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Chapter 12

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Chapter 12

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  1. Chapter 12 The Statement of Cash Flows Financial Accounting 4e by Porter and Norton

  2. IBM Sun Microsystems Gateway, Inc. Western Digital Increase (Decrease) Net Income in Cash(Loss) $ 2,767 $ 7,723 (377) 927 247 (1,034) (16) (99) Cash Flows and Net Income for Four Computer Companies in 2001 (in millions)

  3. Purpose of the Statement of Cash Flows • Explains changes in cash over a period of time • Summarizes cash inflows and outflows from: Operating Activities Investing Activities Financing Activities

  4. Readily convertible to cash • Little risk of price change • Original maturity to investor of three months or less 1 2 3 4 5 6 7 8 9 10 1 2 3 11 12 13 14 15 16 17 4 5 6 7 8 9 10 1 2 3 18 19 20 21 22 23 24 11 12 13 14 15 16 17 4 5 6 7 8 9 10 25 26 27 28 29 30 31 18 19 20 21 22 23 24 11 12 13 14 15 16 17 25 26 27 28 29 30 31 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Cash Equivalents • Examples: • Commercial paper • U.S. Treasury bills • Certain money market funds

  5. outflows Statement of Cash Flows Format Cash Classified by: Operating activities Investing activities Financing activities inflows = Beginning Cash+ = Ending Cash Increase or decrease in cash

  6. from balance sheets Statement of Cash Flows Format Cash flows from operating activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by operating activities $ xxx Cash flows from investing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $ xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $ xxx

  7. Incur Employee Salaries and Wages Sell Products and Services Incur Utility and other Operating Costs Operating Activities Cash transactions concerned with acquiring and selling products and services Make Inventory Purchases

  8. Purchase/Sell Long-Term Investments Buy/Sell Property, plant & equipment Investing Activities Cash transactions concerned with acquiring and disposing of long-term assets Purchase/Sell Intangible Assets (i.e. Patents, trademarks, etc.)

  9. Sell/Repurchase Stocks Borrow $/ Repay Loans Issue Dividends Date Dept. of Treasurer Jane Doe Paycheck for Financing Activities Cash transactions concerned with internal and external financing of the business Issue/Retire Bonds

  10. Operating Activities Investing Activities Long-Term Liabilities or Stockholders’ Equity Financing Activities Long-Term Assets Categorizing Cash Flow Activities Income Statement Transactions Current Assets and Current Liabilities

  11. Methods to ReportCash from Operating Activities • Direct Method • Indirect Method both methods arrive at same cash from operating activities • reports major classes of cash receipts and payments • adjusts net income to remove effect of accruals and deferrals

  12. Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities Preparing the Statement of CashFlows: Direct Method • Step 1 • Set up three master T accounts • Step 2 • Determine the cash flows from operating activities

  13. From Balance Sheet Accounts Receivable Bal. Jan. 1 57,000 Sales on account 670,000 Bal. Dec. 31 63,000 Direct Method - Operating Activities Review journal entries recorded during period: Accounts receivable 670,000 Sales (from income statement) 670,000 ??? Cash collections

  14. Direct Method - Operating Activities Review journal entries recorded during period: Accounts receivable 670,000 Sales (from income statement) 670,000 From Balance Sheet Accounts Receivable Bal. Jan. 1 57,000 664,000 Cash collections Sales on account 670,000 Bal. Dec. 31 63,000

  15. Direct Method - Operating Activities Review journal entries recorded during period: Cash 15,000 Interest Revenue 15,000 Interest Revenue 15,000 Interest earned and received

  16. From Balance Sheet Inventory Bal. Jan. 1 92,000 Bal. Dec. 31 84,000 Direct Method - Operating Activities Review journal entries recorded during period: Cost of Goods Sold (from Inc. Stmt.) 390,000 Inventory 390,000 390,000 Cost of goods sold Purchases on account ???

