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Statement of Cash Flow

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  1. Statement of Cash Flow By Rachelle Agatha, CPA, MBA Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

  2. 0 Objectives: Summarize the types of cash flow activities reported in the statement of cash flows. Prepare a statement of cash flows, using the indirect method. Prepare a statement of cash flows, using the direct method.

  3. 0 Objective 1 Summarize the types of cash flow activities reported in the statement of cash flows.

  4. 0 The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet its financial obligations, and pay dividends.

  5. 0 Reporting Cash Flows The statement of cash flows reports cash flows from three types of activities: 1. Cash flows from operating activities are cash flows from transactions that affect net income. 2. Cash flows from investing activities are cash flows from transactions that affect the investments in noncurrent assets. 3. Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the business.

  6. 0 Statement of Cash Flows—NetSolutions

  7. Operating Operating (receipts from revenues) (payments for expenses) Investing Investing (receipts from sales of noncurrent assets) (payments for acquiring noncurrent assets) Financing (payments for treasury stock, dividends, and redemption of debt securities) Financing (receipts from issuing equity and debt securities) 0 Exhibit 2 Cash Flows Sources (increases) of Cash Uses (decreases) of Cash

  8. 0 Cash Flows from Operating Activities The direct method reports the sources of operating cash and the uses of operating cash.

  9. 0 The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash.

  10. 0 • Cash inflows from operating activities normally arise when cash is received from customers. • Cashoutflows from operating activities normally arise when cash is paid to suppliers for merchandise, supplies, services and to employees for salaries and wages.

  11. 0 A primary advantageof the direct method is that it reports the sources and uses of operating cash flows in the statement of cash flow. A primary disadvantage of the direct method is that the necessary data may not be readily available and may be costly to gather.

  12. 0 A primary advantageof the indirect method is that it focuses on the differences between net income and cash flows from operations. Because the data are readily available, another advantageof the indirect method is that it is normally less costly to use than the direct method.

  13. 0 Cash Flows from Operations: Direct and Indirect Methods— NetSolutions same amount

  14. 0 Cash Flows from Investing Activities • Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets. • Cashoutflows from investing activities normally include payments to acquire fixed assets, investments, and intangible assets.

  15. 0 Cash Flows from Financing Activities • Cash inflows from financing activities normally arise from issuing debt or equity securities. • Cashoutflows from financing activities normally include paying cash dividends, repaying debt, and acquiring treasury stock.

  16. 0 Noncash Investing and Financing Activities Noncash investing and financing activities are transactions that do not involve cash. The effect of such transactions is recorded in a separate schedule that appears at the bottom of the statement of cash flows.

  17. 0 I M P O R T A N T The financial statements, including the statement of cash flows, should not report cash flow per share.

  18. 0 For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on the statement of cash flows under the indirect method. • Purchase patent • Pay cash dividend • Disposal of equipment • Net income • Purchase treasury stock • Depreciation expense

  19. 0 • Investing • Financing • Investing • Purchase patent • Pay cash dividend • Disposal of equipment • Operating • Financing • Operating • Net income • Purchase treasury stock • Depreciation expense

  20. 0 Objective 2 Prepare a statement of cash flows, using the indirect method.

  21. 0 An efficient approach to preparing the statement of cash flows is to analyze the changes in the noncash balance sheet accounts. The logic of this approach is that a change in any balance sheet account (including Cash) can be analyzed in terms of changes in the other balance sheet accounts.

  22. 0 The analysis of Retained Earningsprovides a good starting point for determining the cash flows from operating activities, which is the first section of the statement of cash flows.

  23. 0 Comparative Balance Sheet (Continued)

  24. 0 Comparative Balance Sheet (Concluded)

  25. ACCOUNTRetained Earnings ACCOUNT NO. 32 Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 202,300.00 Dec. 31 Net income 108,000.00 310,300.00 31 Cash dividends 28,000.00 282,300.00 0 Retained Earnings The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year.

  26. ACCOUNTRetained Earnings ACCOUNT NO. 32 Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 202,300.00 Dec. 31 Net income 108,000.00 310,300.00 31 Cash dividends 28,000.00 282,300.00 0 The net income of $108,000 is entered on the statement (or working papers). To statement

  27. 0 Operating Activities— Rundell Inc. Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: This phrase is added to indicate that accrual basis net income is being adjusted to arrive at cash flows from operations.

  28. 0 Depreciation Next, we need to determine depreciation expense for the year. If it isn’t given in the income statement, sometimes it can be found by analyzing the various accumulated depreciation accounts.

  29. ACCOUNT Accumulated Depreciation—Building ACCT. NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 58,300.00 Dec. 31 Depr. for year 7,000.00 65,300.00 0 The comparative balance sheet indicates that Accumulated Depreciation—Buildingincreased by $7,000. By analyzing the account we can see that the increase is the result of the year-end adjusting entry. to statement

  30. 0 The offsetting $7,000 debit is to an expense for depreciation. The effect on the income statement was to reduced net income; however, this expense did not require an outflow of cash. Therefore, the $7,000 is added back to net income in determining cash flows from operating activities.

