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CHAPTER TWENTY-FIVE
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CHAPTER TWENTY-FIVE

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  1. CHAPTER TWENTY-FIVE STATEMENT OF CASH FLOWS

  2. Purpose: To provide information about how cash was generated and used during the period Divides cash related activities into three categories: Operating Activities Investing Activities Financing Activities STATEMENT OF CASH FLOWS

  3. OPERATING ACTIVITIES • Transactions and events associated with: • selling a product or providing a service • the revenues and expenses reported on the Income Statement • Represent the company’s primary source of cash over the life of the business INFLOW EXAMPLES Cash receipts from the sale of goods or services Interest received on loans made to outside entities Dividends received on investments made in the stock of other companies

  4. OPERATING ACTIVITIES • Transactions and events associated with: • selling a product or providing a service • the revenues and expenses reported on the Income Statement • Represent the company’s primary source of cash over the life of the business OUTFLOW EXAMPLES Payments for the acquisition of inventory Payments to employees and the government Payments for interest on loans Payments to other suppliers and for other expenses

  5. CASH FLOWS FROM OPERATING ACTIVITIES • TWO METHODS: • DIRECT • Revenues and expenses are adjusted • to reflect the amount of cash received or paid for each item • INDIRECT • Net income is adjusted • for transactions that affect net income, but have no effect on cash flows

  6. INVESTING ACTIVITIES • Transactions involving long-term assets, investments in debt and equity securities, and lending money and collecting the principalon the related loans INFLOW EXAMPLES • Proceeds from: • collection of principal on loans made • sale of property, plant and equipment; intangibles; and other productive assets • sale of investments in debt and equity securities • discounting notes receivable

  7. INVESTING ACTIVITIES • Transactions involving long-term assets, investments in debt and equity securities, and lending money and collecting the principal on the related loans OUTFLOW EXAMPLES Loans made to other parties Payments to acquire property, plant, and equipment; intangibles; and other productive assets Payments to acquire investments in debt and equity securities

  8. FINANCING ACTIVITIES • Transactions dealing with the exchange of cash between the company and its owners and creditors INFLOW EXAMPLES • Proceeds from additional investments by the owners or the issuance of stock • Proceeds from borrowing money through the signing of a mortgage, issuing a bond or other long- or short-term loans

  9. FINANCING ACTIVITIES • Transactions dealing with the exchange of cash between the company and its owners and creditors OUTFLOW EXAMPLES • Payments of dividends to stockholders or withdrawals by the owners • Payments to purchase treasury stock • Repayment of the principal on loans

  10. STATEMENT OF CASH FLOWS EXAMPLE: Simplex Company has prepared its Income Statement, Statement of Retained Earnings and Balance Sheet for 20-3. Now it needs to prepare its Statement of Cash Flows.

  11. Simplex Company Comparative Balance Sheet December 31, 20-3 and 20-2 Increase (Decrease) 20-3 20-2 Assets Current Assets: $(110,000) Cash $ 90,000 $ 200,000 Accounts Receivable 160,000 190,000 (30,000) Merchandise Inventory 180,000 200,000 (20,000) The Statement of Cash Flows will explain how the cash account decreased by $110,000 in 20-3. Total current assets $430,000 $590,000 (160,000) Property, Plant and Equipment: Land $ 40,000 $ 40,000 0 Building 140,000 0 140,000 Equipment 100,000 0 100,000 Total property, plant and equip. $ 280,000 $ 40,000 $240,000 Total assets $ 710,000 $ 630,000 $ 80,000

  12. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions Sales $ 900,000 Cost of Goods Sold 600,000 Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 The revenues and expenses from the Income Statement are used in computing the “Cash Flow Generated from Operating Activities.”

  13. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions Sales $ 900,000 Cost of Goods Sold 600,000 Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 We’ll start with the Sales… Sales (revenues) are recognized when earned, regardless of the amount of cash actually received. Sales must be converted to the amount of “Cash Received from Customers.”

  14. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance To convert Sales into the “Cash Received from Customers” we need to examine the Accounts Receivable account.

  15. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance Sales Sales increases the Accounts Receivable account.

  16. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance Sales ? Accounts Receivable is decreased by customers making payments.

  17. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance ? Sales Accounts Receivable decreased by $30,000 during 20-3. $160,000 End. balance

  18. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance ? Sales $160,000 End. balance When Accounts Receivable decreases… Cash rec’d from customers > Sales

  19. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance ? $900,000 $160,000 End. balance Sales for the year were $900,000…

  20. CASH RECEIVED FROM CUSTOMERS ACCOUNTS RECEIVABLE $190,000 Beg. balance $930,000 $900,000 $160,000 End. balance Cash Rec’d from Customers = Sales + Decrease in A/R $900,000 + $30,000

  21. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions $30,000 Sales $ 900,000 $ 930,000 Cost of Goods Sold 600,000 Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 Cash Received from Customers.

