PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA 5 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Statement of Cash Flows Chapter 14
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
The term cash on the statement of cash flows refers broadly to both currency and cash equivalents.
Currency and Bank Accounts
Cash
Treasury Bills
Money Market Funds
Commercial Paper
Cash Equivalents
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Learning Objective 1
Classify cash inflows and outflows as relating to operating, investing, or financing activities.
14-8
Organizing a Statement of Cash Flows
Operating Operating ActivitiesActivities
Revenue and expense Revenue and expense transactions that affect transactions that affect
net income. net income.
Investing Activities
Acquiring or disposing of noncurrent assets.
Financing Activities
Borrowing from and repaying principal to
creditors and transactions with stockholders.
14-9
Organizing a Statement of Cash Flows
14-10
Operating Activities: Direct or Indirect Method?
Reconstructs the income statement on a cash basis
from top to bottom
Direct Method
Accrual net income is adjusted
to a cash basis; Used by 99%
Indirect Method
Both methods result in the exact same amount of cash provided by operating activities.
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The Indirect Method: A Three-Step Process Step 1
Step 2
Step 3
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Step 1: Add Depreciation Charges
Accumulated Depreciation is a noncash balance sheet account and we must adjust net income for all of the changes in the noncash balance sheet accounts that
have occurred during the period.
Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts
Report $1,200 net Report $1,200 net income in Operating income in Operating
Activities.Activities.
Report $200 Report $200 dividends paid in dividends paid in
Financing Activities.Financing Activities.
Account Activity for Retained Earnings
Beginning balance $2,000
Ending balance $3,000
Net income $1,200
14-19
Summary of Key Concepts
14-20
Summary of Key Concepts
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Learning Objective 2
Prepare a statement of cash flows using the indirect method to
determine the net cash provided by operating
activities.
14-22
Apparel, Inc. Financial Statements
14-23
Apparel, Inc. Financial Statements
14-24
An Example of a Statement of Cash Flows
In addition to the financial statements provided, assume the following:
1.The company sold a store that had an original cost of $15 million and accumulated depreciation of $10 million. The cash proceeds from the sale were $8 million. The gain on the sale was $3 million.
2.The company did not issue any new bonds during the year.
3.The company did not repurchase any of its own common stock during the year.
4.The company paid a cash dividend during the year.
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Operating Activities: Step 1
Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts
Beginning balance – Debits + Credits = Ending balance$561 million – $10 million + Credits = $654 million Credits = $654 million – $561 million + $10 million Credits = $103 million
The first step in computing Apparel’s net cash provided by operating activities is to add
depreciation to net income.
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Operating Activities: Step 2The second step in computing Apparel’s net cash provided by
operating activities is to analyze net changes in noncash balance sheet accounts that impact net income.
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Operating Activities: Step 3
The third step in computing Apparel’s net cash provided by operating activities is to adjust for
gains and losses included in net income.
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Operating Activities
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Investing Activities
Basic Equation for Asset Accounts
Beginning balance + Debits – Credits = Ending balance$1,394 million + Debits – $15 million = $1,517 million Debits = $1,517 million – $1,394 million + $15 million Debits = $138 million (cash outflow)
Report Report $8 million $8 million
cash inflow.cash inflow.
Report Report $138 million $138 million cash outflow.cash outflow.
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Financing Activities
Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts
Beginning balance – Debits + Credits = Ending balance $897 million – Debits + $140 million = $1,009 million $1,037 million = $1,009 million + Debits Debits = $28 million (cash outflow)
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Statement of Cash Flows
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Seeing the Big Picture
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Interpreting the Statement of Cash Flows
A statement of cash flows A statement of cash flows should be evaluated in the should be evaluated in the
context of a company’s context of a company’s specific circumstances.specific circumstances.
Useful information can also be Useful information can also be derived by examining the derived by examining the
relationships among numbers.relationships among numbers.
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Learning Objective 3
Compute free cash flow.
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Free Cash Flows
Free Cash Flow =Net Cash Provided by Operating Activities
- Capital Expenditures
- Dividends
Free cash flow measures a company’s ability to fund its capital expenditures and dividends from
its net cash provided by operating activities.
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Free Cash FlowsFree cash flow measures a company’s ability to fund its capital expenditures and dividends from
its net cash provided by operating activities.
Free Cash Flow =Net Cash Provided by Operating Activities
- Capital Expenditures
- Dividends
93$ = 259$ - 138$ - 28$
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Earnings Quality
Managers generally perceive that earnings are of higher quality when the earnings: 1.are not unduly influenced by inflation, 2.are computed using conservative accounting principles and estimates, and 3.are correlated with net cash provided by operating activities.