  17. Accounts Payable Direct Method - Operating Activities Review journal entries recorded during period: Inventory 382,000 Accounts Payable 382,000 From Balance Sheet 31,000 Bal. Jan. 1 382,000 Purchases Cash payments ??? 38,000 Bal. Dec. 31

  18. Accounts Payable Direct Method - Operating Activities Review journal entries recorded during period: Accounts Payable 375,000 Cash 375,000 From Balance Sheet 31,000 Bal. Jan. 1 382,000 Purchases Cash payments 375,000 38,000 Bal. Dec. 31

  19. Salaries and Wages Payable From Balance Sheet 60,000 Expense Direct Method - Operating Activities Review journal entries recorded during period: Salary and Wages Expense 60,000 Salaries and Wages Payable 60,000 9,000 Bal. Jan. 1 Cash payments ??? 7,000 Bal. Dec. 31

  20. Salaries and Wages Payable From Balance Sheet Direct Method - Operating Activities Review journal entries recorded during period: Salary and Wages Payable 62,000 Cash 62,000 9,000 Bal. Jan. 1 Cash payments 62,000 60,000 New unpaid wages 7,000 Bal. Dec. 31

  21. Direct Method - Operating Activities Review journal entries recorded during period: Depreciation Expense 40,000 Accumulated Depreciation 40,000 There is no effect on cash flow from depreciation.

  22. From Balance Sheet Prepaid Insurance Bal. Jan. 1 18,000 12,000 Expense Bal. Dec. 31 12,000 Direct Method - Operating Activities Review journal entries recorded during period: Insurance Expense 12,000 Prepaid Insurance 12,000 Cash payments ???

  23. From Balance Sheet Prepaid Insurance Bal. Jan. 1 18,000 Bal. Dec. 31 12,000 Direct Method - Operating Activities Review journal entries recorded during period: Prepaid Insurance 6,000 Cash 6,000 12,000 Expense Cash payments 6,000

  24. From Balance Sheet Interest Expense Bal. Jan. 1 0 Bal. Dec. 31 0 Direct Method - Operating Activities Review journal entries recorded during period: Interest Expense 15,000 Cash 15,000 15,000 Expense Cash payments 15,000

  25. Income Taxes Payable Direct Method - Operating Activities Review journal entries recorded during period: Income Taxes Expense 50,000 Income Taxes Payable 50,000 From Balance Sheet 5,000 Bal. Jan. 1 50,000 Expense Cash payments ??? 8,000 Bal. Dec. 31

  26. Income Taxes Payable Direct Method - Operating Activities Review journal entries recorded during period: Income Taxes Payable 47,000 Cash 47,000 From Balance Sheet 5,000 Bal. Jan. 1 50,000 Expense Cash payments 47,000 8,000 Bal. Dec. 31

  27. Master T Account for Cash Flows from Operating Activities Cash Flows From Operating Activities Cash receipts from: Cash payments for: 375,000 Inventory purchases 62,000 Salaries and wages 6,000 Insurance 15,000 Interest 47,000 Taxes Sales on account 664,000 Interest 15,000 Net cash inflows 174,000

  28. Preparing the Statement of CashFlows: Direct Method • Step 3 • Determine the cash flows from investing activities

  29. Direct Method – Investing Activities Review journal entries recorded during period: Long-Term Investments 30,000 Cash 30,000 From Balance Sheet Long-Term Investments Bal. Jan. 1 90,000 Purchases 30,000 Bal. Dec. 31 120,000

  30. Direct Method – Investing Activities Review journal entries recorded during period: Land 50,000 Notes Payable 50,000 No cash was involved in this transaction so it should be reported in a separate schedule instead of on the Statement of Cash Flows

  31. Direct Method – Investing Activities Review journal entries recorded during period: Property & Equipment 75,000 Cash 75,000 From Balance Sheet Property & Equipment Bal. Jan. 1 280,000 Acquisitions 75,000 ??? Disposals Bal. Dec. 31 320,000