  22. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions $30,000 Sales $ 900,000 $ 930,000 Cost of Goods Sold 600,000 Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 Cost of Goods Sold is adjusted next….

  23. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance We need to determine the amount of merchandise purchased during the year.

  24. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance ? Purchases increase inventory.

  25. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance Cost of Goods Sold ? Selling goods (merchandise) reduces inventory.

  26. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance Cost of Goods Sold ? $180,000 End. balance Inventory decreased by $20,000 during 20-3.

  27. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance Cost of Goods Sold ? $180,000 End. balance When inventory decreases during the year….. Cost of Goods Sold > Purchases

  28. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance ? $600,000 $180,000 End. balance Cost of Goods Sold for 20-3 is $600,000.

  29. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance $580,000 $600,000 $180,000 End. balance Purchases for 20-3 = Cost of Goods Sold - decrease in Merch. Inventory $600,000 - $20,000

  30. CASH PAID FOR MERCHANDISE MERCHANDISE INVENTORY $200,000 Beg. balance $580,000 $600,000 $180,000 End. balance Cost of merchandise purchased.

  31. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions $30,000 Sales $ 900,000 $ 930,000 Cost of Goods Sold 600,000 $(20,000) Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 Decrease in Merchandise Inventory

  32. CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180,000 Beg. balance $120,000 End. balance Now that we know Simplex’ purchases, we need to determine how much cash was paid for these goods.

  33. CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180,000 Beg. balance ? $580,000 $120,000 End. balance Purchases increase Accounts Payable and cash payments on these purchases decrease Accts. Payable.

  34. CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180,000 Beg. balance ? $580,000 $120,000 End. balance Accounts Payable decrease by $60,000 during 20-3, Purchases < Cash paid

  35. CASH PAID FOR MERCHANDISE ACCOUNTS PAYABLE $180,000 Beg. balance $640,000 $580,000 $120,000 End balance Cash paid for merchandise = Purchases + decrease in Accounts Payable $580,000 + $60,000

  36. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions $30,000 Sales $ 900,000 $ 930,000 $60,000 Cost of Goods Sold 600,000 $(20,000) $ 640,000 Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 Decrease in Accounts Payable

  37. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions $30,000 Sales $ 900,000 $ 930,000 $60,000 Cost of Goods Sold 600,000 $(20,000) $ 640,000 Gross Profit $ 300,000 Operating Expenses 220,000 Net Income $ 80,000 Operating Expenses are generally adjusted for prepaid expenses, accrued liabilities, and depreciation.

  38. Simplex Company Schedule for the Calculation of Cash Generated from OperatingActivities For Year Ended December 31, 20-3 Cash Flow Income Statement Additions Deductions $30,000 Sales $ 900,000 $ 930,000 $60,000 Cost of Goods Sold 600,000 $(20,000) $ 640,000 Gross Profit $ 300,000 Operating Expenses 220,000 220,000 Net Income $ 80,000 Simplex does not have any of these items , so there is no need to adjust operating expenses.

  39. Simplex Company Statement of Cash Flows For Year ended December 31, 20-3 Cash flows from operating activities: Cash received from customers $930,000 Cash paid for merchandise $(640,000) Cash paid for operating expenses (220,000) (860,000) Total cash disbursed for operating act. Net cash provided by operating activities $ 70,000 Cash flows from investing activities: Now that the operating section is completed, we turn our attention to the investing section.

  40. Simplex Company Comparative Balance Sheet December 31, 20-3 and 20-2 Increase (Decrease) 20-3 20-2 Assets Current Assets: $(110,000) Cash $ 90,000 $ 200,000 Accounts Receivable 160,000 190,000 (30,000) Merchandise Inventory 180,000 200,000 (20,000) $430,000 Total current assets $590,000 (160,000) Property, Plant and Equipment: Land $ 40,000 $ 40,000 0 Building 140,000 0 140,000 Equipment 100,000 0 100,000 Investing activities involve the purchase and sale of Plant Assets. Total property, plant and equip. $ 280,000 $ 40,000 $240,000 Total assets $ 710,000 $ 630,000 $ 80,000

  41. INVESTING ACTIVITIES BUILDING EQUIPMENT $ 0 $ 0 Beg. balance Beg. balance $100,000 $140,000 End balance End balance Simplex Company informs us the only activity in the building and equipment accounts in 20-3 was the purchase of a building and equipment for cash, just before year end.

