Learning Objectives

1. Power Notes Chapter F14 Statement of Cash Flows 1. Purpose of the Statement of Cash Flows 2. Reporting Cash Flows 3. Statement of Cash Flows – The Indirect Method 4. Statement of Cash Flows – The Direct Method 5. Financial Analysis and Interpretation Learning Objectives C14

2. Cash Flows Increases in Cash Decreases in Cash Operating Operating (receipts from revenues) (payments for expenses) Cash Investing Investing (receipts from sales of noncurrent assets) (payments for aquiring noncurrent assets) Financing Financing (receipts from issuing equity and debt securities) (payments for dividends, and redemption of debt securities)

3. Cash Flows – Operating Activities Typical cash inflows Typical cash outflows Sales of goods and services Merchandise purchases Interest Revenue Payments of wages & other expenses Dividend Revenue Tax payments

4. Cash Flows – Investing Activities Typical cash inflows Typical cash outflows Sales of fixed assets and other long-term investments Purchase of fixed assets and other long-term investments Sale of marketable securities and investments Purchase of marketable securities and investments

5. Cash Flows – Financing Activities Typical cash inflows Typical cash outflows Sales (issuance) of stock Purchase of treasury stock Sale (issuance) of bonds and other money market debt Repayment and redemption of debt (bonds, notes, other) Borrowing from banks and other lending institutions Payment of cash dividends

6. NetSolutionsStatement of Cash Flows – Direct MethodFor the Month Ended November 30, 2002 Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payment to creditors 4,600 Net cash flow from operating activities $ 2,900 Cash payments for acquiring land (20,000) Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000 Net cash flow and ending cash balance $ 5,900 Cash flows from investing activities: Cash flows from financing activities:

7. NetSolutionsStatement of Cash Flows – Indirect MethodFor the Month Ended November 30, 2002 Cash flows from operating activities: Net income, per income statement $ 3,050 Add increase in accounts payable 400 Deduct increase in supplies (550) Net cash flow from operating activities $ 2,900 Cash payments for acquiring of land (20,000) Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000 Net cash flow and ending cash balance $ 5,900 Cash flows from investing activities: Cash flows from financing activities:

8. NetSolutionsStatement of Cash Flows – Direct MethodFor the Month Ended November 30, 2002 Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payment to creditors 4,600 Net cash flow from operating activities $ 2,900 NetSolutionsStatement of Cash Flows – Indirect MethodFor the Month Ended November 30, 2002 Cash flows from operating activities: Net income, per income statement $ 3,050 Add increase in accounts payable 400 Deduct increase in supplies (550) Net cash flow from operating activities $ 2,900

9. Cash Relationships and Cash Flows Balance Sheet Cash 1 Liabilities Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity – Noncash Assets Noncash Assets 3 Stockholders’ Equity 2 1 2 3 The cash flows are determined by analyzing liabilities, stockholders’ equity, and noncash assets.

10. Changes in Current Accounts Change Accounts 2003 2002 Debit Credit Trade receivables (net) $74,000 $65,000 Inventories 172,000 180,000 Accounts payable (mdse.) 43,500 46,700 Accrued expenses payable 26,500 24,300 Income taxes payable 7,900 8,400 9,000 8,000 3,200 2,200 500 These debit changesare subtracted from net income in the operating activitiessection of the statement of cash flows. Think of these debits as deductions from net income in arriving at net cash flow from operations.

11. Changes in Current Accounts Change Accounts 2003 2002 Debit Credit Trade receivables (net) $74,000 $65,000 Inventories 172,000 180,000 Accounts payable (mdse.) 43,500 46,700 Accrued expenses payable 26,500 24,300 Income taxes payable 7,900 8,400 9,000 8,000 3,200 2,200 500 These credit changesare added to net income in the operating activitiessection of the statement of cash flows. Think of these credits as additions to net income in arriving at net cash flow from operations.

12. Operating Activities – Indirect Method Cash flows from operating activities: Add: Net income, per income statement $108,000 Depreciation $ 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 $125,200 Increase in accounts receivables $ 9,000 Decrease in accounts payable 3,200 Decrease in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activities $100,500 Deduct: Start with the accrual basis net income shown on the income statement.

13. Note: The changes in the current balance sheet accounts are determined by comparing the beginning and ending balances. Receivables increased by $9,000 during the period. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 Cost of merchandise sold 790,000 Gross profit $390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash collected from customers Changes Debit Credit Sales 1,180,000 Receivables 9,000 Cash 1,171,000

14. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 Gross profit $390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash payments for merchandise Changes Debit Credit Cost of mdse. sold 790,000 Inventories 8,000 Accounts payable 3,200 Cash

15. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Depreciation Changes Debit Credit Depr. expense 7,000 Accum. depreciation 7,000

16. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash payments for operating expenses Changes Changes Debit Credit Operating expenses 196,000 Accrued expenses 2,200 Cash 193,800

17. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 0 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Changes Gain on sale of investments Debit Credit Cash 72,000 Investments 60,000 Gain on sale of invest. 12,000 The cash inflow of $72,000 will be shown in the investing section of the statement of cash flows.

18. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 0 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Changes Cash paid for interest expense Debit Credit Interest expense 8,000 Cash

19. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 (8,000) Income before income tax $ 191,000 Income tax 83,000 (83,500) Net income $ 108,000 Changes Cash paid for income taxes Debit Credit Income tax expense 83,000 Income tax payable 500 Cash 83,500

20. Rundell Inc.Income StatementFor the Year Ended December 31, 2003 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 0 Other expense: Interest expense 8,000 4,000 (8,000) Income before income tax $ 191,000 Income tax 83,000 (83,500) Net income $ 108,000 $ 100,500 Two different views of income from operations

21. Operating Activities – Direct Method Cash flows from operating activities: Cash inflows: Cash received from customers $1,171,000 Cash outflows: Cash payments for merchandise $785,200 Cash payments for operating expenses 193,800 Cash payments for interest 8,000 Cash payments for income tax 83,500 1,070,500 Net cash flow from operating activities $ 100,500

22. Financial Analysis and Interpretation Free Cash Flow Cash flow from operations $1,400,000 Less: Cash invested in fixed assets to maintain capacity (450,000) Less: Cash used for dividends (100,000) Free cash flow $ 850,000 Use: To measure operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.