The Statement of Cash Flows

1. 11 The Statement of Cash Flows Part One: Financial Accounting • The McGraw-Hill Companies, Inc., 1999

2. Sources of Cash Slide 11-1 • Operations • New borrowings • New stock issues • Sale of property, plant, and equipment • Sale of other noncurrent assets

3. Uses of Cash Slide 11-2 • Cash dividends • Repayment of borrowings • Repurchase of stock • Purchase of property, plant, and equipment • Purchase of other noncurrent assets

4. Typical Questions Answered by the SCF Slide 11-3 • How much cash was provided by the normal, ongoing operations of the company? • In what other ways were significant amounts of cash raised? • Is the company investing enough in new plant and equipment to maintain or increase capacity and to replace old facilities with more efficient ones? • Is the company reinvesting excess cash in productive assets, or is it using the cash to retire stock?

5. Major Categories on the SCF Slide 11-4 Operating activities: Transactions associated with sales revenues and cash outflows associated with the operating expenses Investing activities: Transactions involving acquiring and disinvesting in long-lived assets Financing activities: Transactions involving borrowing of cash through noncurrent instruments and the issuance of equity securities

6. Investing Activities Section of SCF Slide 11-5 Cash flows from investing activities: Acquisition of plant and equipment (500) Proceeds from disposals of plant and equipment 20 Purchase of investment securities (25) Proceeds from sales of investment securities 75 Net cash used by investing activities (430) Cash flows from investing activities: Acquisition of plant and equipment (500) Proceeds from disposals of plant and equipment 20 Purchase of investment securities (25) Proceeds from sales of investment securities 75 Net cash used by investing activities (430) Cash flows from investing activities: Acquisition of plant and equipment (500) Proceeds from disposals of plant and equipment 20 Purchase of investment securities (25) Proceeds from sales of investment securities 75 Net cash used by investing activities (430) Equipment costing $500,000 was purchased for cash during the year. Equipment that originally cost $150,000 was sold for $20,000, resulting in an inflow of cash . The net result of these two transaction on the balance sheet is an increase in plant and equipment of $350,000.

7. Investing Activities Section of SCF Slide 11-6 Cash flows from investing activities: Acquisition of plant and equipment (500) Proceeds from disposals of plant and equipment 20 Purchase of investment securities (25) Proceeds from sales of investment securities 75 Net cash used by investing activities (430) Cash flows from investing activities: Acquisition of plant and equipment (500) Proceeds from disposals of plant and equipment 20 Purchase of investment securities (25) Proceeds from sales of investment securities 75 Net cash used by investing activities (430) Investment securities decreased $50,000 ($450,000 to $400,000) during the year. The firm purchased $25,000 of new securities (an inflow of cash) and and sold $75,000 of old securities (and outflow of cash)

8. Financing Activities Section of SCF Slide 11-7 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (160) Net cash provided by financing activities 326 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (60) Net cash provided by financing activities 326 Short-term borrowing decreased $21,000 (from $147,000 to $126,000). The firm borrowed $15,000 using short-term debt and paid $36,000 on old borrowings.

9. Financing Activities Section of SCF Slide 11-8 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (160) Net cash provided by financing activities 326 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt 375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (60) Net cash provided by financing activities 326 Long-term debt increased $335,000 (from $500,000 in 1997 to $835,000 in 1998). The firm borrowed $375,000 using long-term debt and paid $40,000 on old long-term debt.

10. Financing Activities Section of SCF Slide 11-9 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (160) Net cash provided by financing activities 326 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt 375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (60) Net cash provided by financing activities 326 During 1998, Fairway issued 10,000 additional shares of $1 par value common stock resulting in cash proceeds of $44,000. On the balance sheet, common stock increased $10,000 and paid-in capital increased by $34,000 between 1997 and 1998.

11. Financing Activities Section of SCF Slide 11-10 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (160) Net cash provided by financing activities 326 Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt 375 Payments on long-term debt (40) Proceeds from issuing common stock 44 Dividends paid (60) Net cash provided by financing activities 326 During 1998, cash dividends amounted to $60,000.

12. FASB 95 encourages use of the direct method. Operating Activities Section of SCF Slide 11-11 Net cash flow from operating activities: Cash received from customers $3,103 Dividends and interest received 19 Cash provided by operating activities 3,122 Cash paid to suppliers and employers 2,729 Interest paid 67 Income taxes paid 98 Cash disbursed for operating activities 2,894 Net cash flow from operating activities 228 Direct Method

13. Operating Activities Section of SCF Slide 11-12 Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included in income: Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87) Increase in inventories (47) Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228 Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included in income: Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87) Increase in inventories (47) Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228 Indirect Method

14. Depreciation expense reduces net income, but has no effect on cash. Let’s restate the entry by replacing depreciation. Operating Activities Section of SCF Slide 11-13 The actual adjusting entry made: Depreciation Expense 120,000 Accumulation Depreciation 120,000

15. Operating Activities Section of SCF Slide 11-14 The restated entry: Cash provided by operations 120,000 Accumulation Depreciation 120,000 Examine Illustration 11-6 closely. Notice that entry (3) matches the restated entry above.

16. Operating Activities Section of SCF Slide 11-15 Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included in income: Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87) Increase in inventories (47) Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228 Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included in income: Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87) Increase in inventories (47) Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228 Indirect Method

17. Beginning balance in next period 657,000 Operating Activities Section of SCF Slide 11-16 Inventories Beginning balance 610,000 Cost of sales 2,290,000 Purchases 2,337,000 Ending balance 657,000 Purchases = Cost of sales + (Ending Balance - Beginning Balance) Actual cash payments (assume all purchases were cash purchases) $2,337,000 Cost of sales (based on units sold) 2,290,000 Excess of cash spent over amount recorded as a cost on the income statement $ 47,000

18. Operating Activities Section of SCF Slide 11-17 Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included in income: Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87) Increase in inventories (47) Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228 Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included in income: Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87) Increase in inventories (47) Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228 Indirect Method

19. Operating Activities Section of SCF Slide 11-18 Freeway Corporation sold equipment that originally cost $150,000 for $20,000. The asset was fully depreciated at the time of sale. The journal entry made was: Cash 20,000 Accumulated Depreciation 150,000 Equipment, at Cost 150,000 Gain on Disposal of Equipment 20,000 This gain increased net income by $20,000.

20. Operating Activities Section of SCF Slide 11-19 The actual cash inflow should be treated as cash provided by investing activities and the gain on disposal subtracted from net income through reducing cash provided by operations (see entry 6 in Illustration 11-6). The restated entry is: Cash provided by investing activities 20,000 Accumulated Depreciation 150,000 Equipment, at Cost 150,000 Cash provided by operating activities 20,000

21. Operating Activities Section of SCF Slide 11-20 Suppose the equipment had a book value of $10,000 at the time of sale, and the cash proceeds totaled $15,000. The journal entry made was: Cash 15,000 Accumulated Depreciation 140,000 Equipment, at Cost 150,000 Gain on Disposal of Equipment 5,000

22. Operating Activities Section of SCF Slide 11-20 Suppose the equipment had a book value of $10,000 at the time of sale, and the cash proceeds totaled $15,000. The entry restated is: Cash provided by investing activities 15,000 Accumulated Depreciation 140,000 Equipment, at Cost 150,000 Cash provided by operating activities 5,000 Cash provided by investing activities increased $15,000 and cash provided by operating activities decreased $5,000.

23. Chapter 11 TheEnd