Copyright © 2007 Prentice-Hall. All rights reserved 1 Statement of Cash Flows Chapter 13.

Copyright © 2007 Prentice-Hall. All rights reserved 1

Statement of Cash Statement of Cash FlowsFlows

Statement of Cash Statement of Cash FlowsFlows

Chapter 13


Objective 1Objective 1Objective 1Objective 1

Explain the purposes of the statement of cash flows and

describe its elements


Purposes of the Purposes of the Statement of Cash FlowsStatement of Cash Flows

Purposes of the Purposes of the Statement of Cash FlowsStatement of Cash Flows• Predict future cash flows• Evaluate management decisions• Predict ability to pay debts and to

pay dividends



Distinguish between operating, investing, and

financing cash flows


Types of Business Types of Business ActivitiesActivities

Types of Business Types of Business ActivitiesActivities

• Operating activities• Investing activities• Financing activities


Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

• Transactions that make up net income

• Also affect current assets and current liabilities on the balance sheet


Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

• Inflows – cash receipts from earning revenues– Sale of goods or

services– Interest revenue– Dividend revenue– Other revenues

• Outflows – cash paid from incurring expenses– Salaries and wages– Payments to

suppliers for inventory

– Taxes and fines– Interest paid to

lenders– Other expenses

Focus your attention on: income statement, and changes in current assets, current liabilities


Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

• Transactions that increase and decrease long-term assets


Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

• Inflows– Selling long-term

productive assets– Selling equity

investments– Collecting of

principal on loans– Other

• Outflows– Purchase long-term

productive assets– Purchase equity

investments– Purchase debt

investments– Make loans

Focus your attention on changes in:plant assets, long-term investments, other long-term assets


Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

• Transactions involving obtaining cash from the owners or returning resources to them

• Also involves obtaining cash from creditors and repaying the amount borrowed


Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

• Inflows– Issuing stock– Issuing bonds and

notes

• Outflows– Cash dividends or

withdrawals by owner

– Purchase treasury stock

– Repay cash loans

Focus your attention on changes in:long-term debt and stockholder’s equity


Avery CorporationStatement of Cash Flows

Year Ended December 31, 2008

Cash flows from Operating activities:

List activities

Net Cash Provided (Used) by Operating Activities $ xxxx

Cash Flows from Investing Activities:

List activities

Net Cash Provided (Used) for Investing Activities xxxx

Cash Flows from Financing Activities:

List activities

Net Cash Provided (Used) by Financing Activities xxxx

Net Increase (Decrease) in Cash $ xxxx

Cash Balance, beginning xxxx

Cash Balance, ending $ xxxx


Noncash Investing and Noncash Investing and FinancingFinancing

Noncash Investing and Noncash Investing and FinancingFinancing

• Investing and financing activities that do not affect cash– Acquire land by issuing a note payable– Retire debt by issuing stock– Convert preferred stock to common

stock

• Report in separate schedule or in a note


Format of the StatementFormat of the Statementof Cash Flowsof Cash Flows

Format of the StatementFormat of the Statementof Cash Flowsof Cash Flows

Two acceptable methods for reporting cash flows from operating activities

1. Indirect method2. Direct method

The Investing and Financing sections of the statement will not differ



Prepare a statement of cash flows by the indirect method


Indirect MethodIndirect MethodIndirect MethodIndirect MethodCash flows from operating activities:Net incomeAdjustments to reconcile net income to net cash

provided by operating activities:+ Depreciation / amortization/depletion 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 activities


Indirect MethodIndirect MethodIndirect MethodIndirect Method

Cash flows from investing activities:

+Sales of long-term assets

- Purchases of long-term assets

Net cash provided by (used for) investing activities



Cash flows from financing activities:

+ Issuance of stock

+ Sale of treasury stock

- Purchase of treasury stock

+ Issuance of notes or bonds payable

- Payment of notes or bonds payable

- Payment of dividends

Net cash provided by (used for) financing activities



Net increase (decrease) in cash during the year

+ Cash at December 31, 2007

= Cash at December 31, 2008


E13-18E13-18E13-18E13-18Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash provided by operating activities:

+ Depreciation / amortization/depletion 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 liabilities

Net cash provided by operating activities


E13-18E13-18E13-18E13-18

Cash flows from operating activities:

Net income $38,000

Start with net income


E13-18E13-18E13-18E13-18


Net income $38,000


+ Depreciation / amortization/depletion expense

29,000

Think of the journal entry to record depreciation. Cash is not affected. When accrual basis net income was computed, depreciation decreased net income, but did not decrease cash. This is why it is added


E13-18E13-18E13-18E13-18Cash flows from operating activities:

Net income $38,000


+ Depreciation 29,000

+ Loss on sale of long-term assets

- Gain on sale of long-term assets

The cash received from the sale of a long-term asset is reported in the Investing Activities section. The gain or loss does not affect cash. There were no gains or losses reported on the income statement


E13-18E13-18E13-18E13-18


Net income $38,000




+ Decreases in current assets other than cash




Cash + Other Assets = Liabilities + Owner’s Equity

-15,000+15,000

15,000Now it is time to refer to the balance sheet. Think of the accounting equation in this way: Cash + Other Assets = Liabilities + Owner’s Equity.If you have a cash transaction and a noncash asset is increasing, then cash must be decreasing. If the noncash asset is decreasing, then cash is increasing. In this exercise accounts receivable decreased, which means the company collected more cash than the recorded revenues



Net income $38,000



+ Decreases in accounts receivable 15,000





E13-18E13-18E13-18E13-18


+7,000-7,000

( 7,000)

Inventory increased. The company bought more inventory, which requires the use of cash



Net income $38,000




- Increases in inventory (7,000)




