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Introduction

Introduction. Icebreaker Me You Syllabus Class Procedure Class Expectations. Chapter 14. Statement of Cash Flows. 0. What does it do for us?.

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Introduction

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  1. Introduction • Icebreaker • Me • You • Syllabus • Class Procedure • Class Expectations

  2. Chapter 14 Statement of Cash Flows

  3. 0 What does it do for us? The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet its financial obligations, and pay dividends.

  4. Statement of Cash Flows • Cash flows from operating activities • Cash flows from investing activities • Cash flows from financing activities

  5. Operating Operating (receipts from revenues) (payments for expenses) Investing Investing (payments for acquiring noncurrent assets) (receipts from sales of noncurrent assets) Financing (payments for treasury stock, dividends, and redemption of debt securities) Financing (receipts from issuing equity and debt securities) 0 Cash Flows Sources (increases) of Cash Uses (decreases) of Cash 7

  6. Example Exercise 14-1 0 14-1 For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on the statement of cash flows under the indirect method. • Net income • Purchase treasury stock • Depreciation expense • Purchase patent • Pay cash dividend • Disposal of equipment 18

  7. Follow My Example 14-1 0 14-1 • Investing • Financing • Investing • Operating • Financing • Operating For Practice: PE 14-1A, PE 14-1B 19

  8. Direct vs. Indirect • Cash receipts • Cash disbursements • Data is difficult to obtain/report on • Same result as indirect • Starts with Net Income • Adjusts for rev/exp that don’t have anything to do with cash • Most common b/c data is more available for reporting • Same result as direct

  9. Indirect Method

  10. 0 14-2 Comparative Balance Sheet 23 (Continued)

  11. 0 14-2 Comparative Balance Sheet 24 (Concluded)

  12. ACCOUNT Retained Earnings ACCOUNT NO. 32 Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 202,300.00 Dec. 31 Net income 108,000.00 310,300.00 31 Cash dividends 28,000.00 282,300.00 0 14-2 Retained Earnings The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year. 25

  13. ACCOUNTRetained Earnings ACCOUNT NO. 32 Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 202,300.00 Dec. 31 Net income 108,000.00 310,300.00 31 Cash dividends 28,000.00 282,300.00 0 14-2 The net income of $108,000 is entered on the statement (or working papers). To statement 26

  14. 0 14-2 Depreciation Next, we need to determine depreciation expense for the year. If it isn’t given in the income statement, sometimes it can be found by analyzing the various accumulated depreciation accounts.

  15. ACCOUNT Accumulated Depreciation—Building ACCT. NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 58,300.00 Dec. 31 Depr. for year 7,000.00 65,300.00 0 14-2 The comparative balance sheet (Exhibit 4: Slides 23 and 24) indicates that Accumulated Depreciation—Buildingincreased by $7,000. By analyzing the account we can see that the increase is the result of the year-end adjusting entry. to statement 29

  16. 0 14-2 Gain on Sale of Land The ledger or income statement of Rundell Inc. indicates that the sale of land resulted in a gain of $12,000. This gain increased net income by $12,000, yet cash flows was provided by an investing activity (selling land) rather than an operating activity, so the gain is deducted from net income on the statement of cash flows.

  17. Example Exercise 14-2 0 14-2 Omni Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $3,400 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,100 from sale of land. Reconcile a net income of $50,000 to net cash flow from operating activities. 34

  18. Follow My Example 14-2 0 14-2 Net income $50,000 Adjustments to reconcile net income from operating activities: Depreciation 12,000 Amortization 3,400 Gain on sale of land (4,100) Net cash flow from operating activities $61,300 For Practice: PE 14-2A, PE 14-2B 35

  19. 0 14-2 Changes in Current Operating Assets and Liabilities Next, select current assets and current liabilitiesthat impact cash flows and determine their increases and decreases.

  20. 0 14-2 Adjustments to Net Income (Loss) Using the Indirect Method 37

  21. 0 14-2 Changes in Current Accounts December 31 Increase Decrease* Accounts 2007 2008 9,000 8,000* 3,200* 2,200 500* Accounts receivable (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 Note that Cash and Dividends Payable are not included in this analysis. 38

  22. 0 14-2 Statement of Cash Flows—Indirect Method for Rundell Inc. (Operating Activities Section) 40 Same information as Slide 39, only in final form.

