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Statement of Cash Flows

Dr. N.P Shete. Statement of Cash Flows. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen. Objectives.

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Statement of Cash Flows

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  1. Dr. N.P Shete . Statement of Cash Flows

  2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

  3. Objectives 1.Summarize the types of cash flow activities reported in the statement of cash flows. 2.Prepare a statement of cash flows, using the indirect method. 3.Prepare a statement of cash flows, using the direct method. 4.Calculate and interpret the free cash flow.

  4. Reporting Cash Flows The statement of cash flows reports cash flows by three types of activities: 1. Cash flows from operating activities– transactions that affect net income. 2. Cash flows from investing activities– transactions that affect noncurrent assets. 3.Cash flows from financing activities– transactions that affect equity and debt of the entity.

  5. Operating Operating (receipts from revenues) (payments for expenses) Investing Investing (payments for acquiring noncurrent assets) (receipts from sales of noncurrent assets) Financing Financing (receipts from issuing equity and debt securities) (payments for treasury stock, dividends, and redemption of debt securities) Reporting Cash Flows Decreases in Cash Increases in Cash

  6. Cash Flows from Operating Activities Typical cash inflows Typical cash outflows What are some of the typical cashinflowsfrom operating activities?` What are some of the typical cash outflows from operating activities? Sales of goods and services Merchandise purchases Payments of wages and other expenses Interest revenue Dividend revenue Tax payments

  7. Cash Flows from Investing Activities Typical cash inflows Typical cash outflows What are some of the typical cashinflowsfrom investing activities? What are some of the typical cash outflowsfrom investing activities? Sales of fixed assets Purchase of fixed assets Sale of long-term investments Purchase of long-term investments

  8. Cash Flows from Financing Activities Typical cash inflows Typical cash outflows What are some of the typical cash inflows fromfinancing activities? What are some of the typical cash outflows from financing activities? Paying cash dividends Issuing bonds and long-term notes payable Repaying debt Issuing preferred and common stock Acquiring treasury stock

  9. Noncash Investing and Financing Activities • Issuing bonds to acquire land • Issuing common stock for convertible preferred stock • Issuing a long-term note to acquire equipment • Issuing a stock dividend

  10. No cash flow per share is reported in the financial statements because the user might incorrectly interpret this as the amount available for dividends.

  11. Statement of Cash Flows-- The Indirect Method

  12. The Indirect Method Balance Sheet Cash Liabilities Noncash Assets Stockholders’ Equity Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity – Noncash Assets

  13. 2 1 3 The Indirect Method Balance Sheet Cash Liabilities Noncash Assets Stockholders’ Equity Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity – Noncash Assets The cash flows are determined by analyzing liabilities, stockholders’ equity, and noncash assets.

  14. The Indirect Method Step 1 Start with the accrual basis net income (shown in the income statement, the Retained Earningsaccount, or the statement of stockholders’ equity).

  15. The Indirect Method Find the net income. ACCOUNTRetained Earnings ACCOUNT NO. 32 Balance Date Item Debit Credit Debit Credit Jan. 1 Balance 202,300 Dec. 31 Net income 108,000 310,300 31 Cash dividends 28,000 282,300 To statement 2006

  16. Operating Activities – Indirect Method Cash flows from operating activities: Add: Net income per income statement 108,000 Depreciation 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 125,200 Inc. in accounts receivable 9,000 Dec. in accounts payable 3,200 Dec. in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activity. 100,500 Deduct:

  17. The Indirect Method Step 2 Next, we need to determine depreciation expense for the year. If it isn’t given on the income statement, sometimes it can be found by analyzing the Accumulated Depreciation account.

  18. The Indirect Method Determine depreciation expense. ACCOUNTAccumulated Depreciation--Building ACCOUNT NO. 17 Balance Date Item Debit Credit Debit Credit Jan. 1 Balance 58,300 Dec. 31 Depreciation for year 7,000 65,300 2006 to statement

  19. Operating Activities – Indirect Method Cash flows from operating activities: Net income per income statement 108,000 Depreciation 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 125,200 Inc. in accounts receivable $ 9,000 Dec. in accounts payable 3,200 Dec. in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activities 100,500 Add: Deduct: Because Depreciation Expense reduced net income but did not require an outflow of cash, it is added back to net income.

