on the cash-flow statement

30. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-30 COMPUTING INDIVIDUAL AMOUNTS To compute the amounts for the statement of cash flows, many accountants use the income statement and the changes in the related balance sheet accounts. For the operating cash-flow amounts, the adjustment process follows this basic approach: Revenue or expense from the income statement Adjust for the change in the related balance sheet accounts Amount for the statement of cash flows Sales revenue Accounts receivable Cash collections from customers

31. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-31

32. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-32

33. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-33 COMPUTING CASH COLLECTIONS FROM CUSTOMERS Collections can be computed by converting sales revenue (an accrual- basis amount) to the cash basis. The following equation determines cash collections: Beginning balance + Sales - Collections = Ending balance Beginning balance + Sales - Collections = Ending balance $80,000$284,000  $ 93,000 ==== $271,000 Accounts Receivable + -

34. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-34 COMPUTING CASH COLLECTIONS FROM CUSTOMERS Beginning balance 80,000 Sales 284,000 Ending balance 93,000 Collections 271,000 Accounts Receivable The Accounts Receivable T-account provides the same data in a slightly differed format:

35. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-35 All collections of receivables are computed in the same way The following exhibit summarizes these computations COMPUTING CASH COLLECTIONS FROM CUSTOMERS

36. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-36 To suppliersCost of goods sold + Increase in inventory - Decrease in inventory + Decrease in accounts payable - Increase in accounts payable Receipts: From customers Of interest Of dividends To employees For interest For income tax Payments + Increase in prepaids - Decrease in prepaids + Decrease in accounts receivable - Increase in accounts receivable + Decrease in interest receivable - Increase in interest receivable + Decrease in dividends receivable - Increase in dividends receivable + Decrease in salary payable - Increase in salary payable + Decrease in interest payable - Increase in interest payable Sales revenue Interest revenue Dividend revenue Operating expenses Receipts/ Payments From Income Statement Account Change in Related Account Balance Sheet + Decrease in income tax payable - Increase in income tax payable Salary expense Interest expense Income tax expense + Decrease in accrued liabilities - Increase in accrued liabilities

37. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-37 COMPUTING PAYMENTS TO SUPPLIERS This computation includes two parts: –Payments for inventory –Payments for expenses other than interest and income tax This is accomplished by analyzing Cost of Goods Sold from the income statement and Accounts Payable from the balance sheet

38. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-38 The computation of Anchor Corporation’s cash payments for inventory is given by the following equations: Beginning inventory Purchases Ending inventory Cost of goods sold + ++++++ = ======== - $138,000  $135,000 $150,000 $147,000 Cost of Goods Sold - COMPUTING PAYMENTS TO SUPPLIERS

39. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-39 Beginning balance Purchases Payments for inventory Ending balance + ++++++ = ======== - $57,000 $147,000  $91,000 $113,000 - Insert the figures for purchases into Accounts Payable to determine the amount of cash payments for inventory as follows: COMPUTING PAYMENTS TO SUPPLIERS Accounts Payable

40. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-40 COMPUTING PAYMENTS TO SUPPLIERS The T-accounts show where the data came from: Beg. Inventory 138,000 Purchases 147,000 Cost of goods sold 150,000 End. Inventory 135,000 Payments for inventory 113,000 Beg. bal. 57,000 Purchases 147,000 End. bal. 91,000 Cost of Goods Sold Accounts Payable

41. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-41 COMPUTING PAYMENTS FOR OPERATING EXPENSES Payments for operating expenses other than interest and income tax can be computed as plug figures by analyzing Prepaid Expense and Accrued Liabilities as follows for Anchor Corporation:

42. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-42 Beginning balance Payments Expiration of prepaid expense Ending balance + ++++++ = ======== - $7,000  $8,000 - Prepaid Expenses Beginning balance Accrual of expense at year end Payments Ending balance + ++++++ = ======== - $3,000 $1,000     $3,000 - Accrued Liabilities $8,000

43. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-43 Accrual of expense at year end Expiration of prepaid expense Payments Ending balance + ++++++ = ======== + $1,000 $7,000     $17,000 $9,000 + Operating Expenses Total payments for operating expenses = $20,000 $8,000 + $3,000 = $9,000 = $20,000 Total payments for operating expenses = $20,000 $8,000 + $3,000 = $9,000 = $20,000

44. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-44 The T-accounts give another picture of the same data: Accrual of expense at year end 1,000 Expiration of prepaid expense 7,000 Payments9,000 End. bal.17,000 Beg. bal. 7,000 Payments 8,000 End. bal. 8,000 Expiration of prepaid expense 7,000 Payment 3,000 Beg. bal. 3,000 Accrual of expense at year end 1,000 End. bal. 1.000 Operating Expenses (other than Salaries, Wages, and Depreciation Accrued LiabilitiesPrepaid Expenses

45. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-45 COMPUTING PAYMENTS TO EMPLOYEES Anchor’s calculation adjusts Salary and Wage Expense for the change in Salary and Wage Payable: Beginning balance Salary and wage expense Payments Ending balance + ++++++ = ======== - $6,000 $56,000     $4,000 $58,000 - Salary and Wage Payable

46. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-46 COMPUTING PAYMENTS TO EMPLOYEES Beginning balance 6,000 Salary & Wage expense 56,000 Ending balance 4,000 Payments to employees 58,000 Salary and Wage Payable

47. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-47 COMPUTING PAYMENTS OF INTEREST AND INCOME TAX In the example, the expense and payment amounts are the same for interest and income tax No analysis is required to determine these payment amounts If the expense and the payment differ, the payment can be computed by analyzing the related liability account

48. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-48 COMPUTING ACQUISITIONS AND SALES OF PLANT ASSETS Anchor Corporation’s –Balance sheet reports beginning plant assets, net of depreciation, of $219,000 and an ending net amount of $453,000 –Income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets The acquisitions of plant assets total $306,000

49. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-49 To calculate the proceeds from the sale of plant assets, we must first determine the book value of plant assets sold Beginning balance AcquisitionsDepreciation Book value of assets sold Ending balance + ++++++ - ------- ------ = ======== $219,000$306,00018,000  $453,000 $54,000 The sale proceeds are computed as follows: Sale proceeds Book value of assets sold GainLoss + ++++++- ------ = ======== $54,000$8,000 $0 $62,000 Plant Assets (net)

50. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-50 The plant asset T-account provides another look at the computation on the book value of the assets sold: Depreciation 18,000 Book value of assets sold 54,000 Beg. bal. 219,000 Acquisitions 306,000 End. bal. 453,000 Plant Assets (net)

51. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-51 COMPUTING ACQUISITIONS AND SALES OF PLANT ASSETS Proceeds from the sale of an asset need not equal the asset’s book value: Proceeds = Book Value + Gain, or Proceeds = Book Value - Loss Proceeds = Book Value - Loss

52. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-52 Investments are easier to analyze because there is no depreciation to account for, as shown in the following equation: Beginning balance Purchases Book value of investments sold Ending balance + ++++++ = ======== - $100,000 $50,000  $140,000 $10,000 - Investments (amounts assumed for illustration only) COMPUTING ACQUISITIONS AND SALES OF INVESTMENTS

53. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-53 A T-account analysis is presented below: Book value of investments sold XXX Beg. bal.* XXX Purchases** XXX End. bal. Investments *From balance sheet **From statement of cash flows. COMPUTING ACQUISITIONS AND SALES OF INVESTMENTS

54. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-54 COMPUTING LOANS AND THEIR COLLECTIONS Beginning balance New loans made Collections Ending balance + ++++++ = ======== - $90,000 $10,000  $30,000 $70,000 - Loans and Notes Receivable (amounts assumed for illustration only) Loan transactions are similar to collections from customers:

55. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-55 Beginning balance* XXX New loans made** XXX Ending balance XXX Collections XXX Loans and Notes Receivable *From balance sheet **From statement of cash flows. COMPUTING LOANS AND THEIR COLLECTIONS

56. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-56 Receipts From sale of plant assets Beginning plant assets (net) Acquisition cost DepreciationBook value of assets sold Ending plant assets (net) =+-- Cash received Book values of assets sold Gain on sale or - Loss on sale = + From sale of investments Beginning investments Purchase cost of investments sold Cost of investments sold Ending investments +-= From collection of loans and notes receivable Cash receivedGain on sale or - Loss on sale Cost of investments sold = + Beginning loans or notes receivable New loans madeCollectionsEnding loans or notes receivable +- = Computation of Cash Flows from Investing Activities

57. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-57 Computation of Cash Flows from Investing Activities (cont.) Payments For acquisition of plant assets Beginning plant assets (net) Acquisition cost DepreciationBook value of assets sold Ending plant assets (net) =+-- For purchase of investments Beginning investments Purchase cost of investments Cost of investments sold Ending investments +-= For new loans made Beginning loans or notes receivable New loans madeCollectionsEnding loans or notes receivable +-=

58. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-58 COMPUTING ISSUANCES AND PAYMENTS OF LONG- TERM DEBT For Anchor Corporation, new debt issuances total $94,000. The computation of debt payments follows from analysis of the Long-Term Debt account: Beginning balance Issuance of new debt Payments of debt Ending balance + ++++++ = ======== - $77,000 $94,000  $160,000 $11,000 - Long-Term Debt

59. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-59 COMPUTING ISSUANCES AND PAYMENTS OF LONG- TERM DEBT Beg. bal. 77,000 Issuance of new debt 94,000 Payments 11,000 Long-Term Debt End. bal. 160,000

60. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-60 The amount of a new issuance of common stock is determined by combining the Common Stock and any related Capital Excess of Par It is convenient to work with a single summary account for stock, as was used for plant assets COMPUTING ISSUANCES AND RETIREMENTS OF STOCK

61. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-61 Beginning balance Issuance of new stock Retirements of stock Ending balance + ++++++ = ======== - $258,000 $101,000  $359,000 0 - Common Stock Beg. bal. 258,000 Issuance of new stock 101,000 Retirements of stock 0 Common Stock End. bal. 359,000 

62. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-62 COMPUTING PURCHASES AND SALES OF TREASURY STOCK Beginning balance Purchase of treasury stock Retirements of stock Ending balance + ++++++ = ======== - $16,000 $3,000  $5,000 $14,000 - Treasury Stock (amount assumed for illustration only)

63. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-63 COMPUTING PURCHASES AND SALES OF TREASURY STOCK Beg. bal. XXX Purchase of treasury stock XXX Cost of treasury stock sold XXX Treasury Stock End. bal. XXX

64. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-64 If either the purchase amount or the cost of treasury stock sold is known, the other amount can be computed For a sale of treasury stock, the amount to report on the cash-flow statement is the sale proceeds COMPUTING PURCHASES AND SALES OF TREASURY STOCK

65. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-65 COMPUTING DIVIDEND PAYMENTS Beginning balance Net income Dividend declarations Ending balance + ++++++ = ======== - $86,000 $41,000  $110,000 $17,000 - Retained Earnings Beginning balance Declared dividends Dividend payments Ending balance + ++++++ = ======== - $0 $17,000  $0 $17,000 - Dividends Payable  

66. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-66 Dividend declarations 17,000 Beg. bal. 86,000 Net income 41,000 End. bal. 110,000 Dividend payments 17,000 Beg. bal. (assumed) 0 Dividend declarations 17,000 End. bal. (assumed) 0 Retained Earnings Dividends Payable The T-accounts provide another view of this computation: COMPUTING DIVIDEND PAYMENTS

67. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-67 The following exhibit summarizes the computation of cash flows from financing activities Amounts that must be computed are highlighted in color COMPUTING DIVIDEND PAYMENTS

68. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-68 Computation of Cash Flows from Financing Activities Receipts From issuance of long-term debt Beginning long-term debt Cash received from issuance of long-term debt Payment of debt Ending long- term debt =+- From issuance of stock Beginning stock Cash received from issuance of new stock Payments to retire stock Ending stock +-= From sale of treasury stock Cash receivedExtra amount of sale above cost or - amount of cost in excess of sale amount Cost of treasury stock sold = + Beginning treasury stock Purchase cost of treasury stock Cost of treasury stock sold Ending treasury stock +-=

69. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-69 Computation of Cash Flows from Financing Activities Payments Of long-term debt Beginning long-term debt Cash received from issuance of long-term debt Payment of debt Ending long- term debt =+- To retire stock Beginning stock Cash received from issuance of new stock Payments to retire stock Ending stock +-= To purchase treasury stock Beginning treasury stock Purchase cost of treasury stock Cost of treasury stock sold Ending treasury stock +-= For dividends Beginning retained earnings Net income Dividend declarations Ending retained earnings +-= Beginning dividends payable Dividend declarations Dividend payments Ending dividends payable +-=

70. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-70 NONCASH INVESTING AND FINANCING ACTIVITIES Suppose Anchor Corporation issued no-par common stock at $320,000 to acquire a warehouse. Anchor would journalize this transaction as follows: Warehouse Building320,000 Common Stock320,000 Warehouse Building320,000 Common Stock320,000

71. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-71 NONCASH INVESTING AND FINANCING ACTIVITIES Noncash investing and financing activities like this transaction can be reported in a separate schedule that accompanies the statement of cash flows: Noncash Investing and Financing Activities: Acquisition of building by issuing common stock$320 Acquisition of land by issuing note payable 72 Payment of long-term debt by transferring investments to the creditor 104 Acquisition of equipment by issuing short-term note payable 37 Total noncash investing and financing activities$533 Noncash Investing and Financing Activities: Acquisition of building by issuing common stock$320 Acquisition of land by issuing note payable 72 Payment of long-term debt by transferring investments to the creditor 104 Acquisition of equipment by issuing short-term note payable 37 Total noncash investing and financing activities$533

72. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-72 RECONCILING NET INCOME TO NET CASH FLOW FROM OPERATING ACTIVITIES The FASB requires companies that use the direct method to report a reconciliation from net income to net cash flow from operating activities The following exhibit shows the reconciliation for Anchor Corporation Net cash inflow from operating activities of $68,000 is the same amount derived under the direct method

73. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-73 RECONCILING NET INCOME TO NET CASH FLOW FROM OPERATING ACTIVITIES

74. © 2001 Prentice Hall Business Publishing Financial Accounting, 4/e Harrison and Horngren 12A-74 END OF CHAPTER 12 Part A