Statement of Cash Flows Revisited

1. Statement of Cash Flows Revisited CHAPTER 22

3. Role of the Statement of Cash Flows 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.

4. Statement of Cash Flows . . . . . . is required by SFAS No. 95.

5. Cash and Cash Equivalents 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.

6. Primary Elements of the Statement of Cash Flows (SCF)

7. Cash Flows From Operating 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

8. Cash Flows From Investing 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

9. Cash Flows From Financing 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

10. 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.

11. Common noncash activities include: SFAS No. 95 RequirementsNoncash Activities

12. Preparing the Statement of Cash Flows

14. 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.

15. Analyzing SalesQuestion Accounts Receivable was $40,000 on 1/1/99, and $52,000 on 12/31/99. If total sales revenue for 1999 was $800,000, then how much cash was received from customers? a. $800,000 b. $760,000 c. $812,000 d. $788,000

16. Accounts Receivable was $40,000 on 1/1/99, and $52,000 on 12/31/99. If total sales revenue for 1999 was $800,000, then how much cash was received from customers? a. $800,000 b. $760,000 c. $812,000 d. $788,000 Analyzing SalesQuestion

17. Direct MethodGains and Losses on Sale of Assets Gains and losses do not appear on the Statement of Cash Flows using the Direct Method.

18. 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:

19. Cost of Goods SoldQuestion Examine the following information and determine how much was paid for inventory in 2001. a. $900,000 b. $923,000 c. $947,000 d. $877,000

20. Examine the following information and determine how much was paid for inventory in 2001. a. $900,000 b. $923,000 c. $947,000 d. $877,000 Cost of Goods SoldQuestion

21. Direct MethodSalaries Expense Payments can be pulled from the payroll journal. Cash paid to employees can be computed from the accrual-basis expense.

22. Salary Expense for 2001 was $700,000. Salary Payable was $35,000 on 12/31/00 and $10,000 on 12/31/01. How much cash was paid to employees in 2001? a. $700,000 b. $735,000 c. $725,000 d. $675,000 Salaries ExpenseQuestion

23. Salary Expense for 2001 was $700,000. Salary Payable was $35,000 on 12/31/00 and $10,000 on 12/31/01. How much cash was paid to employees in 2001? a. $700,000 b. $735,000 c. $725,000 d. $675,000 Salaries ExpenseQuestion

24. 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.

25. Direct MethodDeferred Revenue Receipts can be found in the cash receipts journal. Receipts can also be inferred:

26. Direct MethodPrepaid Expenses Payments can be found in the cash disbursements journal. Payments can be inferred:

28. Using the direct method, prepare a Statement of Cash Flows for the year ended 1999. Examine the following information . . . Statement of Cash FlowsDirect Method Example

29. Statement of Cash FlowsDirect Method Example

30. Statement of Cash FlowsDirect Method Example

31. Statement of Cash FlowsDirect Method Example

32. Statement of Cash FlowsDirect Method Example Additional Information for 1999: 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.

33. Additional Information for 1999: 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

34. Additional Information for 1999: 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

35. Cash Received from Customers Cash Paid to Employees Statement of Cash FlowsDirect Method Example

36. Cash Paid for Inventory Cash Paid for Interest Statement of Cash FlowsDirect Method Example

37. Cash Paid for Taxes Other Operating Cash Flows Statement of Cash FlowsDirect Method Example

38. Cash Flows From Operating Activities Statement of Cash FlowsDirect Method Example

40. Statement of Cash FlowsSupplemental Schedule

41. 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.

42. Indirect MethodWorking Capital Accounts

43. 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

45. Prepare a Statement of Cash Flows for the period ending December 31, 1999 using the Indirect Method.Refer to the following information . . . Statement of Cash FlowsIndirect Method Example

46. Statement of Cash FlowsIndirect Method Example

47. Statement of Cash FlowsIndirect Method Example

48. Statement of Cash FlowsIndirect Method Example

49. Statement of Cash FlowsIndirect Method Example Additional Information for 1999: 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.

50. Statement of Cash FlowsIndirect Method Example Additional Information for 1999: 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.

51. Statement of Cash FlowsIndirect Method Example Additional Information for 1999: 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.

52. Statement of Cash FlowsIndirect Method Example

53. Statement of Cash FlowsIndirect Method Example

54. Statement of Cash FlowsIndirect Method Example

55. Statement of Cash FlowsIndirect Method Example

56. Statement of Cash FlowsIndirect Method Example

57. Grate Big CompanyStatement of Cash FlowsFor the Period Ending December 31, 1999

58. End of Chapter 22