Plain Background Power Point Slides Chapter 12 the Statement of Cash Flows2948
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The Statement of CashFlows
Chapter 12
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Objective 1
Identify the purposes of thestatement of cash flows.
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Reports the entitys cash flows(cash receipts and cash
payments) during the period
Basic Concepts
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Purposes of the Statement
of Cash Flows1. Predict future cash flows2. Evaluate management decisions
3. Determine the ability to paydividends to stockholders andpayments to creditors
4. Show the relationship of netincome to the businesss cashflows
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What is Cash?
Cash on hand
Cash in the bank
Cash equivalents - highly liquid,short-term investments that can beconverted into cash with little delay
Money-market investments
U.S. Government Treasury bills
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Objective 2
Distinguish among operating,investing, and financing cash
flows.
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Operating, Investing, and
Financing ActivitiesOperating activities create
revenues, expenses, gains, and
losses.Investing activities increase and
decrease long-term assets.
Financing activities obtain cashfrom investors and creditors.
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Two Formats for
Operating ActivitiesIndirect method reconciles from net
income to net cash provided by
operating activitiesDirect method reports all cash
receipts and cash payments fromoperating activities
The two methods have no effect oninvesting or financing activities.
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Two Formats for
Operating ActivitiesIndirect Method
Net income $XXXAdjustments:
Depreciation, etc. XXXNet income provided by operating activities $XXX
Direct Method
Collection from customers $XXXDeductions:Payment to suppliers, etc. XXXNet income provided by operating activities $XXX
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Objective 3
Prepare a statement of cashflows by the indirect method.
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The Indirect Method:
Operating ActivitiesPositive Items
Net incomeDepreciation/amortization
Loss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilities
Negative Items
Net lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities
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The Indirect Method:
Investing ActivitiesPositive ItemsSale of plant assetsSale of investments that are not cash equivalents
Collections of loans receivable
Negative Items
Acquisition of plant assetsPurchase of investments that are not cash
equivalentsMaking loans to others
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The Indirect Method:
Financing ActivitiesPositive Items
Issuing stockSelling treasury stock
Borrowing money
Negative Items
Payment of dividendsPurchase of treasury stockPayment of principal amounts of debts
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Comparative Balance Sheets
Assets
Current:Cash
Accounts receivableInterest receivableInventoryPrepaid expenses
Long-term receivablePlant assets, net
Total
$ 22933
1358
11453
$725
$ 42801
1387
219
$487
$ (20)132
(3)1
11234
$238
(In thousands) 20x2 20x1 Inc/dec)
Anchor Corporation December 31
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Comparative Balance Sheets
Liabilities
Current:Accounts payableSalary payable
Accrued liabilitiesLong-term debtStockholders equityCommon stockRetained earnings
Total
$ 91341
160
359110
$725
$ 5763
77
25886
$487
$ 34(2)(2)83
10124
$238
(In thousands) 20x2 20x1 Inc/dec)
Anchor Corporation December 31
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Income Statement
Revenues and gains:Sales revenue $284Interest revenue 12
Dividend revenue 9Gain on sale of plant assets 8Total revenues and gains $313
Anchor CorporationYear Ended December 31, 20x2
(In thousands)
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Expenses:Cost of goods sold $150Salary and wage expense 56Depreciation expense 18Other operating expense 17Interest expense 16Income tax expense 15Total expenses $272
Income Statement
Anchor CorporationYear Ended December 31, 20x2
(In thousands)
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Total revenues and gains $313Total expenses 272
Net income $ 41
Income Statement
Anchor CorporationYear Ended December 31, 20x2
(In thousands)
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Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
Cash flows from operating activities:Net Income $41
Adjustments to reconcile net income tonet cash provided by operating activities:
A Depreciation 18B Gain on sale of plant (8)
Statement of Cash Flows:
Operating ActivitiesDepreciation does not affectcash, but it decreases netincome add it back in.
Sales of long-term assets areinvesting
Activities remove gains fromnet income.
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C Increase in accounts receivable (13)C Increase in interest receivable (2)C Decrease in inventory 3C Increase in prepaid expenses (1)C
Increase in accounts payable 34C Decrease is salary payable (2)C Decrease in accrued liabilities (2) 27Net cash provided by operating activities $68
Statement of Cash Flows:
Operating ActivitiesStatement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
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Changes in Current Asset and
Current Liability Accounts C1. An increase in a current asset other
than cash indicates a decrease in cash.
2. A decrease in a current asset otherthan cash indicates an increase in cash.
3. A decrease in a current liability
indicates a decrease in cash.4. An increase in a current liability
indicates an increase in cash.
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Statement of Cash Flows:
Investing Activities
Cash flows from investing activities:Acquisition of plant assets $(306)Loan to another company (11)Proceeds from sale of plant assets 62
Net cash used for investing activities $(255)
Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
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Statement of Cash Flows:
Financing Activities
Cash flows from financing activities:Proceeds from issuance of common stock $101Proceeds from issuance of long-term debt 94Payment of long-term debt (11)
Payment of dividends (17)Net cash provided by financing activities $167
Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
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Statement of Cash Flows
Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $ (20)
Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22
Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
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Computing Acquisition and
Sales of Plant AssetsAnchor had plant assets, net of
depreciation, of $219,000 at the
beginning of the year and$453,000 at year end. Theacquisition of plant assets
amounted to $306,000 duringthe year.
