Reporting the Statement of Cash Flows

1. Chapter 16 Reporting the Statement of Cash Flows

2. Purpose of the Statementof Cash Flows Where does a company spend its cash? How does a company obtain its cash? What explains the change in the cash balance?

3. Importance of Cash Flows How did the business fund its operations? Does the business have sufficient cash to pay its debts as they mature? Did the business borrow any funds or repay any loans? Did the business make any dividend payments?

4. Measurement of Cash Flows Cash Cash Equivalents Currency • Short-term, highly liquid investments. • Readily convertible into cash. • Sufficiently close to maturity so that market value is unaffected by interest rate changes.

5. The Statement of Cash Flows includes the following three sections: Operating Activities Investing Activities Financing Activities Classification of Cash Flows C1

6. Operating Activities C1 • Inflows • Receipts from customers • Cash dividends received • Interest from borrowers • Other • Outflows • Salaries and wages • Payments to suppliers • Taxes and fines • Interest paid to lenders • Other

7. Investing Activities C1 • Inflows • Selling long-term productive assets • Selling equity investments • Collecting principal on loans • Other • Outflows • Purchasing long-term productive assets • Purchasing equity investments • Purchasing debt investments • Other

8. Financing Activities C1 • Inflows • Issuing its own equity securities • Issuing bonds and notes • Issuing short- and long-term liabilities • Contributions by owners • Outflows • Pay dividends • Purchasing treasury stock • Repaying cash loans • Paying owners’ withdrawals

9. Items requiring separate disclosure include: Retirement of debt by issuing equity securities. Conversion of preferred stock to common stock. Leasing of assets in a capital lease transaction. Noncash Investing and Financing C1

10. Format of the Statementof Cash Flows

11. Preparing the Statementof Cash Flows P1

12. Analyzing the Cash Account P1 The Cash account is a natural place to look for information about cash flows from operating, investing, and financing activities.

13. Analyzing the Cash Account P1 Cash from Operating Cash from Investing Cash from Financing Cash Provided

14. Analyzing Noncash Account P1 A second approach to preparing the statement of cash flows is analyzing noncash accounts.

15. Information to Prepare the Statement P1 Information to prepare the statement of cash flows usually comes from three sources: Comparative Balance Sheets Current Income Statement Additional Information

16. Cash Flows from OperatingIndirect and Direct Methods of Reporting Direct Method Indirect Method The net cash amount provided by operating activities is identical under both the direct and indirect methods.

17. Application of the Indirect Method of Reporting P2

18. Application of the Indirect Method of Reporting P2 Additional information on Genesis Inc.’s 2011 transactions: The accounts payable balances result from merchandise inventory purchases. Purchased $70,000 in plant assets by paying $10,000 cash and issuing $60,000 of notes payable. Sold plant assets with an original cost of $30,000 and accumulated depreciation of $12,000 for $12,000 cash, yielding a $6,000 loss. Received $15,000 cash from issuing 3,000 shares of common stock. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain. Declared and paid cash dividends of $14,000.

19. Cash Flows from Operating Activities Net Income Application of the Indirect Method of Reporting P2 Changes in noncash current assets and current liabilities 1 2 3 + Noncash expenses such as depreciation and amortization + Losses and - Gains

20. Adjustments for Changes in Current Assets and Current Liabilities P2 Use this table when adjusting Net Income to Operating Cash Flows.

21. Adjustments for Changes in Current Assets and Current Liabilities P2

22. Adjustments for Operating Items Not Providing or Using Cash P2

23. Adjustments for Nonoperating Items P2

24. Summary of Adjustments for Indirect Method P2 Common adjustments to net income when computing net cash provided or used by operating activities under the indirect method:

25. Cash Flows from Investing P3 A three-stage process to determine cash provided or used by investing activities: Identify changes in investing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects

26. Cash Flows from Investing P3 This analysis reveals a $40,000 increase in plant assets from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,000.

27. Cash Flows from Investing P3 Item b: Genesis purchased plant assets of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash. Item c: Genesis sold plant assets costing $30,000 (with $12,000 of accumulated depreciation) for $12,000 cash, resulting in a $6,000 loss. We also reconstruct the entry for Depreciation Expense using information from the income statement.

28. Cash Flows from Investing P3

29. Cash Flows from Financing P3 A three-stage process to determine cash provided or used by financing activities: Identify changes in financing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects

30. Cash Flows from Financing P3 This analysis reveals: an increase in notes payable from $64,000 to $90,000, an increase in common stock from $80,000 to $95,000, and an increase in retained earnings from $88,000 to $112,000.

31. Cash Flows from Financing P3 Item e: Notes with a carrying value of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain. Item b: Genesis purchased plant assets of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash.

32. Cash Flows from Financing P3 Item d: Issued 3,000 shares of common stock at par for $5 per share. Item f: Cash dividends of $14,000 are paid.

33. P3

34. P3

35. Global View Reporting Cash Flows from Operating Both U.S. GAAP and IFRS permit the reporting of cash flows from operating activities using either the direct or indirect method. However, two notable differences include: U.S. GAAP requires cash inflows from interest revenue and dividend revenue be classified as operating, whereas IFRS permits classification under operating or investing provided that this classification is consistently applied across periods. U.S. GAAP requires cash outflows for interest expense be classified as operating, whereas IFRS again permits classification under operating or financing provided that it is consistently applied across periods. Reporting Cash Flows from Investing and Financing U.S. GAAP and IFRS are broadly similar in computing and classifying cash flows from investing and financing activities. One notable exception is that U.S. GAAP requires cash outflows for income tax be classified as operating, whereas IFRS permits the splitting of those cash flows among operating, investing, and financing depending on the sources of that tax.

36. Analyzing Cash Sources and Uses A1 Most managers stress the importance of understanding and predicting cash flows for business decisions.

37. Operating cash flows Cash flow on = total assets Average total assets Cash Flow on Total Assets A1 Used, along with income-based ratios, to assess company performance.

38. Appendix 16A: Spreadsheet Preparation of the Statement of Cash Flows P4 A spreadsheet, also called work sheet or working paper, can help us organize the information needed to prepare a statement of cash flows.

39. Appendix 16B: Direct Method of Reporting Operating Cash Flows P5 Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts: Framework for reporting cash receipts and cash payments

40. Appendix 16B: Direct Method of Reporting Operating Cash Flows P5

41. End of Chapter 16