Chapter 14

1. Chapter 14 Statement of Cash Flows

2. 0 What does it do for us? 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.

3. Statement of Cash Flows • Cash flows from operating activities • Cash flows from investing activities • Cash flows from financing activities

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

5. Direct vs. Indirect • Cash receipts • Cash disbursements • Data is difficult to obtain/report on • Same result as indirect • Starts with Net Income • Adjusts for rev/exp that don’t have anything to do with cash • Most common b/c data is more available for reporting • Same result as direct

6. Indirect Method

7. 0 14-2 Comparative Balance Sheet 23 (Continued)

8. 0 14-2 Comparative Balance Sheet 24 (Concluded)

9. ACCOUNT Retained 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 14-2 Retained Earnings The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year. 25

10. 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 14-2 The net income of $108,000 is entered on the statement (or working papers). To statement 26

11. 0 14-2 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.

12. 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 14-2 The comparative balance sheet (Exhibit 4: Slides 23 and 24) 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 29

13. 0 14-2 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.

14. 0 14-2 Changes in Current Operating Assets and Liabilities Next, select current assets and current liabilitiesthat impact cash flows and determine their increases and decreases.

15. 0 14-2 Adjustments to Net Income (Loss) Using the Indirect Method 37

16. 0 14-2 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. 38

17. 0 14-2 Statement of Cash Flows—Indirect Method for Rundell Inc. (Operating Activities Section) 40 Same information as Slide 39, only in final form.

18. 0 14-2 Building By examining theBuilding account, we can determine that Rundell Inc. bought a building for $60,000 cash. ACCOUNTBuilding ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 200,000 Dec. 27 Purchased for cash 60,000 260,000 52

19. 0 14-2 Land The $45,000 decline in the Land account resulted from two separate transactions: a sale and a purchase. ACCOUNTLand ACCOUNT NO. Balance Date Item Debit Credit Debit Credit 2008 Jan. 1 Balance 125,000 June 8 Sold for $72,000 cash 60,000 65,000 Oct. 12 Purchased for $15,000 cash 15,000 80,000 54

20. 0 14-2 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. 45

21. 0 14-2 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 47

22. 0 14-2 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 48

23. 0 14-2 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 50

25. 0 14-3 Financial Analysis and Interpretation Free cash flow is a measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.

26. 0 14-3 Free Cash Flow Cash flow from operations Less: Investments in fixed assets to maintain current production Free cash flow Positive free cash flow is considered favorable. A company that has free cash flow is able to fund internal growth, retire debt, pay dividends, and enjoy financial flexibility.