E13-18E13-18E13-18E13-18


+13,000+13,000

13,000If you have a cash transaction and a liability is increasing, then cash must be increasing. If the liability is decreasing, then cash is decreasing. In this exercise accounts payable increased. The company paid less than the expense recognized



Net income $38,000





+ Increases in accounts payable 13,000



E13-18E13-18E13-18E13-18


-8,000-8,000

(8,000)


E13-18E13-18E13-18E13-18


Net income $38,000





+ Increases in accounts payable 13,000

- Decreases in accrued liabilities (8,000)

Net cash provided by operating activities $80,000


E13-18E13-18E13-18E13-18



- Purchases of plant assets


(101,000)


E13-18E13-18E13-18E13-18



- Purchases of plant assets

(101,000)


$24,000

$(77,000)


E13-18E13-18E13-18E13-18


+ Issuance of stock








E13-18E13-18E13-18E13-18


+ Issuance of stock $30,000








E13-18E13-18E13-18E13-18Cash flows from financing activities:





- Payment of notes payable (15,000)




E13-18E13-18E13-18E13-18







- Payment of dividends (11,000)



E13-18E13-18E13-18E13-18Cash flows from financing activities:



- Payment of dividends (11,000)

Net cash provided by financing activities $4,000


Seacrest Services, Inc.Statement of Cash Flows

Year Ended June 30, 2008Cash provided by operating activities $80,000Cash flows from investing activities: Acquired land ($101,000) Sold land 24,000 Net cash used for investing activities (77,000)Cash flows from financing activities:

Issued common stock $30,000Paid long-term note (15,000)Paid dividends (11,000)

Net cash provided by financing activities: 4,000Net increase in cash during the year $7,000Cash balance, June 30, 2007 20,000Cash balance, June 30, 2008 $27,000


E13-18E13-18E13-18E13-18

Note:

Noncash investing and financing activities:

Acquired land by issuing a note payable $15,000


E13-18 (2)E13-18 (2)E13-18 (2)E13-18 (2)

• Seacrest Services’ cash flows look fairly strong– Operations are the main source of cash– The company is investing in new plant

assets without having to borrow much– It was able to issue stock and pay off a

long-term note payable — both financing transactions

• All of these signs are favorable


E13-19E13-19E13-19E13-19

Retained Earnings

45,000 Beg. Bal.

73,000 End. Bal.

62,000 Net income

107,000 Bal.?34,000

You start with $45,000. Net income increases retained earnings. If no dividends had been

declared, the retained earnings balance should have been $107,000. Since the balance is $73,000,

we declared dividends for the difference


Exercise 13-19Exercise 13-19Exercise 13-19Exercise 13-19Plant Assets

103,000

107,000

16,000 Depreciation 27,000

?114,000

CashLoss on sale of assets 1,000 Plant assets (net) 7,000

6,000

7,000

You start with $103,000, depreciation reduces the carrying value of the asset. Purchasing new assets increases the carrying value. If no assets were sold, the balance should have been $114,000. Since the balance is $107,000, the company sold $7,000 of

assetsRemember the journal entry that was prepared when

you sold an asset? In this case, you know the amounts for two of the accounts. The debit to cash

must be $6,000



Prepare a statement of cash flows by the direct method


Direct MethodDirect MethodDirect MethodDirect MethodCash flows from operating activities:Receipts: Collections from customers Interest received Dividends received Total cash receiptsPayments: To suppliers To employees For interest For income tax Total cash paymentsNet cash provided by operating activities


E13-26E13-26E13-26E13-26

Sales – increase in accounts receivable$24,623 - 183 = $24,440

Receipts From Customers

Sales Revenue+ Decrease in Accounts Receivable

- Increase in Accounts Receivable

If accounts receivable is increasing, then our customers are

charging more and paying less


E13-26E13-26E13-26E13-26Payments to Suppliers

Cost of Goods Sold

+ Increase in Inventory

+ Decrease in Accounts Payable

- Decrease in Inventory

- Increase in Accounts Payable

Cost of goods sold + increase in inventory - increase in accounts payable18,048 + 651 – 183 = $18,516

If inventory increases, you’re going to have to

pay cash for it

If accounts payable increases, you are

charging more, paying less


E13-26E13-26E13-26E13-26Payments for Operating Expenses

Operating Expense

+ Increase in Prepaids

+ Decrease in Accrued Liabilities

- Decrease in Prepaids

- Increase in Accrued Liabilities

Operating expenses – increase in accrued liabilities$4,883 – 90 = $4,793

If accrued liabilities increase, you are charging

more, paying less


E13-26E13-26E13-26E13-26

Acquisitions of property and equipment:

Property & Equipment

Beg bal 3,428

End bal 4,345

1,186

269 Depreciation

3,159

You start with $3,428, but depreciation reduces the carrying value of the asset. If nothing else had happened this period, the balance should have

been $3,159. Since the ending balance is $4,345, we must have bought additional assets


E13-26E13-26E13-26E13-26

Borrowing:

Long-term liabilitiesBeg bal 464

End bal 478

14


E13-26E13-26E13-26E13-26

Proceeds from issuance of common stock:

Common stockBeg bal 446

End bal 676

230


E13-26E13-26E13-26E13-26

Payment of cash dividends:

Retained earningsBeg bal 3,788

End bal 4,531

Net inc. 886

1434,674

You start with $3,788. Net income increases retained earnings. If no dividends had been

declared, the retained earnings balance should have been $4,674. Since the balance is $4,531, we

declared dividends for the difference


End of Chapter 13End of Chapter 13End of Chapter 13End of Chapter 13

Copyright © 2007 Prentice-Hall. All rights reserved 1 Statement of Cash Flows Chapter 13.

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Transcript of Copyright © 2007 Prentice-Hall. All rights reserved 1 Statement of Cash Flows Chapter 13.