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The Statement of Cash Flows

The Statement of Cash Flows. Chapter 12. Objective 1. Identify the purposes of the statement of cash flows. Basic Concepts. Reports the entity’s cash flows (cash receipts and cash payments) during the period. Purposes of the Statement of Cash Flows. Predict future cash flows

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The Statement of Cash Flows

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  1. The Statement of Cash Flows Chapter 12

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

  3. Basic Concepts • Reports the entity’s cash flows (cash receipts and cash payments) during the period

  4. Purposes of the Statementof Cash Flows • Predict future cash flows • Evaluate management decisions • Determine the ability to pay dividends to stockholders’ and payments to creditors • Show the relationship of net income to the business’s cash flows

  5. What is Cash? • Cash on hand • Cash in the bank • Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delay • Money-market investments • U.S. Government Treasury bills

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

  7. Operating, Investing, and Financing Activities • Operating activities create revenues, expenses, gains, and losses. • Investing activities increase and decrease long-term assets. • Financing activities obtain cash from investors and creditors.

  8. Two Formats forOperating Activities • Indirect method reconciles from net income to net cash provided by operating activities • Direct method reports all cash receipts and cash payments from operating activities • The two methods have no effect on investing or financing activities.

  9. Indirect Method Net income $XXX Adjustments: Depreciation, etc. XXX Net income provided by operating activities $XXX Direct Method Collection from customers $XXX Deductions: Payment to suppliers, etc. XXX Net income provided by operating activities $XXX Two Formats forOperating Activities ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

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

  11. Positive Items Net income Depreciation/amortization Loss on sale of long-term assets Decreases in current assets other than cash Increases in current liabilities Negative Items Net loss Gain on sale of long-term assets Increases in current assets other than cash Decreases in current liabilities The Indirect Method:Operating Activities

  12. Positive Items Sale of plant assets Sale of investments that are not cash equivalents Collections of loans receivable Negative Items Acquisition of plant assets Purchase of investments that are not cash equivalents Making loans to others The Indirect Method:Investing Activities

  13. Positive Items Issuing stock Selling treasury stock Borrowing money Negative Items Payment of dividends Purchase of treasury stock Payment of principal amounts of debts The Indirect Method:Financing Activities

  14. Anchor Corporation – December 31 (In thousands) 20x2 20x1 Inc/dec) Assets Current: Cash Accounts receivable Interest receivable Inventory Prepaid expenses Long-term receivable Plant assets, net Total $ 22 93 3 135 8 11 453 $725 $ 42 80 1 138 7 – 219 $487 $ (20) 13 2 (3) 1 11 234 $238 Comparative Balance Sheets

  15. Comparative Balance Sheets Anchor Corporation – December 31 (In thousands) 20x2 20x1 Inc/dec) Liabilities Current: Accounts payable Salary payable Accrued liabilities Long-term debt Stockholders’ equity Common stock Retained earnings Total $ 91 34 1 160 359 110 $725 $ 57 6 3 77 258 86 $487 $ 34 (2) (2) 83 101 24 $238

  16. Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands) Revenues and gains: Sales revenue $284 Interest revenue 12 Dividend revenue 9 Gain on sale of plant assets 8 Total revenues and gains $313

  17. Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands) Expenses: Cost of goods sold $150 Salary and wage expense 56 Depreciation expense 18 Other operating expense 17 Interest expense 16 Income tax expense 15 Total expenses $272

  18. Income Statement Anchor Corporation Year Ended December 31, 20x2 (In thousands) Total revenues and gains $313 Total expenses 272 Net income $ 41

  19. Statement of Cash Flows(IndirectMethod) Year Ended December 31, 20x2 (In thousands) Cash flows from operating activities: Net Income $41 Adjustments to reconcile net income to net cash provided by operating activities: A Depreciation 18 B Gain on sale of plant (8) Statement of Cash Flows:Operating Activities Depreciation does not affect cash, but it decreases net income – add it back in. Sales of long-term assets are investing Activities – remove gains from net income.

  20. Statement of Cash Flows: Operating Activities Statement of Cash Flows(IndirectMethod) Year Ended December 31, 20x2 (In thousands) C Increase in accounts receivable (13) C Increase in interest receivable (2) C Decrease in inventory 3 C Increase in prepaid expenses (1) C Increase in accounts payable 34 C Decrease is salary payable (2) C Decrease in accrued liabilities (2) 27 Net cash provided by operating activities $68

  21. Changes in Current Asset and Current Liability Accounts – C 1. An increase in a current asset other than cash indicates a decrease in cash. 2. A decrease in a current asset other than cash indicates an increase in cash. 3. A decrease in a current liability indicates a decrease in cash. 4. An increase in a current liability indicates an increase in cash.