  23. Example Exercise 14-3 0 14-2 Victor Corporation’s comparative balance sheet for current assets and current liabilities was as follows: Dec. 31, 2009 Dec. 31, 2008 Accounts receivable $ 6,500 $ 4,900 Inventory 12,300 15,000 Accounts payable 4,800 5,200 Dividends payable 5,000 4,000 Adjust net income of $70,000 for changes in operating assets and liabilities. 41

  24. Follow My Example 14-3 0 14-2 Net income $70,000 Adjustments to reconcile net income to net cash from from operating activities: Increase in accounts receivable (1,600) Decrease in inventory 2,700 Decrease in accounts payable (400) Net cash flow from operating activities $70,700 For Practice: PE 14-3A, PE 14-3B 42

  25. Example Exercise 14-4 0 14-2 Omicron, Inc. reported the following data: Net income $120,000 Depreciation expense 12,000 Loss on disposal of equipment 15,000 Increase in Accounts receivable 5,000 Decrease in Accounts payable (2,000) Prepare the cash flow for operating activities section of the statement of cash flows using the indirect method. 43

  26. Follow My Example 14-4 0 14-2 Cash flows from operating activities: Net income $120,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 12,000 Loss from disposal of equipment 15,000 Changes in current operating assets and liabilities: Increase in accounts receivable (5,000) Decrease in accounts payable (2,000) Net cash flow from operating activities $140,000 44 For Practice: PE 14-4A, PE 14-4B

  27. 0 14-2 Building By examining theBuilding account, we can determine that Rundell Inc. bought a building for $60,000 cash. ACCOUNTBuilding ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 200,000 Dec. 27 Purchased for cash 60,000 260,000 52

  28. 0 14-2 Land The $45,000 decline in the Land account resulted from two separate transactions: a sale and a purchase. ACCOUNTLand ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 125,000 June 8 Sold for $72,000 cash 60,000 65,000 Oct. 12 Purchased for $15,000 cash 15,000 80,000 54

  29. 0 14-2 Cash Flows Used for Payment of Dividends ACCOUNTDividends Payable ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 10,000 10 Cash paid 10,000 — June 20 Dividends declared 14,000 14,000 July 10 Cash paid 14,000 — Dec. 20 Dividends declared 14,000 14,000 Note that while $28,000 in dividends were declared, only $24,000 were paid during the year. 45

  30. 0 14-2 Common Stock Common Stockincreased by $8,000. ACCOUNTCommon Stock ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 16,000 Nov. 1 4,000 shares issued/cash 8,000 24,000 47

  31. 0 14-2 Analyzing the two accounts together, we can determine that the 4,000 shares were sold for $48,000. ACCOUNTPaid-in Capital in Excess of Par—Common Stock Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 80,000 Nov. 1 4,000 shares issued/cash 40,000 120,000 48

  32. 0 14-2 Bonds Payable Bonds Payable decreased by $50,000. ACCOUNTBonds Payable ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 150,000 June 30 Retired by payment of cash at face amount 50,000 100,000 50

  33. Example Exercise 14-5 0 14-2 Alpha Corporation purchased land for $125,000. Later in the year the company sold land with a book value of $165,000 for $200,000. How are the effects of these transactions are reported on the statement of cash flows? 60

  34. Follow My Example 14-5 The gain on sale of land is deducted from net income as shown below: Gain on sale of land $(35,000) The purchase and sale of land is reported as part of cash inflow form investing activities as shown below: Cash received for sale of land $200,000 Cash paid for purchase of land (125,000) 0 14-2 61 For Practice: PE 14-5A, PE 14-5B

  35. 0 14-3 Financial Analysis and Interpretation Free cash flow is a measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.

  36. 0 14-3 Free Cash Flow Cash flow from operations Less: Investments in fixed assets to maintain current production Free cash flow Positive free cash flow is considered favorable. A company that has free cash flow is able to fund internal growth, retire debt, pay dividends, and enjoy financial flexibility.

  37. Homework • Read Chapter 14 up to the Direct Method and the Financial Analysis and Interpretation at the end of the Chapter • EX 14-3, 14-5, 14-7, 14-11, 14-17, PR 14-1A • Read Chapter 15

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