C H A P T E R 13 Statement of Cash Flows. Learning Objective 1 Understand the purpose of a statement of cash flows.

C H A P T E R 13Statement of Cash Flows

Learning Objective 1

Understand the purpose of a statement of cash flows.

What Does The Statement ofCash Flows Do?

Summarizes a company’s cash flows for a period of time.

Explains how a company’s cash was generated and how that cash was used.

Complementary to the income statement.

Indicates ability of a company to generate income in the future.


Recognize the different types of information reported in the statement of cash flows.

What Are Cash Equivalents?

Short-term, highly liquid investments that can be converted easily into cash.

Examples:Treasury BillsMoney Market FundsCommercial Paper

The Flow of Cash

Cash paidfor operating

activities

Cash paidfor investing

activities

Cash paidfor financing

activities

outflows

Cash receivedfrom operating

activities

Cash receivedfrom investing

activities

Cash receivedfrom financing

activities

Cash andcash

equivalents

inflows

Match Classifications of Cash Flows

1.Transactions and events that enter into the determination of net income.2.Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.3.Transactions and events whereby resources are obtained from, or repaid to, owners and creditors.

Operating Activities

Financing Activities

Investing Activities

Operating

Activities



Statement of Cash Flows

Cash

Cash Inflows




CashCash Outflows

Statement of Cash Flows




Cash Inflow

• Sale of goods orservices

• Sale of investmentsin trading securities

• Interest revenue

• Dividend revenue

Cash Outflow

• Inventory payments

• Interest payments

• Wages

• Utilities, rent

• Taxes

What Items Are Classified as Operating Activities?


Cash Inflow• Sale of plant

assets

• Sale of securities, other than trading securities

• Collection of principal on loans

Cash Outflow• Purchase of plant

assets

• Purchase of securities, other than trading securities

• Making of loans to other entities

Cash Inflow• Issuance of own

stock

• Borrowing

Cash Outflow• Dividend

payments

• Repaying principal on borrowing

• Treasury stock purchase


Define Noncash ItemsNoncash items are items included in the determination of net income on an accrual basis that do not affect cash; examples are depreciation and amortization.


Prepare a simple statement of cash flows.

What is the Format ofthe Statement of Cash Flows?

Cash provided by (used in): Operating activities $XXX Investing activities XXX Financing activities XXXNet increase (decrease) in cash $XXXCash—beginning of year XXXCash—end of year $XXX

A Simple ExampleRed Bull CorporationTrial Balance, 1/1/03

Debit CreditCash $ 500Accounts Receivable 1,300Property, Plant &Equipment

500

Accumulated Depreciation $ 350Accounts Payable 1,100Long-Term Debt 250Common Stock 300Retained Earnings 300Totals $2,300 $2,300

A Simple Example

1. Sales on account, $1,3002. Collections on account, $1,8003. Paid accounts payable, $1,0004. Paid long-term debt, $1005. Issued stock at par value, $2006. Paid interest on debt, $507. Sold equipment, $100 (original cost, $250, accumulated depreciation, $225)

The following transactions were conducted by Red Bull Corp during 2003:

Record the appropriate journal entries.

Accounts Receivable . . . . . . . . . . . . . . 1,300Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800Accounts Receivable . . . . . . . . . . . . . . 1,800

Accounts Payable . . . . . . . . . . . . . . . . . 1,000Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000

Long-Term Debt . . . . . . . . . . . . . . . . . . 100Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Common Stock . . . . . . . . . . . . . . . . . . . 200

Interest Expense . . . . . . . . . . . . . . . . . . 50Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Accumulated Depreciation . . . . . . . . . . 225

Property, Plant, & Equipment . . . . . . . . 250Gain on Sale of Equipment . . . . . . . . . . 75

A Simple Example

A Simple ExampleRed Bull Corporation

Trial Balance, 12/31/03

Debit CreditCash $1,450Accounts Receivable 800Property, Plant &Equipment 250Accumulated Depreciation $ 125Accounts Payable 100Long-Term Debt 150Common Stock 500Retained Earnings 1,625Totals $2,500 $2,500

STATEMENT OF CASH FLOWS

Operating activities:Collections on account. . . . . . . . . . . . . $ 1,800 Payment of accounts payable . . . . . . . $1,000

Payment for interest . . . . . . . . . . . . . . . 50 (1,050)Cash flows from operating activities. . . $ 750

Investing activities:Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100

Financing activities:Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)

Cash flows from financing activities . . . 100

A Simple Example

A Simple Example

Statement of Cash Flows (continued)

Net increase in cash. . . . . . . . . . . . . . . . $ 950

Beginning cash balance. . . . . . . . . . . . . 500

Ending cash balance . . . . . . . . . . . . . . . $1,450


Analyze financialstatements to prepare astatement of cash flows.