  32. Accumulated Depreciation Direct Method – Investing Activities Book value of equipment sold was $20,000. Original cost of equipment was $35,000. From Balance Sheet 75,000 Bal. Jan. 1 40,000 Expense Disposals 15,000 100,000 Bal. Dec. 31

  33. Master T Account for Cash Flows from Investing Activities Cash Flows From Investing Activities Cash receipts from: Cash payments for: 30,000 Purchase of investments 75,000 Purchase of property and equipment Sale of machine 25,000 80,000 Net cash outflows

  34. Date Dept. of Treasurer Jane Doe Paycheck for Preparing the Statement of CashFlows: Direct Method • Step 4 • Determine the cash flows from financing activities

  35. Direct Method – Financing Activities Review journal entries recorded during period: Land 50,000 Notes Payable 50,000 No cash was involved in this transaction so it should be reported in a separate schedule instead of on the Statement of Cash Flows

  36. Bonds Payable Direct Method – Financing Activities Review journal entries recorded during period: Loss on Retirement of Bonds 3,000 Bonds Payable 60,000 Cash 63,000 From Balance Sheet 260,000 Bal. Jan. 1 Retirement 60,000 200,000 Bal. Dec. 31

  37. Capital Stock Direct Method – Financing Activities Review journal entries recorded during period: Cash 25,000 Capital Stock 25,000 From Balance Sheet 75,000 Bal. Jan. 1 25,000 Stock issued 100,000 Bal. Dec. 31

  38. Retained Earnings Direct Method – Financing Activities Review journal entries recorded during period: Retained Earnings 67,000 Cash 67,000 From Balance Sheet 193,000 Bal. Jan. 1 120,000 Net income 2004 Cash dividends 67,000 246,000 Bal. Dec. 31

  39. Master T Account for Cash Flows from Financing Activities Cash Flows From Financing Activities Cash receipts from: Cash payments for: • Sale of Stock • Borrowings • Debt Retirements • Dividends • Stock Repurchases Net cash inflows Net cash outflows -OR-

  40. Master T Account for Cash Flows from Financing Activities Cash Flows From Financing Activities Cash receipts from: Cash payments for: 63,000 Retirement of bonds 67,000 Payment of cash dividends Issuance of stock 25,000 105,000 Net cash outflows

  41. Examples: Exchange Stock for Assets Certificate of Stock Buy Assets through Debt Financing from Supplier Noncash Investing and Financing Activities • Disclose important financing and investing activities which do not require cash

  42. Statement of Cash Flows Format Cash flows from operating activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by operating activities $ xxx Cash flows from investing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows $ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $ xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $ xxx Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

  43. Indirect Method - Operating Activities Income Statement Conversion of accrual to cash basis Cash Flows from Operating Activities

  44. Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable (6,000) Accounts Receivable Bal. Jan. 1 57,000 Net increase 6,000 Decrease $6,000 Bal. Dec. 31 63,000

  45. Inventory Bal. Jan. 1 92,000 Bal. Dec. 31 84,000 Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable (6,000) Decrease in inventory 8,000 8,000 Net decrease Increase $8,000

  46. Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable ( 6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Accounts Payable 31,000 Bal. Jan. 1 7,000 Net increase 38,000 Bal. Dec. 31 Increase $7,000

  47. Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable ( 6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Salaries & Wages Payable 9,000 Bal. Jan. 1 Net decrease 2,000 7,000 Bal. Dec. 31 Decrease $2,000

  48. Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable ( 6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000 Prepaid Insurance Bal. Jan. 1 18,000 6,000 Net decrease Bal. Dec. 31 12,000 Decrease $6,000

  49. Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable ( 6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000 Increase in income taxes payable 3,000 Income Taxes Payable 5,000 Bal. Jan. 1 3,000 Net increase 8,000 Bal. Dec. 31 Increase $3,000

  50. Indirect Method - Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income: Increase in accounts receivable ( 6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000 Increase in income taxes payable 3,000 Gain on sale of machine ( 5,000) Depreciation expense 40,000 Loss on retirement of bonds 3,000 Add back noncash expense Report entire outflow as a financing activity Gain is not part of operating activities