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Chapter 13 Statement of Cash Flows ( 現金流量表 )

Chapter 13 Statement of Cash Flows ( 現金流量表 ). Instructor: Chih-Liang Julian Liu Department of Industrial and Business Management Chang Gung University. Learning Objectives Indicate the usefulness of the statement of cash flows.

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Chapter 13 Statement of Cash Flows ( 現金流量表 )

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  1. Chapter 13 Statement of Cash Flows (現金流量表) Instructor: Chih-Liang Julian Liu Department of Industrial and Business Management Chang Gung University

  2. Learning Objectives • Indicate the usefulness of the statement of cash flows. • Distinguish among operating, investing, and financing activities. • Prepare a statement of cash flows using the indirectmethod. • Analyze the statement of cash flows.

  3. Preview of Chapter 13

  4. Accrual versus Cash Basis Accrual Basis Cash Basis Indirect Method Statement of Cash Flows Income Statement Net Income=Cash + Accruals (A/R, A/P)

  5. Usefulness and Format Usefulness of the Statement of Cash Flows • Provides information to help assess: • Entity’s ability to generate future cash flows. • Entity’s ability to pay dividends and meet obligations. • Reasons for difference between net income and net cash provided (used) by operating activities. • Cash investing and financing transactions during the period.

  6. Usefulness and Format Classification of Cash Flows Operating Activities InvestingActivities FinancingActivities Income Statement Items Changes in Investments and Non-Current Asset Changes in Non-Current Liabilities and Equity

  7. Usefulness and Format Classification of Cash Flows Illustration 13-1 Typical receipt and payment classifications

  8. Usefulness and Format Classification of Cash Flows

  9. Usefulness and Format Significant Non-Cash Activities (重大非現金活動) • Direct issuance of ordinary shares to purchase assets. • Conversion of bonds into ordinary shares. • Direct issuance of debt to purchase assets. • Exchanges of plant assets. • Companies report non-cash activities in either a • separate note (單獨附註) or • supplementary schedule to the financial statements (附表報導) .

  10. Usefulness and Format Format of the Statement of Cash Flows • Order of Presentation: • Operating activities. • Investing activities. • Financing activities. Direct Method Indirect Method The cash flows from operating activities section always appears first, followed by the investing and financing sections.

  11. Format of the Statement of Cash Flows Illustration 13-3

  12. Illustration: Classify each of these transactions by type of cash flow activity. 1. Issued 100,000 shares of HK$50 par value ordinary shares for HK$800,000 cash. 2. Borrowed HK$2,000,000 from Castle Bank, signing a 5-year note bearing 8% interest. 3. Purchased two semi-trailer trucks for HK$1,700,000 cash. 4. Paid employees HK$120,000 for salaries and wages. 5. Collected HK$200,000 cash for services provided. Financing Financing Investing Operating Operating

  13. Usefulness and Format Preparing the Statement of Cash Flows • Three Sources of Information: • Comparative statements of financial position • Current income statement • Additional information

  14. Usefulness and Format Preparing the Statement of Cash Flows Three Major Steps: Illustration 13-4

  15. Usefulness and Format Three Major Steps:

  16. Usefulness and Format Indirect and Direct Methods • Companies favor the indirect method for two reasons: • Easier and less costly to prepare, and • Focuses on the differences between net income and net cash flow from operating activities.

  17. Preparing the Statement of Cash Flows Illustration – Indirect Method Illustration 13-5

  18. Preparing the Statement of Cash Flows Illustration 13-6

  19. Preparing the Statement of Cash Flows Illustration 13-6 • Additional information for 2014: • Depreciation expense was comprised of €6,000 for building and €3,000 for equipment. • The company sold equipment with a book value of €7,000 (cost €8,000, less accumulated depreciation €1,000) for €4,000 cash. • Issued €110,000 of long-term bonds in direct exchange for land. • A building costing €120,000 was purchased for cash. Equipment costing €25,000 was also purchased for cash. • Issued ordinary shares for €20,000 cash. • The company declared and paid a €29,000 cash dividend.

