1 Chapter 12 The Statement of Cash Flows A FEDERAL RESERVE NOTE THE UNITED STATES OF AMERICA THE UNITED STATES OF AMERICA L70744629F 12 12 12 12 L70744629F ONE DOLLAR ONE DOLLAR WASHINGTON, D.C. THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE SERIES 1985 H 293 Financial Accounting 4e by Porter and Norton
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1 Chapter 12 The Statement of Cash Flows Financial Accounting 4e by Porter and Norton.
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1
Chapter 12
The Statement of Cash Flows
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Financial Accounting 4e by Porter and Norton
2
Cash Flows and Net Income for Four Computer Companies in 2001
IBM
Sun Microsystems
Gateway, Inc.
Western Digital
Increase(Decrease) Net
Incomein Cash (Loss)
$ 2,767 $ 7,723
(377) 927
247 (1,034)
(16) (99)
(in millions)
3
Purpose of the Statement of Cash Flows
Explains changes in cash over a period of time
OperatingActivities
FinancingActivities
InvestingActivities
Summarizes cash inflows and outflows from:
4
Cash EquivalentsA
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
Readily convertible to cash
Little risk of price change
Original maturity to investor of three months or less
Examples:• Commercial paper• U.S. Treasury bills• Certain money market funds
Statement of Cash Flows FormatCash flows from operating activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by operating activities $ xxxCash flows from investing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by investing activities xxxCash flows from financing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $ xxxCash and cash equivalents at beginning of year xxxCash and cash equivalents at end of year $ xxx
Master T Account for Cash Flows from Operating Activities
28
Preparing the Statement of CashFlows: Direct Method
Step 3– Determine the cash flows from investing
activities
29
Long-Term Investments
Direct Method – Investing Activities
Review journal entries recorded during period:
Bal. Jan. 1 90,000
Bal. Dec. 31 120,000
From BalanceSheet
Purchases 30,000
Long-Term Investments 30,000 Cash 30,000
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
Property & Equipment
Direct Method – Investing Activities
Review journal entries recorded during period:
Bal. Jan. 1 280,000
Bal. Dec. 31 320,000
From BalanceSheet
Acquisitions 75,000
Property & Equipment 75,000 Cash 75,000
??? Disposals
32
Accumulated Depreciation
Direct Method – Investing Activities
Book value of equipment sold was $20,000. Original cost of equipment was $35,000.
75,000 Bal. Jan. 1
100,000 Bal. Dec. 31
From BalanceSheet
40,000 ExpenseDisposals 15,000
33
Cash Flows From Investing Activities
80,000 Net cash outflows
30,000 Purchase of investments
75,000 Purchase of property and equipment
Cash receipts from: Cash payments for: Sale of machine 25,000
Master T Account for Cash Flows from Investing Activities
34
Preparing the Statement of CashFlows: Direct Method
Step 4– Determine the cash flows from
financing activities
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
Payche
ck for
Date
Dept.
of Tre
asurer
Jane D
oe
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:
260,000 Bal. Jan. 1
200,000 Bal. Dec. 31
From BalanceSheet
Retirement 60,000
Loss on Retirement of Bonds 3,000Bonds Payable 60,000
Cash 63,000
37
Capital Stock
Direct Method – Financing Activities
Review journal entries recorded during period:
75,000 Bal. Jan. 1
100,000 Bal. Dec. 31
From BalanceSheet
25,000 Stock issued
Cash 25,000 Capital Stock 25,000
38
Retained Earnings
Direct Method – Financing Activities
Review journal entries recorded during period:
193,000 Bal. Jan. 1
246,000 Bal. Dec. 31
From BalanceSheet
120,000 Net income 2004
Retained Earnings 67,000 Cash 67,000
Cash dividends 67,000
39
Cash Flows From Financing Activities
Net cash inflows
Cash receipts from: Cash payments for:
• Debt Retirements• Dividends• Stock Repurchases
• Sale of Stock• Borrowings
Master T Account for Cash Flows from Financing Activities
Net cash outflows-OR-
40
Cash Flows From Financing Activities
105,000 Net cash outflows
63,000 Retirement of bonds
67,000 Payment of cash dividends
Cash receipts from: Cash payments for: Issuance of stock 25,000
Master T Account for Cash Flows from Financing Activities
41
Noncash Investing and Financing Activities
Disclose important financing and investing activities which do not require cash
Buy Assets through Debt Financing from Supplier
Exchange Stock for Assets
Certificate of Stock
Examples:
42
Statement of Cash Flows FormatCash flows from operating activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by operating activities $ xxxCash flows from investing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by investing activities xxxCash flows from financing activities:
Inflows $ xxxOutflows (xxx)
Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $ xxxCash and cash equivalents at beginning of year xxxCash 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
Cash Flows from Operating Activities
Conversion of accrual
to cash basis
44
Bal. Jan. 1 57,000
Bal. Dec. 31 63,000
Accounts Receivable
Net increase 6,000
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable (6,000)
Decrease $6,000
45
Bal. Jan. 1 92,000
Bal. Dec. 31 84,000
Inventory
8,000 Net decrease
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable (6,000)Decrease in inventory 8,000
Increase $8,000
46
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000
Increase $7,000
Accounts Payable
31,000 Bal. Jan. 1
38,000 Bal. Dec. 31
7,000 Net increase
47
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000)
Decrease $2,000
Salaries & Wages Payable
9,000 Bal. Jan. 1
7,000 Bal. Dec. 31
Net decrease 2,000
48
Indirect Method - Operating ActivitiesNet cash flows from operating activities:
Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000
Decrease $6,000
Prepaid Insurance
Bal. Jan. 1 18,000
Bal. Dec. 31 12,000
6,000 Net decrease
49
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Increase in income taxes payable 3,000
Increase $3,000
Income Taxes Payable
5,000 Bal. Jan. 1
8,000 Bal. Dec. 31
3,000 Net increase
50
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Increase in income taxes payable 3,000Gain on sale of machine ( 5,000)Depreciation expense 40,000Loss on retirement of bonds 3,000
Add back noncash expense
Gain is not part of operating activities
Report entire outflow as a
financing activity
51
Cash Flow Adequacy
Measures company’s ability to meet principal and interest obligations
Creditors concerned with cash available to repay debts after company has replaced its long-term assets
Cash Flow from Operating Activities - Capital Expenditures . Avg. Debt Maturing over Next Five Years
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA
L70744629F
12
1212
12
L70744629F
ONE DOLLARONE DOLLAR
WASHINGTON, D.C.
THIS NOTE IS LEGAL TENDER
FOR ALL DEBTS, PUBLIC AND PRIVATE
SERIES
1985
H 293
52
Appendix
Accounting Tools:
A Work-Sheet Approach to the
Statement of Cash Flows
53
Indirect Method: Using a Work Sheet
Enter account balances
54
Indirect Method: Using a Work Sheet
Record investing &
financing activities
55
Indirect Method: Using a Work Sheet
Enter net income
56
Indirect Method: Using a Work Sheet
Enter noncash revenues or expenses
57
Indirect Method: Using a Work Sheet
Extend current assets& current liabilities
58
Indirect Method: Using a Work Sheet
Total columns
59
Indirect Method: Using a Work Sheet
Determine net cash inflow (outflow)
60
End of Chapter 12
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA