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, Alternate 4e by Porter and Norton
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1 Chapter 12 The Statement of Cash Flows Financial Accounting, Alternate 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, Alternate 4e by Porter and Norton
2
Cash Flows and Net Income for Four Computer Companies in 2002
Dell Computer Corp.
IBM
Hewlitt-Packard Co.
Gateway, Inc.
Increase(Decrease) Net
Income in Cash (Loss)
$ 591 $2,122
(948) 3,579
6,995 (903)
(265) (298)
(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
Net cash provided by operating activities $ 174,000
26
Preparing the Statement of CashFlows: Direct Method
Step 3– Determine the cash flows from investing
activities by examining the long-term asset accounts and any additional info
27
Direct Method – Investing Activities
Long-Term Investments: The net increase of $30,000 matches the additional info given on the balance sheet and required the use of cash.
Land: The additional balance sheet info reveals that a note payable was issued.
No cash was involved in the land transaction so it should be reported in a separate schedule instead of on the Statement of Cash Flows
28
Direct Method – Investing Activities
Property and Equipment: The additional balance sheet info reveals that equipment was purchased for $75,000 and a machine was sold for $25,000.
Beginning property and equip. $280,000+ Acquisitions 75,000– Disposals (x)= Ending property and equip. $320,000
Solve for x. The cost of fixed assets sold = $35,000
29
Direct Method – Investing Activities
Accumulated Depreciation:
Beginning accum. depreciation $ 75,000
+ Depreciation expense 40,000
– Accum. depreciation on assets sold (x)
= Ending accum. depreciation $100,000
Solve for x. The accumulated depreciation on the assets disposed of during the year = $15,000
30
Cash inflows from:Sale of machine $ 25,000
Cash outflows from:Purchase of investment (30,000)Purchase of property and equip. (75,000)
Net cash used by investing activities $(80,000)
Schedule of Cash Flows from Investing Activities
31
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
32
Direct Method – Financing Activities
Notes payable: This increase is already shown on a supplemental schedule of noncash activities.
Bonds payable: Bonds with a face value of $60,000 are retired by paying $63,000.
33
Direct Method – Financing Activities
Capital stock was issued for cash
Retained earnings:
Beginning retained earnings $ 193,000+ Net income 120,000– Cash dividends (x)= Ending retained earnings $ 246,000Solve for x. Cash paid for dividends = $67,000
34
Cash inflows from:Issuance of stock $ 25,000
Cash outflows from:Retirement of bonds (63,000)Payment of cash dividends (67,000)
Net cash used by financing activities $(105,000)
Schedule of Cash Flows from Financing Activities
35
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:
36
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)
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Indirect Method - Operating Activities
Income Statement
Cash Flows from Operating Activities
Conversion of accrual
to cash basis
38
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable (6,000)Gain on sale of machine 5,000
Increase $5,000
Selling price of machine $25,000Book value of machine 20,000Gain on sale $ 5,000
40
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000
Decrease $8,000
From balance sheet:Inventory, 2003 $92,000Inventory, 2004 84,000
$ 8,000
41
Indirect Method - Operating Activities
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000
Increase $7,000
From balance sheet:Accts. payable, 2004 $38,000Accts. payable, 2003 31,000
$ 7,000
42
Indirect Method - Operating ActivitiesNet cash flows from operating activities:
Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000)
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000
Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Depreciation expense 40,000
Add back noncash expense
45
Indirect Method - Operating ActivitiesNet cash flows from operating activities:
Net income xx,xxxAdjustments to reconcile net income:
Increase in accounts receivable ( 6,000)Gain on sale of machine 5,000Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Depreciation expense 40,000Increase in income taxes payable 3,000
Increase $3,000
Inc. taxes payable, 2004 $8,000Inc. taxes payable, 2003 5,000
$3,000
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)Gain on sale of machine ( 5,000)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 3,000Depreciation expense 40,000Loss on retirement of bonds 3,000
Report entire outflow as a
financing activity
47
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
48
Appendix
Accounting Tools:
A Work-Sheet Approach to the
Statement of Cash Flows
49
Indirect Method: Using a Work Sheet
Enter account balances
50
Indirect Method: Using a Work Sheet
Record investing &
financing activities
51
Indirect Method: Using a Work Sheet
Enter net income
52
Indirect Method: Using a Work Sheet
Enter noncash revenues or expenses
53
Indirect Method: Using a Work Sheet
Extend current assets& current liabilities
54
Indirect Method: Using a Work Sheet
Total columns
55
Indirect Method: Using a Work Sheet
Determine net cash inflow (outflow)
56
End of Chapter 12
A
FEDERAL RESERVE NOTE
THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA