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Chapter 22. Statement of Cash Flows Revisited. CASH INFLOWS. Operating Activities. Investing Activities. Financing Activities. Sale of operational assets Sale of investments Collections of loans. Issuance of stock Issuance of bonds and notes. Cash received from revenues. Business.
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Chapter 22 Statement of Cash Flows Revisited
CASH INFLOWS Operating Activities Investing Activities Financing Activities Sale of operational assets Sale of investments Collections of loans Issuance of stock Issuance of bonds and notes Cash received from revenues Business Cash paid for expenses Purchase of operational assets Purchase of investments Loans to others Payment of dividends Repurchase of stock Repayment of debt CASH OUTFLOWS
The Statement helps users assess . . . a firm’s ability to generate cash. a firm’s ability to meet its obligations. the reasons for differences between income and associated cash flows. the effect of cash and noncash investing and financing activities on a firm’s financial position. Role of the Statement of Cash Flows
. . . is required by SFAS No. 95. Statement of Cash Flows . . . . . . lists inflows and outflows of cash and cash equivalents by category. . . . explains the change in cash during the period.
Short-term, highly liquid investments. Readily convertible into known, fixed amounts of cash. So near maturity that there is insignificant risk of market value fluctuation from interest rate changes. Cash and Cash Equivalents Cash Equivalents Cash Resources immediately available to pay obligations.
Primary Elements of the Statement of Cash Flows (SCF) Cash Flows from Operating Activities Cash Flows from Financing Activities Cash Flows from Investing Activities
Inflows Receipts from customers Interest received Dividends received Refunds from suppliers Revenues received in advance Outflows Payments to suppliers Payments to employees Interest payments Income tax payments Payments on operating leases Cash Flows From Operating Activities
Inflows Proceeds from plant assets sales Proceeds from sales and maturities of debt and equity securities Collections of loan principal Sale of real estate Outflows Payments to purchase plant assets Purchases of debt and equity securities Loans to others Payments to purchase real estate Cash Flows From Investing Activities
Inflows Proceeds from debt for specific investing activities Proceeds from loans from financial institutions Proceeds from issuance of stock Outflows Dividends paid to stockholders Principal payments on loans from financial institutions Principal payments on capital leases Cash Flows From Financing Activities
SFAS No. 95 RequirementsNoncash Activities • Disclosure is required for significant noncash investing and financing activities. • Disclosure should appear in a supporting schedule to the Statement of Cash Flows or in the Notes to the Financial Statements.
SFAS No. 95 RequirementsNoncash Activities Common noncash activities include: Retirement of bonds by issuing stock. Acquiring an asset by issuing a note payable. Settlement of debt by transferring assets. Incurrence of capitalized lease obligations.
Preparing the Statement of Cash Flows Reconcile beginning cash to ending cash is required. Disclose significant noncash activities, taxes paid, & interest paid.
Let’s look at the Direct Method for preparing the Cash Flows from Operating Activities section.
{ Collections Accrual-basis + Decrease in net A/R on Account Revenues - Increase in net A/R = Direct MethodAnalyzing Sales Revenue • The key information is cash collected from customers. • Can be computed two ways: • Obtained from cash receipts journal. • Obtained from accrual sales information.
Analyzing SalesReview Question Accounts Receivable was $40,000 on 1/1/03 and $52,000 on 12/31/03. If total sales revenue for 2003 was $800,000, then how much cash was received from customers? a. $800,000 b. $760,000 c. $812,000 d. $788,000
Analyzing SalesReview Question Accounts Receivable was $40,000 on 1/1/03 and $52,000 on 12/31/03. If total sales revenue for 2003 was $800,000, then how much cash was received from customers? a. $800,000 b. $760,000 c. $812,000 d. $788,000 A/R increased $12,000 during 2003. Subtract increase in A/R during the year from total revenues to arrive at cash collected from customers. $800,000 - $12,000 = $788,000
Direct MethodGains and Losses on Sale of Assets Gains and losses do not appear on the Statement of Cash Flows using the Direct Method.