  22. Statement of Cash Flows(IndirectMethod) Year Ended December 31, 20x2 (In thousands) Cash flows from investing activities: Acquisition of plant assets $(306) Loan to another company (11) Proceeds from sale of plant assets 62 Net cash used for investing activities $(255) Statement of Cash Flows:Investing Activities

  23. Statement of Cash Flows(IndirectMethod) Year Ended December 31, 20x2 (In thousands) Cash flows from financing activities: Proceeds from issuance of common stock $101 Proceeds from issuance of long-term debt 94 Payment of long-term debt (11) Payment of dividends (17) Net cash provided by financing activities $167 Statement of Cash Flows:Financing Activities

  24. Statement of Cash Flows(IndirectMethod) Year Ended December 31, 20x2 (In thousands) Net cash provided by operating activities $ 68 Net cash used for investing activities (255) Net cash provided by financing activities 167 Net decrease in cash $ (20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2 $ 22 Statement of Cash Flows

  25. Computing Acquisition andSales of Plant Assets • Anchor had plant assets, net of depreciation, of $219,000 at the beginning of the year and $453,000 at year end. The acquisition of plant assets amounted to $306,000 during the year.

  26. Computing Acquisition andSales of Plant Assets The income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets. What is the book value of the assets sold? Beginning balance + Acquisitions – Depreciation – Book value of assets sold = Ending balance

  27. Computing Acquisition andSales of Plant Assets $219,000 + 306,000 – 18,000 – X= $453,000 X = $219,000 + 306,000 – 18,000 – 453,000 X = $54,000 (book value) How much are the proceeds from the sale of plant assets?

  28. Computing Acquisition andSales of Plant Assets Book value + Gain – Loss = Sale proceeds $54,000 + $8,000 – 0 = $62,000

  29. Computing Acquisition andSales of Plant Assets Plant Assets (Net) Beginning bal. 219,000 Acquisitions 306,000 Ending bal. 453,000 Depreciation 18,000 Book val. 54,000 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  30. Computing Acquisition andSales of Investments Beginning balance + Purchases – Book value of investment sold = Ending balance

  31. Computing Loans andTheir Collections Beginning balance + New loans made – Collections = Ending balance

  32. Computing Issuances and Payments of Long-Term Debt Beginning balance was $77,000. New debt amounting to $94,000 was incurred during the year. The ending balance for the Long-Term Debt account was $160,000. How much was the payment?

  33. Computing Issuances and Payments of Long-Term Debt Long-Term Debt Payments 11,000 Beginning bal. 77,000 New debt 94,000 Ending bal. 160,000 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  34. Computing Issuances of Stock: Purchases of Treasury Stock Beginning balance of common stock + Issuance of newstock = Ending balance Beginning balance of treasury stock + Purchase of treasury stock = Ending balance

  35. Computing Dividend Payments Retained earnings beginning balance + Net income – Dividends declared = Ending balance $86,000 + $41,000 – X = $110,000 X = $110,000 – $86,000 – $41,000 X = $17,000

  36. Noncash Investing andFinancing Activities Suppose Anchor Corporation issued Common stock valued at $300,000 to acquire a warehouse. Warehouse Building 300,000 Common Stock 300,000

  37. Noncash Investing andFinancing Activities Noncash Investing and Financing Activities: (000) Acquisition of building by issuing common stock $300 Acquisition of land by issuing note payable 70 Payment of long-term debt by issuing common stock 100 Total noncash investing and financing activities $470 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  38. Learning Objective 4 Prepare a statement of cash flows by the direct method.

  39. The Direct Method • The FASB has expressed a preference for the direct method • Provides clearer information about the sources and uses of a company’s operating cash

  40. The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) Cash flows from operating activities: Receipts: Collections from customers $271 Interest received on notes receivable 10 Dividends received on investments in stock 9 Total cash receipts $290

  41. The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) Payments: To suppliers $133 To employees 58 For interest 16 For income tax 15 Total payments 222 Net cash provided by operating activities $ 68

  42. The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) Net cash provided by operating activities $ 68 Net cash used for investing activities (255) Net cash provided by financing activities 167 Net decrease in cash $(20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2 $ 22 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

  43. Cash Flows fromOperating Activities • Cash collections from customers • Cash receipts of interest • Cash receipts of dividends • Payments to suppliers • Payments to employees • Payments for interest and income tax expense

  44. Cash Flows fromInvesting Activities • Purchases of plant assets; investments in, and loans to, other companies • Proceeds from the sale of plant assets and investments; and the collections of loans

  45. Cash Flows fromFinancing Activities • Proceeds from the issuance of stock and debt • Payment of debt and purchases of the company’s own stock • Payment of cash dividends

  46. Computing Cash Collectionsfrom Customers Beginning accounts receivable balance + Sales on account – Collections = Ending accounts receivable balance

  47. Computing Paymentsto Suppliers Step 1: How much were the purchases? Beginning inventory + Purchases – Cost of goods sold = Ending Inventory $138,000 + X – $150,000 = $135,000 X = $150,000 – $138,000 + $135,000 X = $147,000

  48. Computing Paymentsto Suppliers Accounts Payable Payments for inventory Beg. balance 57,000 Purchases 147,000 End. balance 91,000

  49. Computing Paymentsto Suppliers Step 2: How much did the business pay for this inventory? Beginning Accounts Payable + Purchases – Payments = Ending Accounts Payable $57,000 + $147,000 – X = $91,000 X = $57,000 + $147,000 – $91,000 X = $113,000

  50. Computing Payments forOperating Expenses Beginning prepaid expense + Payments – Expiration of prepaid expense = Ending balance Beginning accrued liabilities + Accrual of expense at year end – Payments = Ending balance Accrual of other operating expenses at year end + Expiration of prepaid expense + Payments = Ending balance

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