6-Step Process for Preparing a Statement of Cash Flows

1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.

2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.

3. Analyze the long-term assets to identify the cash flow effects of investing activities.

4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.

5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.

6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

Example: Change in Cash

Red Bull Corporation

Beginning cash balance. . . . . . . . . . . . . $ 500Ending cash balance . . . . . . . . . . . . . . . 1,450Net increase in cash. . . . . . . . . . . . . . . . $ 950

Cash Flow Statements—MatchA method of reporting net cash flows from operations that shows the major classes of cash receipts and payments for a period of time.A method of reporting net cash flows from operations that involves converting accrual-basis net income to a cash basis.

Indirect Method

Direct Method








Income Statement Conversion

Income Statement Adjustments

Cash Flows from

Operations

Sales $1,300 +500 $1,800

Accounts payable -1,000 (1,000)

Interest expense (50) No change (50)

$1,250 -500 net adjustment $ 750









Red Bull Corporation sells a piece of equipment for $100 during the year. The T-accounts relating to the equipment and the associated depreciation are given as follows.

PP&E

500

?

250

Acc. Dep.

350 ?

125

PP&E

500

250

250

Acc. Dep.

350225

125


From the preceding T-Accounts make Red Bull Corporation’s journal entries relating to Property, Plant, & Equipment for the year:

Cash. . . . . . . . . . . . . . . . . . . . . . . . 100Accumulated Depreciation. . . . . . . 225

Property, Plant, & Equipment . . 250Gain on Sale of Equipment . . . . 75

Investing ActivitiesRecord the investing activities section of Red Bull Corporation’s statement of cash flows:

Investing activities:Proceeds from sale of PP&E . . . . . . .$ 100 Cash flows from investing activities . . $ 100









Red Bull Corporation’s financing activities section of its statement of cash flows is as follows:

Financing activities:Issued stock. . . . . . . . . . . . . . . . . . . . . .$ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)Cash flows from financing activities . . . $ 100








STATEMENT OF CASH FLOWS

Operating activities:Collections on account. . . . . . . . . . . . . $1,800 Payment of accounts payable . . . . . . . $1,000

Payment for interest. . . . . . . . . . . . . . . 50 (1,050)Cash flows from operating activities. . . 750

Investing activities:Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100

Financing activities:Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)

Cash flows from financing activities . . . 100 Net increase in cash. . . . . . . . . . . . . . . . . $950 Beginning cash balance. . . . . . . . . . . . . . 500 Ending cash balance . . . . . . . . . . . . . . . . $1,450

A Simple Example








Define Noncash TransactionsNoncash transactions are investing and financing activities that do not affect cash; if significant, they are disclosed below the statement of cash flows or in the notes to the financial statements.


Use information from thestatement of cash flowsto make decisions.

Cash Flows from

Operating

Cash Flows from

Investing

Cash Flows from

Financing

General Explanation

1. + + + Building up pile of cash. Possibly looking for acquisition.

2. + – –

Operating cash flow being used to buy fixed assets and pay down debt.

3. + + – Operating cash flow and sale of fixed assets being used to pay down debt.

4. + – + Operating cash flow and borrowed money being used to expand.

Analysis of Statement of Cash Flows

continued

Cash Flowsfrom

Operating

Cash Flowsfrom

Investing

Cash Flowsfrom

Financing

GeneralExplanation

5. – + +Operating cash flowproblems covered by saleof fixed assets, borrowing,and contributions.

6. – – +Rapid growth, short falls inoperating cash flow, andpurchase of fixed assets.

7. – + –Sale of fixed assets isfinancing operating cashflow shortages.

8. – – –Company is using cashreserves to finance cashflow short falls and paycreditors.

Analysis of Statement of Cash Flows

C H A P T E R 13 Statement of Cash Flows. Learning Objective 1 Understand the purpose of a statement of cash flows.

Documents

cash examples

simple statement of

cash equivalents

companys cash flows

income statement

statement ofcash flows

simple example1

accounts receivable1