  20. Preparing the Statement of Cash Flows Income Statement Operating Cash Flows Net Income = Cash+ Accruals Cash Indirect Method Cash =Net Income adjust Accruals

  21. Preparing the Statement of Cash Flows Step 1: Operating Activities Determine net cash provided/used by operating activities by converting net income from accrual basis to cash basis. • Common adjustments to Net Income (Loss): • Add back non-cash expenses (depreciation, amortization, or depletion expense). • Deduct gains and add losses. • Changes in non-cash current asset and current liability accounts.

  22. Step 1: Operating Activities Question Which is an example of a cash flow from an operating activity? • Payment of cash to lenders for interest. • Receipt of cash from the sale of ordinary shares. • Payment of cash dividends to the company’s shareholders. • None of the above.

  23. Step 1: Operating Activities Depreciation Expense Although depreciation expense reduces net income, it does not reduce cash. The company must add it back to net income. Depreciation Expense 9,000 (I/S) Accumulated Depreciation 9,000 (S/FP) Illustration 13-7

  24. Depreciation Expense Income Statement Operating Cash Flows Net Income = Rev. – Dep. Exp. = Rev. – 9,000 OperatingCash Flows = Cash Inflows – Cash Outflows = Cash Inflows–0 Indirect Method Cash = Net Income+ Depreciation Expense

  25. Step 1: Operating Activities Loss on Disposal of Plant Assets • Companies should report cash received from the sale (disposal) of plant assets in the investing activities section. Because of this, • any loss on sale is added to net income in the operating section. • any gain on sale is deducted from net income in the operating section.

  26. Step 1: Operating Activities Loss on Disposal of Plant Assets Illustration 13-8

  27. Loss on Disposal of Plant Assets Computer Services’ income statement reports a $3,000 loss on disposal of plant assets (book value $7,000, less $4,000 cash received from sale of plant assets). Cash 4,000 (S/C: Investing Cash) Accumulated Depreciation 1,000 Loss on Disposal of Plant Assets 3,000 (I/S: Net Income) Equipment 8,000

  28. Loss on Disposal of Plant Assets Income Statement Operating Cash Flows Cash = Cash Inflows – Cash Outflows = Cash Inflows–0 Net Income = Sales – Loss = Sales – 3,000 Indirect Method Cash =Net Income+ Loss on Sale of Equipment

  29. Step 1: Operating Activities Changes to Non-Cash Current Asset Accounts When the Accounts Receivable balance decreases, cash receipts are higher than revenue earned under the accrual basis. Illustration 13-9 Accounts Receivable 1/1/014 Balance 30,000 Receipts from customers 517,000 Sales revenue 507,000 12/31/14 Balance 20,000 Company adds to net income the amount of the decrease in accounts receivable.

  30. Changes to Accountings Receivable When the Accounts Receivable balance decreases, cash receipts are higher than revenue earned under the accrual basis. Accounts Receivable 507,000(S/F) Sales 507,000 (I/S: Net Income) Cash 517,000 (S/C: Operating Inflows) Accounts Receivable 517,000(S/F)

  31. Changes to Accountings Receivable Income Statement Operating Cash Flows Cash = Cash Inflows – Cash Outflows = 517,000–Cash Outflows Net Income = Sales – COGS = 507,000 –COGS Indirect Method Cash =Net Income+ Decrease in A/R

  32. Step 1: Operating Activities Changes to Non-Cash Current Asset Accounts Illustration 13-10

  33. Step 1: Operating Activities Changes to Non-Cash Current Asset Accounts When the Inventory balance increases, the cost of merchandise purchased exceeds the cost of goods sold. Inventory 1/1/14 Balance 10,000 Cost of goods sold 150,000 Purchases 155,000 12/31/14 Balance 15,000 Cost of goods sold does not reflect cash payments made for merchandise. The company deducts from net income this inventory increase.

  34. When the Inventory balance increases, the cost of merchandise purchased exceeds the cost of goods sold. Merchandise Inventory 155,000 (S/F) Cash 155,000 (Operating Outflows) Cost of Goods Sold 150,000 (I/S: Net Income) Merchandise Inventory 150,000 (S/F) Merchandise Inventory 1/1/11 Balance 10,000 Cost of goods sold 150,000 Purchases 155,000 12/31/11 Balance 15,000 As a result, cost of goods sold does not reflect cash payments made for merchandise. The company deductsfrom net income this inventory increase.

