The Statement of Cash Flows

1. The Statement of Cash Flows Chapter 14

2. Objective 1 Identify the purposes of the statement of cash flows

3. Statement of Cash Flows • How did a company acquire cash and how did it spend it? • Why did cash increase/decrease during the period?

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

5. Cash • Cash on hand and in the bank • Cash equivalents • Highly liquid investments • Can convert into cash quickly • Money-market accounts • Investments in U.S. government securities

6. Objective 2 Distinguish among operating, investing, and financing cash flows

7. Basic Cash Flows • Operating activities • Investing activities • Financing activities

8. Operating Activities • Transactions that make up net income • Also affect current assets and current liabilities on the balance sheet

9. 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 Operating Activities Focus your attention on: income statement, and changes in current assets, current liabilities

10. Investing Activities • Transactions that increase and decrease long-term assets

11. 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 Investing Activities Focus your attention on changes in: plant assets, long-term investments, other long-term assets

12. Financing Activities • Increases and decreases in long-term liabilities and owner’s equity

13. Inflows Issuing stock Issuing bonds and notes Outflows Cash dividends or withdrawals by owner Purchase treasury stock Repay cash loans Financing Activities Focus your attention on changes in: long-term debt and stockholder’s equity

15. Noncash Investing and Financing • 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

16. Format of the Statementof Cash Flows Two acceptable methods for reporting cash flows from operating activities • Indirect method • Direct method The Investing and Financing sections of the statement will not differ

17. Objective 3 Prepare the statement of cash flows by the indirect method

18. Indirect Method Cash 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

19. Indirect Method Cash flows from investing activities: +Sales of long-term assets - Purchases of long-term assets Net cash provided by (used for) investing activities

20. Indirect Method 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

21. Indirect Method Net increase (decrease) in cash during the year + Cash at December 31, beginning = Cash at December 31, ending

22. E14-20

23. E14-20 Start with net income

24. E14-20 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

25. E14-20 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

26. E14-20 -15,000 +15,000 Now 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 15,000

27. E14-20 +7,000 -7,000 (7,000) Inventory increased. The company bought more inventory, which requires the use of cash

28. E14-20 +13,000 +13,000 If 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 13,000

29. E14-20 -8,000 -8,000 (8,000)

30. E14-20 85,000

31. E14-20 Cash flows from investing activities: +Sales of long-term assets - Purchases of long-term assets Net cash provided by (used for) investing activities

32. E14-20 Cash flows from investing activities: +Sales of long-term assets - Purchases of plant assets (101,000) Net cash provided by (used for) investing activities

33. E14-20 Cash flows from investing activities: +Sales of long-term assets $24,000 - Purchases of plant assets (101,000) Net cash provided by (used for) investing activities

34. E14-20 Cash flows from investing activities: +Sales of long-term assets $24,000 - Purchases of plant assets (101,000) Net cash Used for investing activities $(77,000)

35. E14-20 Cashflows 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

36. E14-20 Cash flows from financing activities: + Issuance of stock $30,000 + 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

37. E14-20 Cash flows from financing activities: + Issuance of stock $30,000 + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes payable (15,000) - Payment of dividends Net cash provided by (used for) financing activities

38. E14-20 Cash flows from financing activities: + Issuance of stock $30,000 + Sale of treasury stock - Purchase of treasury stock + Issuance of notes or bonds payable - Payment of notes payable (15,000) - Payment of dividends (11,000) Net cash provided by (used for) financing activities

39. E14-20 Cash flows from financing activities: + Issuance of stock $30,000 - Payment of notes payable (15,000) - Payment of dividends (11,000) Net cash provided by financing activities $4,000

40. Vitamin Plus, Inc. Statement of Cash Flows Year Ended June 30, 2006 Cash inflows from operating activities $85,000 Cash flows from investing activities: Acquired land ($101,000) Sold land 24,000 Net cash flows from investing activities (77,000) Cash flows from financing activities: Issued common stock $30,000 Paid long-term note (15,000) Paid dividends (11,000) Net cash flows from financing activities: 4,000 Net increase in cash during the year $12,000 Cash balance, June 30, 2007 20,000 Cash balance, June 30, 2008 $32,000

41. E14-20 Note: Noncash investing and financing activities: Acquired land by issuing a note payable $15,000

42. E14-20 (2) • Vitamins Plus’ 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

43. E14-21 You start with $45,000. Net income increases retained earnings. If no dividends had been declared, the retained earnings balance should have been $105,000. Since the balance is $70,000, we declared dividends for the difference Retained Earnings 45,000 Beg. Bal. 60,000 Net income 105,000 Bal. 35,000 ? 70,000 End. Bal.

44. Exercise 14-21 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 assets Plant Assets Remember the journal entry that was prepared when you sold an asset? In this case, you know the amounts credited. The debit to cash was $11,000 103,000 27,000 16,000 Depreciation 114,000 ? 7,000 107,000 11,000 Cash Gain on sale of assets 4,000 Plant assets (net) 7,000

45. End of Chapter 14