Statement of Cash Flows Chapter 13
Helps investors with questions about the company’s Ability to generate positive cash flows. Ability to meet its obligations and to pay dividends. Reasons for difference between net income and net cash flows from operating activities. Need for external financing. Investing and financing transactions for the period. Purpose of the Statement Provides information about the cash receipts and cash payments of a business entity during the accounting period.
Classification of Cash Flows • The Statement of Cash Flows must include the following three sections: • Cash Flows from Operating Activities • Cash Flows from InvestingActivities • Cash Flows from Financing Activities
+ _ Operating Activities • Inflows from: • Interest and dividends received • Sales to customers Cash Flows from Operating Activities • Outflowsto: • Suppliers of merchandise and services • Employees • Lenders for interest • Governments for taxes
Inflows from: Sale of investments and plant assets Collection of principal on loans + _ Investing Activities Cash Flows from Investing Activities • Outflows to: • Purchase investments and plant assets • Purchase debt or equity investments • Make loans
Inflows from: Short-term and long-term borrowing Owners (for example, from issuing stock) + _ Financing Activities Cash Flows from Financing Activities • Outflows to: • Make payments on borrowed funds • Owners for dividends • Purchase treasury stock
Cash and Cash Equivalents Cash Cash Equivalents Currency • Short-term, highly liquid investments. • Readily convertible into cash. • So near maturity that market value is unaffected by interest rate changes.
The operating cash flows section can be prepared using either the direct method or the indirect method. Let’s look at the direct methodfor preparing the Statement of Cash Flows.
Accrual basis revenue includes sales that did not result in cash inflows. Can be computed as: Direct Method: Cash Received from Customers Decrease in receivables + = Cash Received from Customers Net Sales Increase in receivables – =
The accounts receivable balance was $80,000 on 12/31/10 and $110,000 on 12/31/11. If accrual sales revenue for 2011 was $900,000, what was cash basis revenue? Direct Method: Cash Received from Customers Net Sales $900,000 $870,000Cash Received from Customers $30,000Increase in receivables – =
Step 1 Step 2 Direct Method: Cash Paid for Purchases of Merchandise
Direct Method: Cash Payments for Expenses After deducting depreciation and other noncash expenses, the cash paid for expenses is affected by (1) whether the expense was prepaid, and (2) whether the expense was accrued. + Increase in + Decrease in Cash Paid for prepaid expenses accrued liabilities = Expenses Expenses - Decrease in - Increase in prepaid expenses accrued liabilities
Additional Information Trading Securities were purchased during 2009 at a cost of $25,000. Equipment with a book value of $40,000 was sold during the year for $43,000. Equipment with a book value of $30,000 was destroyed during a freak flood in 2009. There was no insurance. Martin owns 25% of the common stock of another company and uses the equity method to account for this investment. Martin’s tax rate is 40%. The Notes Payable to the bank carry a 12% rate. The payments are due on the first day of each month. The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1. Sold stock during 2009 for $50,000. Received $10,000 dividends from its equity investment. Direct Method
Cash Received from Customers Cash Paid to Employees Direct Method
Cash Paid for Inventory Cash Paid for Interest Direct Method
Cash Paid for Taxes Other Operating Cash Flows Direct Method
Cash Flows From Operating Activities Direct Method
Equipment with a book value of $40,000 was sold for $43,000. Bonds Payable decreased from $250,000 to $150,000 during 2011.
Equipment with a book value of $40,000 was sold for $43,000. Bonds Payable decreased from $250,000 to $150,000 during 2011. Notes Payable decreased from $70,000 to $60,000 during 2011.
Notice that the Ending Cash Balance per the Statement of Cash Flows agrees with the 12/31/11 Cash balance on the Balance Sheet.
Reconciling Net Income withNet Cash Flows • There are two major categories of reconciling items. They include adjusting for: • Noncash Expenses. • Timing Differences. Depreciation Expense Accounts receivable
Reporting Operating Cash Flows by the Indirect Method Changes in current assets and current liabilities as shown on the following table Cash Flows from Operating Activities Net Income + Losses and - Gains + Noncash expenses such as depreciation and amortization
Reconciling Net Income with Net Cash Flows Use this table when adjusting Net Income to Operating Cash Flows.
Managing Cash Flows Cash Budgets are used by management to plan and forecast future cash flows.
Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. Managing Cash Flows
A Worksheet for Preparing a Statement of Cash Flows Additional Information Net income for the year amounted to $250,000. cash dividends of $140,000 were declared and paid. Auto’s only noncash expense was depreciation, which totaled $60,000. Marketable securities costing $15,000 were sold for $35,000 cash, resulting in a $20,000 nonoperating gain. The company purchased plant assets for $100,000, making a $30,000 cash down payment and issuing a $70,000 mortgage not payable for the balance of the purchase price.
Supplemental Information We are required to disclose information concerning major investing and financing activities that do not involve cash.