Fundamentals of Financial Accounting , Canadian Edition

1. Fundamentals of Financial Accounting, Canadian Edition

2. Chapter 12 Reporting and Interpreting the Statement of Cash Flows

3. Ability to generate cashfrom its operations. Management of currentassets and current liabilities. Expenditures forlong-term assets. Amount received fromexternal financing. The Need for a Statement ofCash Flows The statement focusesattention on:

4. The Need for a Statement ofCash Flows The statement helps to answer these questions: • Is there enough cash to pay short-term debt? • Are accounts receivable and inventory adequately managed? • Has the company purchased sufficient equipment and other long-term assets? • Did the company generate enough cash internally to finance the purchases, or did it rely on external financing? • Is the company changing the source of its external financing?

5. Classifications on the Statement of Cash Flows The Statement of Cash Flows must include the following three sections: Operating Activities Investing Activities Financing Activities

6. What do you need? • Comparative balance sheets • A complete income statement • Additional details

7. Chequing and Savings Accounts Currency Cash Equivalents • Highly liquid short-term investmentswithin three months of maturity. Classifications on the Statement of Cash Flows Cash

8. Remember this??? Assets Liabilities Shareholders’ Equity + = Cash + noncash assets Liabilities Shareholders’ Equity = + Cash Liabilities Shareholders’ Equity noncash Assets = + -

9. Cash Flow Equation Cash Liabilities Shareholders’ Equity Noncash Assets = - +

10. Cash Transactions and their effects on other Balance Sheet Accounts

11. Cash Flows from Operating Activities Cash inflows and outflows that directly relate to income from normal operations reported on the income statement.

12. Changes in current assets and current liabilities. + Losses and - Gains + Noncash expenses such as depreciation and amortization. Cash Flows from Operating Activities - Indirect Method The indirect method adjusts net income by eliminating noncash items. Cash Flows from Operating Activities - Indirect Method Net Income

13. Steps to Determine Operating Cash Flows Step 1 – Identify balance sheet accounts related to operating activities

14. Step 1 – Identify Balance Sheet

15. Step 1- Identify Balance Sheet

16. Step 1- Identify Balance Sheet

17. Steps to Determine Operating Cash Flows Step 2 – Create a schedule of operating activities which begins by assuming the numbers on income statement are cash flow

18. Step 2- Create schedule of operating activities

19. Steps to Determine Operating Cash Flows Step 3 – Adjust the income statement Numbers for the effects of items marked O that reflect differences in the timing of accrual basis net income and cash flows

20. Step 3- Operating Section Adjustments

21. Steps to Determine Operating Cash Flows Step 3a – Adjust for noncash expenses like amortization expense

22. Steps to Determine Operating Cash Flows Step 3b – Adjust for changes in current Assets and current liabilities

23. Step 3- Operating Section Adjustments

24. Change in Accounts Receivable Accounts Receivable Beg. Balance Cash Collected Sales Revenue End Balance A/R (beginning) Sales Revenue Cash Collected A/R (ending) + - = Sales Revenue - Cash Collected A/R (ending) A/R (beginning) - =

25. Change in Accounts Receivable Accounts Receivable Beg. Balance 827 Change -$192 Cash Collected From customers Sales Revenue (on account) 21,162 21,354 Ending Balance 635

26. Change in Inventory Inventory Beg. Balance Cost of Goods Sold Purchases End Balance Inventory (beginning) Purchases Cost of Goods Sold Inventory (ending) + - = Purchases - Cost of Goods Sold Inventory (ending) Inventory (beginning) - =

27. Change in Inventory Inventory Beg. Balance 19,000 Increase Purchase of inventory 1,115 Ending Balance 20,115

28. Change in Prepaid Expenses Prepaid Expenses Beg. Balance Used up/ expensed Cash prepayment End Balance Prepaid (beginning) Cash prepayment Used up/ expenses Prepaid (ending) + - = Cash prepayment - Used up/ expenses Prepaid (ending) Prepaid (beginning) - =

29. Change in Prepaid Prepaid Beg. Balance 619 Increase Paid for Premiums 3 Ending Balance 622

30. Change in Accounts Payable Accounts Payable Accounts Payable (L) Beg Balance Cash payments Purchases on account End Balance Accounts Payable (L) Beg Balance 897 Increase 400 Purchases on account End Balance 1,297

31. Change in Income Tax Payable Income Tax Payable (L) Beg Balance 309 Decrease 237 Paid taxes End Balance 72

32. Operating Section

33. Direct Method • Direct method is another method of • calculating the operating section of the • cash flow statement

34. Direct Method

35. Direct Method (cont’d)

36. Inflowsfrom: Sale or disposal of property, plant, and equipment. Sale or maturity of investments in securities. + Outflowsto: • Purchase property, plant, and equipment. • Purchase investments in securities. _ Cash Flows from InvestingActivities Cash Flows from Investing Activities

37. Cash Flows from Investing Activities

38. Change in Property, Plant & Equipment (PPE) Property, Plant & Equipment Beg Balance 28,648 Purchases 1,119 End Balance 29,767

39. Change in Winery Licences Winery Licences Beg Balance 252 Expiry of Licence 210 End Balance 42

40. Net Cash Flow from Investing Activities

41. Inflowsfrom: Borrowing on notes, mortgages, bonds, etc. from creditors. Issuing shares to owners. + Outflowsto: • Repay principal to creditors (excluding interest). • Repurchase shares from owners. • Dividends to owners. _ Cash Flows from Financing Activities Cash Flows from Financing Activities

42. Cash Flows from Financing Activities

43. Change in Long-Term Debt Long-Term Debt (L) Beg Balance 11,088 (1,407 + 9,681) Repaid 1,454 End Balance 9,634 (1,418+8,216

44. Change in Share Capital (SE) Share Capital (SE) Beg Balance 6,084 Issue new shares 15 End Balance 6,099

45. Change in Contributed Surplus (SE) Contributed Surplus (SE) Beg Balance 210 Repurchase of shares 210 End Balance 0

46. Change in Retained Earnings (SE) Retained Earnings (SE) Beg Balance 14,847 Net Income 2,426 Dividends Declared 0 End Balance 17,273

47. Net Cash Flow from Financing Activities

48. Summarized Cash Flow Statement From Balance Sheet

49. A Comparison of the Direct and Indirect Methods • Net cash flow is the same for both methods. • The direct method provides more detail about cash from operating activities. • The investing and financing sections for the two methods are identical.

50. Interpreting Cash Flows from Operating Activities • Operating cash flows must be positive over the long-run for a company to be successful. • An upward trend in operating cash flows over time indicates growth and efficient operations.