  42. Simplex Company Statement of Cash Flows For Year ended December 31, 20-3 Cash flows from operating activities: Cash received from customers $930,000 Cash paid for merchandise $(640,000) Cash paid for operating expenses (220,000) (860,000) Total cash disbursed for operating act. Net cash provided by operating activities $ 70,000 Cash flows from investing activities: Purchased building $(140,000) Purchased equipment (100,000) Net cash used by investing activities (240,000) Cash flows from financing activities: On to the Financing section...

  43. Simplex Company Comparative Balance Sheet December 31, 20-3 and 20-2 Increase (Decrease) 20-3 20-2 Assets Current Assets: $(110,000) Cash $ 90,000 $ 200,000 Accounts Receivable 160,000 190,000 (30,000) Merchandise Inventory 180,000 200,000 (20,000) Total current assets $430,000 $590,000 (160,000) Financing activities involve exchanges of cash between the company and its stockholders and creditors. Property, Plant and Equipment: Land $ 40,000 $ 40,000 0 Building 140,000 0 140,000 Equipment 100,000 0 100,000 Total property, plant and equip. $ 280,000 $ 40,000 $240,000 Total assets $ 710,000 $ 630,000 $ 80,000

  44. Liabilities Current liabilities: Notes Payable $ 60,000 $ 50,000 $ 10,000 Accounts Payable 120,000 180,000 (60,000) Total liabilities $180,000 $230,000 (50,000) Let’s begin by analyzing the cash related activities in the Notes Payable account. Stockholders’ Equity Common Stock $5 par, 100,000 shares auth.; Issued 58,000 in 20-3, 50,000 in 20-2 $290,000 $250,000 40,000 Paid-in-capital in excess of par- common stock 130,000 100,000 30,000 Retained Earnings 110,000 50,000 60,000 Total stockholders’ equity $ 530,000 $ 400,000 130,000 Total liab. & stockholders’ equity $ 710,000 $ 630,000 $ 80,000

  45. FINANCING ACTIVITIES NOTES PAYABLE $ 50,000 Beg. balance $10,000 $ 60,000 $10,000 increase in 20-3 from issuing a note.

  46. Simplex Company Statement of Cash Flows For Year ended December 31, 20-3 Cash flows from operating activities: Cash received from customers $930,000 Cash paid for merchandise $(640,000) Cash paid for operating expenses (220,000) (860,000) Total cash disbursed for operating act. Net cash provided by operating activities $ 70,000 Cash flows from investing activities: Purchased building $(140,000) Purchased equipment (100,000) Net cash used by investing activities (240,000) Cash flows from financing activities: Issued Note Payable $ 10,000

  47. Liabilities Current liabilities: Notes Payable $ 60,000 $ 50,000 $ 10,000 Accounts Payable 120,000 180,000 (60,000) Total liabilities $180,000 $230,000 (50,000) Stockholders’ Equity Common Stock $5 par, 100,000 shares auth.; Issued 58,000 in 20-3, 50,000 in 20-2 $290,000 $250,000 40,000 Paid-in-capital in excess of par- common stock 130,000 100,000 30,000 We will move now to the Capital Stock accounts. Retained Earnings 110,000 50,000 60,000 Total stockholders’ equity $ 530,000 $ 400,000 130,000 Total liab. & stockholders’ equity $ 710,000 $ 630,000 $ 80,000

  48. INVESTING ACTIVITIES PAID-IN CAPITAL IN EXCESS OF PAR-COMMON STOCK COMMON STOCK $250,000 $ 100,000 Beg. balance Beg. balance $130,000 $290,000 End balance End balance The only types of transactions that increase or decrease the Capital Stock accounts are issuing and retiring stock.

  49. INVESTING ACTIVITIES PAID-IN CAPITAL IN EXCESS OF PAR-COMMON STOCK COMMON STOCK $250,000 $ 100,000 Beg. balance Beg. balance $40,000 $130,000 $290,000 End balance End balance Since Common Stock increased during 20-3, stock with par value of $40,000 was issued.

  50. INVESTING ACTIVITIES PAID-IN CAPITAL IN EXCESS OF PAR-COMMON STOCK COMMON STOCK $250,000 $ 100,000 Beg. balance Beg. balance $40,000 $30,000 $130,000 $290,000 End balance End balance Since Paid-In Capital increased during 20-3, stock was issued for a price $30,000 above the par value.