{ Cash Cost + Inventory Increase paid for of - Inventory Decrease Inventory Goods + A/P Decrease Purchases Sold - A/P Increase = Direct MethodCost of Goods Sold • Payments can be found in the purchases journal. • assuming accounts payable is used to purchase inventory. • Payments can be inferred:
Cost of Goods SoldReview Question Examine the following information and determine how much was paid for inventory in 2004. a. $900,000 b. $923,000 c. $947,000 d. $877,000
Cost of Goods SoldReview Question Examine the following information and determine how much was paid for inventory in 2004. a. $900,000 b. $923,000 c. $947,000 d. $877,000 Inventory increased $35,000 in 2004. Accounts Payable increased $12,000 in 2004. + Inventory Increases - Accounts Payable Increases $900,000 +$35,000 - $12,000 = $923,000
{ Cash paid to Accrual-basis + Decrease in Payable Employees Expense - Increase in Payable = Direct MethodSalaries Expense • Payments can be pulled from the payroll journal. • Cash paid to employees can be computed from the accrual-basis expense.
Salaries ExpenseQuestion Salary Expense for 2004 was $700,000. Salary Payable was $35,000 on 12/31/03 and $10,000 on 12/31/04. How much cash was paid to employees in 2004? a. $700,000 b. $735,000 c. $725,000 d. $675,000
Salaries ExpenseQuestion Salary Expense for 2004 was $700,000. Salary Payable was $35,000 on 12/31/03 and $10,000 on 12/31/04. How much cash was paid to employees in 2004? a. $700,000 b. $735,000 c. $725,000 d. $675,000 Salary Payable decreased $25,000 during the year. Add the decrease in Salary Payable to Salary Expense to arrive at cash paid to employees. $700,000 + $25,000 = $725,000
Direct MethodEstimated Expenses Depreciation, Amortization, and Depletion Expenses • Operating cash flows are not involved. • They are not disclosed in the SCF using the direct method.
{ + Increase in Deferred Cash Accrual-basis Revenues Collections Revenue - Decrease in Deferred Revenues = Direct MethodDeferred Revenue • Receipts can be found in the cash receipts journal. • Receipts can also be inferred:
{ + Increase in Prepaid Cash Accrual-basis Expenses Payments Expense - Decrease in Prepaid Expenses = Direct MethodPrepaid Expenses • Payments can be found in the cash disbursements journal. • Payments can be inferred:
Let’s do an example of a direct method Statement of Cash Flows.
Statement of Cash FlowsDirect Method Example Using the direct method, prepare a Statement of Cash Flows for the year ended 2003. Examine the following information . . .
Statement of Cash FlowsDirect Method Example Additional Information for 2003: • Trading Securities were purchased at a cost of $25,000. • Equipment with a book value of $40,000 was sold during the year for $43,000. • Uninsured equipment with a book value of $30,000 was destroyed during a freak flood. • Bond premium amortization was $1,000.
Statement of Cash FlowsDirect Method Example Additional Information for 2003: • Grate Big holds a 25% investment in Tiny Co. and uses the Equity Method. • Grate Big received $10,000 in dividends from Tiny Co. • Grate Big’s tax rate is 40%. • The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month.
Statement of Cash FlowsDirect Method Example Additional Information for 2003: • The Bonds Payable carry a 9% interest rate. Interest is payable semiannually on July 1 and on January 1. • The company sold stock during the year for $50,000 cash.
Statement of Cash FlowsDirect Method Example • Cash Received from Customers • Cash Paid to Employees
Statement of Cash FlowsDirect Method Example • Cash Paid for Inventory • Cash Paid for Interest
Statement of Cash FlowsDirect Method Example • Cash Paid for Taxes • Other Operating Cash Flows
Statement of Cash FlowsDirect Method Example • Cash Flows From Operating Activities
Grate Big CompanyStatement of Cash FlowsFor the Period Ending December 31, 2003 Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the ending Cash balance on the Balance Sheet.
Now, let’s look at the Indirect Method for preparing the Cash Flows from Operating Activities section.
Operating Cash FlowsIndirect Method • Net cash flows from operating activities are determined by • starting with net income. • adjusting for items that reconcile net income to operating cash flows. • Individual operating cash flows are not disclosed.
Indirect MethodWorking Capital Accounts Note: Cash and cash equivalents, short-term investments in securities available for sale, dividends payable, and short-term payables to financial institutions are excluded from this category.
Indirect MethodOther Reconciling Items • Add to net income: • Depreciation, depletion, and amortization expenses • Losses • Noncash expenses • Subtract from net income: • Bond premium amortization • Gains • Noncash revenues
Statement of Cash FlowsIndirect Method Example Prepare a Statement of Cash Flows for the period ending December 31, 2003, using the Indirect Method.Refer to the following information . . .