  35. Changes to Inventory When the Inventory balance increases, the cost of merchandise purchased exceeds the cost of goods sold. Merchandise Inventory 155,000(S/F) Cash 155,000 (Operating Outflows) Cost of Goods Sold 150,000 (I/S: Net Income) Merchandise Inventory 150,000 (S/F)

  36. Changes to Inventory Income Statement Operating Cash Flows Cash = Cash Inflows – Cash Outflows = Cash Inflows–155,000 Net Income = Sales – COGS = Sales – 150,000 Indirect Method Cash =Net Income– Increase of Inventory

  37. Step 1: Operating Activities Changes to Non-Cash Current Asset Accounts Illustration 13-10

  38. Step 1: Operating Activities Changes to Non-Cash Current Asset Accounts When the Prepaid Expense balance increases, cash paid for expenses is higher than expenses reported on an accrual basis. The company deducts the decrease from net income to arrive at net cash provided by operating activities. If prepaid expenses decrease, reported expenses are higher than the expenses paid.

  39. Changes to Prepaid Expense • When the Prepaid Expense balance increases • Cash paid for expenses is higher than expenses reported on an accrual basis. • Prepaid Expense 5,000 (S/F) Cash 5,000 (S/F: Operating Outflows) • Expense 1,000 (I/S: Net Income) Prepaid Expense 1,000 (S/F) • Company deductstheincrease from net income to arrive at net cash provided by operating activities. Prepaid Expense 1/1/11 Balance 1,000 5,000 1,000 12/31/11 Balance 5,000

  40. Changes to Prepaid Expense Income Statement Operating Cash Flows Cash = Cash Inflows – Cash Outflows = Cash Inflows–5,000 Net Income = Sales – Exp. = Sales – 1,000 Indirect Method Cash =Net Income– Increase in Prepaid Exp.

  41. Step 1: Operating Activities Changes to Non-Cash Current Asset Accounts Illustration 13-10

  42. Step 1: Operating Activities Changes to Non-Cash Current Liability Accounts When Accounts Payable increases, the company received more in goods than it actually paid for. The increase is added to net income to determine net cash provided by operating activities. When Income Taxes Payable decreases, the income tax expense reported on the income statement was less than the amount of taxes paid during the period. The decrease is subtracted from net income to determine net cash provided by operating activities.

  43. Changes to Non-Cash Current Liability Accounts • When Accounts Payable increases • Company received more in goods than it actually paid for. • Increase is added to net income. Purchases 26,000 (I/S) Accounts Payable 16,000 (S/F) Cash 10,000 (S/C: Outflows) • Cost of Goods Sold = Beg. Inventory + Purchases -Ending inventory

  44. Changes to Accounting Payable Income Statement Operating Cash Flows Cash = Cash Inflows – Cash Outflows = Cash Inflows–10,000 Net Income = Sales – COGS = Sales – 26,000 Indirect Method Cash =Net Income+ Increase in A/P

  45. Changes to Non-Cash Current Liability Accounts • When Income Tax Payable decreases • Income tax expense was less than the amount of taxes paid during the period. • Decrease is subtracted from net income. • Accounting entry: Income Tax Expense 47,000 (I/S) Income Tax Payable 47,000 (S/F) Income Tax Payable 49,000 (S/F) Cash 49,000 (S/C: Outflow)

  46. Changes to Income Tax Payable Income Statement Operating Cash Flows Cash = Cash Inflows – Cash Outflows = Cash Inflows–49,000 Net Income = Sales – Tax Exp. = Sales – 47,000 Indirect Method Cash =Net Income- Decrease in IT/P

  47. Step 1: Operating Activities Changes to Non-Cash Current Liability Accounts Illustration 13-11

  48. Step 1: Operating Activities Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method Illustration 13-12

  49. Step 2: Investing and Financing Activities Company purchased land of €110,000 by issuing long-term bonds. This is a significant non-cashinvesting and financing activity that merits disclosure in a separate schedule. Land 1/1/14 Balance 20,000 Issued bonds 110,000 12/31/14 Balance 130,000 Bonds Payable 1/1/14 Balance 20,000 For land 110,000 12/31/14 Balance 130,000

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