  20. The Indirect Method Step 3 Select current assets and current liabilities that impact cash flow and determine the increases and decreases.

  21. Determine the debit or credit change of each item above. Changes in Current Accounts Change Accounts 2006 2005 Debit Credit 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 9,000 8,000 3,200 2,200 500

  22. Changes in Current Accounts Change Accounts 2006 2005 Debit Credit 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 9,000 8,000 3,200 2,200 500 These debit changesare subtracted from net income in the operating activitiessection of the statement of cash flows. Think of these debits as deductions from net income in arriving at net cash flow from operations.

  23. Changes in Current Accounts Change Accounts 2006 2005 Debit Credit 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 9,000 8,000 3,200 2,200 500 These credit changesare added to net income in the operating activitiessection of the statement of cashflows. Think of these credits as additions to net income in arriving at net cash flow from operations.

  24. Operating Activities—Indirect Method Cash flows from operating activities: Net income per income statement 108,000 Depreciation 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 125,200 Inc. in accounts receivable 9,000 Dec. in accounts payable 3,200 Dec. in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activities 100,500 Add:

  25. The Indirect Method Step 4 Analyze the income statement to determine if there are any gains or losses from selling investments, equipment, etc.

  26. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Sales 1,180,000 Cost of merchandise sold 790,000 Gross profit 390,000 Operating expenses: Depreciation expense 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations 187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,0000 Income before income tax 191,000 Income tax 83,000 Net income 108,000 Gain on sale of land 12,000

  27. Operating Activities—Indirect Method Cash flows from operating activities: Net income, per income statement 108,000 Depreciation 7,000 Decrease in inventories 8,000 Increase in accrued expenses 2,200 17,200 125,200 Inc. in accounts receivable 9,000 Dec. in accounts payable 3,200 Dec. in income taxes payable 500 Gain on sale of land 12,000 24,700 Net cash flow from operating activities 100,500 Add: This gain was included in net income, but did not represent an operating cash flow.

  28. The Indirect Method If there had been a loss on this sale, the loss would have been added to net income.

  29. Cash Flows from Financing Activities Dividends ACCOUNTDividends Payable ACCOUNT NO. 23 Balance Date Item Debit Credit Debit Credit 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 2006 Total cash paid 24,000

  30. Cash Flows from Financing Activities Because paying of dividends affects equity, it is a negative $24,000 cash flow fromfinancing activities transaction.

  31. Cash Flows from Financing Activities Sale of Common Stock ACCOUNTCommon Stock ACCOUNTNO.33 Balance Date Item Debit Credit Debit Credit Jan. 1 Balance 16,000 Nov. 1 4,000 shares issued for cash 8,000 24,000 2006

  32. Cash Flows from Financing Activities Sale of Common Stock ACCOUNTPaid-In Capital in Excess of Par--Common ACCT.NO.34 Balance Date Item Debit Credit Debit Credit Jan. 1 Balance 80,000 Nov. 1 4,000 shares issued for cash 40,000 120,000 2006

  33. Cash Flows from Financing Activities Issuing common stock affects equity; therefore, we have a total positive cash flow of $48,000 from this financing activities transaction.

  34. Cash Flows from Financing Activities Retirement of Bonds Payable ACCOUNTBonds Payable ACCOUNT.NO.25 Balance Date Item Debit Credit Debit Credit Jan. 1 Balance 150,000 June 30 Retired by payment of cash at face amount 50,000 100,000 2006

  35. Cash Flows from Financing Activities This transaction is a negative cash flows from financing activities item because long-term debt is involved.

  36. Cash Flows from Investing Activities Purchased a Building ACCOUNTBuilding ACCOUNTNO.18 Balance Date Item Debit Credit Debit Credit Jan. 1 Balance 200,000 Dec. 27 Purchased for cash 60,000 260,000 2006

  37. Cash Flows from Investing Activities Purchased a Building Purchasing a building involves a noncurrent asset, so this is a negative cash flows from investing activities item.