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Computing Acquisition and
Sales of Plant AssetsThe income statement shows
depreciation expense of
$18,000 and an $8,000 gain onsale of plant assets. What is thebook value of the assets sold?
Beginning balance + Acquisitions Depreciation Book value of assets sold= Ending balance
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Computing Acquisition and
Sales of Plant Assets$219,000 + 306,000 18,000 X = $453,000
How much are the proceeds
from the sale of plant assets?
X = $219,000 + 306,000 18,000 453,000X = $54,000 (book value)
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Computing Acquisition and
Sales of Plant Assets
Book value + Gain Loss = Sale proceeds
$54,000 + $8,000 0 = $62,000
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Computing Acquisition and
Sales of Plant AssetsPlant Assets (Net)
Beginning bal. 219,000
Acquisitions 306,000
Ending bal. 453,000
Depreciation 18,000
Book val. 54,000
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Computing Acquisition and
Sales of InvestmentsBeginning balance + Purchases
Book value ofinvestment sold
= Ending balance
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Computing Issuances and
Payments of Long-Term Debt
Beginning balance was $77,000.
New debt amounting to $94,000was incurred during the year.
The ending balance for the Long-Term
Debt account was $160,000.How much was the payment?
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Computing Issuances and
Payments of Long-Term Debt
Long-Term Debt
Beginning bal. 77,000New debt 94,000Payments 11,000
Ending bal. 160,000
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Computing Issuances of Stock:
Purchases of Treasury Stock
Beginning balance of common stock +Issuance of new stock= Ending balance
Beginning balance of treasury stock +Purchase of treasury stock= Ending balance
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Computing Dividend Payments
Retained earnings beginning balance +Net income Dividends declared
= Ending balance$86,000 + $41,000 X = $110,000
X = $110,000 $86,000 $41,000
X = $17,000
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Noncash Investing andFinancing Activities
Suppose Anchor Corporation issuedCommon stock valued at $300,000
to acquire a warehouse.
Warehouse Building 300,000
Common Stock 300,000
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Noncash Investing andFinancing Activities
Noncash Investing and Financing Activities: (000)Acquisition of building by issuing common
stock $300 Acquisition of land by issuing note payable 70Payment of long-term debt by issuing
common stock 100
Total noncash investing and financingactivities $470
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Learning Objective 4
Prepare a statement of cashflows by the direct method.
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The Direct Method
The FASB has expressed apreference for the direct method
Provides clearer informationabout the sources and uses of acompanys operating cash
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Cash flows from operating activities:Receipts:Collections from customers $271
Interest received on notes receivable 10Dividends received on investments in stock 9Total cash receipts $290
Statement of Cash FlowsYear Ended December 31, 20x2
(In thousands)
The Direct Method
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Payments:To suppliers $133To employees 58For interest 16
For income tax 15Total payments 222Net cash provided by operating
activities $ 68
The Direct Method
Statement of Cash FlowsYear Ended December 31, 20x2
(In thousands)
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Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $(20)
Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22
The Direct Method
Statement of Cash FlowsYear Ended December 31, 20x2 (In thousands)
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Cash Flows fromOperating Activities
Cash collections from customers
Cash receipts of interest
Cash receipts of dividends Payments to suppliers
Payments to employees
Payments for interest and incometax expense
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Purchases of plant assets;investments in, and loans to,
other companiesProceeds from the sale of plant
assets and investments; andthe collections of loans
Cash Flows fromInvesting Activities
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Proceeds from the issuance ofstock and debt
Payment of debt and purchasesof the companys own stock
Payment of cash dividends
Cash Flows fromFinancing Activities
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Computing Cash Collectionsfrom Customers
Beginning accounts receivable balance
+ Sales on account Collections= Ending accounts receivable balance
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Computing Paymentsto Suppliers
Step 1: How much were thepurchases?
Beginning inventory + Purchases Costof goods sold = Ending Inventory
$138,000 + X $150,000 = $135,000
X = $150,000 $138,000 + $135,000
X = $147,000
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Computing Paymentsto Suppliers
Accounts Payable
Payments for inventoryBeg. balance 57,000Purchases 147,000
End. balance 91,000
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Computing Paymentsto Suppliers
Step 2: How much did the businesspay for this inventory?
Beginning Accounts Payable + Purchases Payments = Ending Accounts Payable
$57,000 + $147,000 X = $91,000
X = $57,000 + $147,000 $91,000X = $113,000
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Computing Payments forOperating Expenses
Beginning prepaid expense + Payments Expiration of prepaid expense
= Ending balanceBeginning accrued liabilities + Accrual of
expense at year end Payments= Ending balance
Accrual ofother operating expenses at year end+ Expiration of prepaid expense + Payments
= Ending balance
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Computing Payments toEmployees
Salary Payable was $6,000 at thebeginning of the year and $4,000 at
year end. During the year, SalaryExpense was $56,000. How muchdid the business pay?
$58,000
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Measuring Cash Adequacy:Free Cash Flow
The amount of cash available fromoperations after paying for planned
investments in plant, equipment,and other long-term assets.
Net cash flow from operating activities
Cash outflow earmarked for investments inplant, equipment, and other long-term assets
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End ofChapter 12
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