  31. Amortization is treated in the same manner as depreciation. 0 Operating Activities—Rundell Inc. Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 7,000

  32. 0 Gain on Sale of Land The ledger or income statement of Rundell Inc. indicates that the sale of land resulted in a gain of $12,000. This gain increased net income by $12,000, yet cash flows was provided by an investing activity (selling land) rather than an operating activity, so the gain is deducted from net income on the statement of cash flows.

  33. 0 Operating Activities—Rundell Inc. Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 7,000 Gain on sale of land (12,000)

  34. 0 Omni Corporation’s accumulated depreciation increased by $12,000, while patents decreased by $3,400 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,100 from sale of land. Reconcile a net income of $50,000 to net cash flow from operating activities.

  35. 0 Net income $50,000 Adjustments to reconcile net income from operating activities: Depreciation 12,000 Amortization 3,400 Gain on sale of land (4,100) Net cash flow from operating activities $61,300

  36. 0 Changes in Current Operating Assets and Liabilities Next, select current assets and current liabilitiesthat impact cash flows and determine their increases and decreases. Exhibit 5 in the next slide my prove to be helpful in determining how to treat increases and decreases in noncash current operating assets and current operating liabilities.

  37. 0 Adjustments to Net Income (Loss) Using the Indirect Method

  38. 0 Changes in Current Accounts December 31 Increase Decrease* Accounts 2007 2008 9,000 8,000* 3,200* 2,200 500* Accounts receivable (net) $ 74,000 $ 65,000 Inventories 172,000 180,000 Accounts payable (mdse.) 43,500 46,700 Accrued expenses payable 26,500 24,300 Income taxes payable 7,900 8,400 Note that Cash and Dividends Payable are not included in this analysis.

  39. 0 Operating Activities—Indirect Method Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 7,000 Gain on sale of land (12,000) Changes in current operating assets and liabilities: Increase in accounts receivable (9,000) Decrease in inventory 8,000 Decrease in accounts payable (3,200) Increase in accrued expenses 2,200 Decrease in income taxes payable (500) You will notice that increases actually decrease cash flows from operating activities, and decreases do just the opposite.

  40. 0 Statement of Cash Flows—Indirect Method for Rundell Inc. (Operating Activities Section) Same information as Slide 39, only in final form.

  41. 0 Victor Corporation’s comparative balance sheet for current assets and current liabilities was as follows: Dec. 31, 2009 Dec. 31, 2008 Accounts receivable $ 6,500 $ 4,900 Inventory 12,300 15,000 Accounts payable 4,800 5,200 Dividends payable 5,000 4,000 Adjust net income of $70,000 for changes in operating assets and liabilities.

  42. 0 Net income $70,000 Adjustments to reconcile net income to net cash from from operating activities: Increase in accounts receivable (1,600) Decrease in inventory 2,700 Decrease in accounts payable (400) Net cash flow from operating activities $70,700

  43. 0 Omicron, Inc. reported the following data: Net income $120,000 Depreciation expense 12,000 Loss on disposal of equipment 15,000 Increase in Accounts receivable 5,000 Decrease in Accounts payable (2,000) Prepare the cash flow for operating activities section of the statement of cash flows using the indirect method.

  44. 0 Cash flows from operating activities: Net income $120,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 12,000 Loss from disposal of equipment 15,000 Changes in current operating assets and liabilities: Increase in accounts receivable (5,000) Decrease in accounts payable (2,000) Net cash flow from operating activities $140,000

  45. 0 Cash Flows Used for Payment of Dividends ACCOUNTDividends Payable ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 10,000 10 Cash paid 10,000 — June 20 Dividends declared 14,000 14,000 July 10 Cash paid 14,000 — Dec. 20 Dividends declared 14,000 14,000 Note that while $28,000 in dividends were declared, only $24,000 were paid during the year.

  46. 0 Because paying of dividends affects equity and is an outflow of cash, it is a negative $24,000 cash flowsfromfinancing activities transaction.

  47. 0 Common Stock Common Stockincreased by $8,000. ACCOUNTCommon Stock ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 16,000 Nov. 1 4,000 shares issued/cash 8,000 24,000

  48. 0 Analyzing the two accounts together, we can determine that the 4,000 shares were sold for $48,000. ACCOUNTPaid-in Capital in Excess of Par—Common Stock Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 80,000 Nov. 1 4,000 shares issued/cash 40,000 120,000

  49. 0 Issuing common stock affects equity; therefore, we have a positive $48,000 cash flows from financingactivitiesitem.

  50. 0 Bonds Payable Bonds Payable decreased by $50,000. ACCOUNTBonds Payable ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 150,000 June 30 Retired by payment of cash at face amount 50,000 100,000