  38. Cash Flows from Investing Activities Land Transactions ACCOUNTLand ACCOUNTNO.16 Balance Date Item Debit Credit Debit Credit 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 2006

  39. Cash Flows from Investing Activities Land Transactions The first transaction, the sale of land, results in a positive cash flow from investing activities because land is a noncash asset.

  40. Cash Flows from Investing Activities Land Transactions The $12,000 gain was recorded earlier on Slide 27 as an operating activity. The purchase of land also is an investing activity. Click here to return to Slide 27. To return to this slide, type “40” and press the “Enter” key.

  41. Rundell Inc. Statement of Cash Flows For the Year Ended December 31, 2006 Cash flows from operating activities: Net income $108,000 Add: Depreciation $ 7,000 Decrease in inventor. 8,000 Increase in accrued exp. 2,200 17,200 $125,000 Deduct: Increase in A/R $9,000 Decrease in accts. Pay. 3,200 Decrease in ITP 500 Gain on sale of land 12,00024,700 Net cash flow from operating act. $100,500 Cash flows from investing activities: Cash from sale of land $72,000 Less: Cash paid to pur. land $15,000 Cash paid for bldg. 60,00075,000 (3,000) Cash flows from financing activities: Cash received from sale of c.s. $48,000 Less: Cash paid to retire b. $50,000 Cash paid for divid. 24,000 74,000 Net cash flow for financing (26,000) Increase in cash $71,500 Cash at beginning of year 26,000 Cash at end of year $97,500 Refer to Exhibit 6 in your textbook to see the formal statement of cash flows using the indirect approach.

  42. Statement of Cash Flows-- The Direct Method

  43. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales 1,180,000 Cost of merchandise sold 790,000 Gross profit 390,000 Operating expenses: Depreciation expense 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations 187,000 Other income: Gain on sale of land 12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 This is an accrual basis income statement. The direct methodof reporting cash flows will essentially convert this to a cash basis statement.

  44. Note:The changesin the current balance sheet accounts are determined by comparing the beginning and ending balances. Receivables increased by $9,000 during the period. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 Cost of merchandise sold 790,000 Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash collected from customers Changes Debit Credit Sales 1,180,000 Receivables 9,000

  45. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis 1,171,000 Sales 1,180,000 Cost of merchandise sold 790,000 Gross profit $390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash collected from customers Changes Debit Credit Sales 1,180,000 Receivables 9,000 Cash 1,171,000 The increase in receivablesrepresents a reduction in cash inflow relative to the accrual revenue reported on the income statement.

  46. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales 1,180,000 1,171,000 Cost of merchandise sold 790,000 Gross profit $390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash payments for merchandise Changes Debit Credit Cost of mdse. sold 790,000 Inventories 8,000 Accounts payable 3,200 Cash

  47. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 1,171,000 Cost of merchandise sold 790,000 Gross profit $390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 (785,200) Cash payments for merchandise Changes Debit Credit Cost of mdse. sold 790,000 Inventories 8,000 Accounts payable 3,200 Cash 785,200 minus plus A decrease in Inventories(creditchange) and an decrease in Accounts Payable(debit change)have the opposite effects.

  48. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales 1,180,000 1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit 390,000 Operating expenses: Depreciation expense 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income 108,000 0 Depreciation Changes Debit Credit Depreciation expense 7,000 Accumulated depreciation 7,000 There is no cash flow for depreciation expense.

  49. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales 1,180,000 1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense 7,000 0 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income 108,000 (193,800) Cash payments for operating expenses Changes Changes Debit Credit Operating expenses 196,000 Accrued expenses 2,200 Cash minus 193,800

  50. Rundell Inc.Income StatementFor the Year Ended December 31, 2006 Cash Basis Sales 1,180,000 1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Changes Gain on sale of investments Debit Credit Cash 72,000 Investments 60,000 Gain on sale of invest. 12,000 0 The cash inflow of 72,000 will be shown in the investingsection of the statement of cash flows and the gain is ignored.

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