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Reporting the Statement of Cash Flows(refer to HOU

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Title: Reporting the Statement of Cash Flows(refer to HOU


1
Reporting the Statement of Cash Flows(refer to
HOUs)
Chapter
16
2
Purpose of the Statement of Cash Flows
How does a company obtain its cash?
Where does a company spend its cash?
What explains the change in the cash balance?
3
Importance of Cash Flows
How did the business fund its operations?
Does the business have sufficient cash to pay its
debts as they mature?
Did the business borrow any funds or repay any
loans?
Did the business make any dividend payments?
4
Measurement of Cash Flows
Cash
Cash Equivalents
Currency
  • Short-term, highly liquid investments.
  • Readily convertible into cash.
  • So near maturity that market value is unaffected
    by interest rate changes.

5
Classifying Cash Flows
  • The Statement of Cash Flows includes the
    following three sections
  • Operating Activities
  • Investing Activities
  • Financing Activities

6
Operating Activities
  • Inflows
  • Receipts from customers.
  • Cash dividends received.
  • Interest from borrowers.
  • Other.
  • Outflows
  • Salaries and wages.
  • Payments to suppliers.
  • Taxes and fines.
  • Interest paid to lenders.
  • Other.

7
Investing Activities
  • Inflows
  • Selling long-term productive assets.
  • Selling equity investments.
  • Collecting principal on loans.
  • Other.
  • Outflows
  • Purchasing long-term productive assets.
  • Purchasing equity investments.
  • Purchasing debt investments.
  • Other.

8
Financing Activities
  • Inflows
  • Issuing its own equity securities.
  • Issuing bonds and notes.
  • Issuing short- and long-term liabilities.
  • Outflows
  • Pay dividends.
  • Purchasing treasury stock
  • Repaying cash loans.
  • Paying owners withdrawals.

9
Noncash Investing and Financing
  • Items requiring separate disclosure include
  • Retirement of debt by issuing equity securities.
  • Conversion of preferred stock to common stock.
  • Leasing of assets in a capital lease transaction.

10
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11
There are two acceptable methods to determine
Cash Flows from Operating Activities Direct
Method Indirect Method
12
Lets look at the Direct Method for preparing the
Cash Flows from Operating Activities section.
13
Analyzing the Cash Account
Lets use this Cash account to prepare BG
Companys Statement of Cash Flows under the
Direct Method.
14
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15
Lets look at the Indirect Method for preparing
the Cash Flows from Operating Activities section.
16
Indirect Method of Reporting Operating Cash Flows
Changes in current assets and current liabilities.
Losses and - Gains
Noncash expenses such as depreciation and
amortization.
97.5 of all companies use the indirect method.
17
Indirect Method of Reporting Operating Cash Flows
Use this table when adjusting Net Income to
Operating Cash Flows.
18
Indirect MethodExample
  • East, Inc. reports 125,000 net income for the
    year ended December 31, 2005.
  • Accounts Receivable increased by 7,500 during
    the year and Accounts Payable increased by
    10,000.
  • During 2005, East reported 12,500 of
    Depreciation Expense.

What is East, Inc.s Operating Cash Flow for 2005?
19
Indirect MethodExample
For the indirect method, start with net income.
20
Indirect MethodExample
Add noncash expenses such as depreciation,
depletion, amortization, or bad debt expense.
21
Indirect MethodExample
22
Indirect MethodExample
23
Indirect MethodExample
If we used the Direct Method, we would get the
same 140,000 for Cash Provided by Operating
Activities.
24
Lets prepare a Statement of Cash Flows for BG
Company using the Indirect Method.
25
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26
  • Additional Information for 2005
  • Net income was 105,000.
  • Cash dividends declared and paid were 40,000.
  • Bonds payable of 50,000 were redeemed for
    50,000 cash.
  • Common stock was issued for 35,000 cash.

27
Add noncash expenses and losses. Subtract noncash
revenues and gains.
Then, analyze the changes in current assets and
current liabilities.
28
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29
Now, lets complete the investing section.
30
Now, lets complete the financing section.
31
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32
CASE TWO
  • Prepare a statement of cash flow using the
    indirect method

33
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34
  • Additional Information for 2005
  • Net income was 38,000.
  • a. The accounts payable balances result from
    merchandise inventory purchases.
  • b. Purchased plant assets costing 70,000 by
    paying 10,000 cash and issuing 60,000 of bonds
    payable.
  • c. Sold plant assets with an original cost of
    30,000 and accumulated depreciation of 12,000
    for 12,000 cash, yielding a 6,000 loss.
  • d. Received cash of 15,000 from issuing 3,000
    shares of common stock.
  • e. Paid 18,000 cash to retire bonds with a
    34000 book value, yielding a 16000 gain.
  • f. Cash dividends declared and paid were 14,000.

35
Add noncash expenses and losses. Subtract noncash
revenues and gains.
Then, analyze the changes in current assets and
current liabilities.
36
Adjustments for changes in current assets and
current liabilities
  • Decreases in noncash current assets are added to
    net income
  • Increases in noncash assets are subtracted from
    net income

37
Accounts receivable
Accounts Receivable
Beg Bal 40,000
Sales 590,000
Cash receipts 570,000
End Bal 60,000
Increase in A/R balance from 40,000 to 60,000
indicates that the company collects less cash
than is reported in sales. The 20,000 is
subtracted from net income.
38
Merchandise Inventory
Merchandise inventory
Beg Bal 70,000
Cost of goods sold 300,000
Purchases 314,000
End Bal 84,000
Increase in merchandise inventory balance from
70,000 to 84,000 indicates that the company has a
larger amount of cash purchase than cost of goods
sold. The 14,000 increase is subtracted from net
income.
39
Prepaid expense
Prepaid expense
Beg Bal 4,000
Wages and other operating exp 216,000
Cash payment 218,000
End Bal 6,000
Increase in prepaid expense balance from 4,000 to
6,000 indicates the companys cash payments
exceed its recorded prepaid expense. The 2,000
increase is subtracted from net income.
40
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41
Adjustments for changes in current liabilities
  • Increases in current liabilities are added to net
    income
  • Decreases in current liabilities are subtracted
    from net income

42
Accounts payable
Accounts payable
Beg Bal 40,000 Purchases 314,000
Cash payment 319,000
End Bal 35,000
  • The decrease in A/P balance from 40,000 to 35,000
    indicates that cash payments to suppliers exceed
    purchases by 5,000 for the period. The 5,000 is
    subtracted from net income.

43
Interest payable
Interest payable
Beg Bal 4,000 Interest expense 7,000
Cash paid for interest 8,000
End Bal 3,000
  • The decrease in interest payable balance from
    4,000 to 3,000 indicates that cash paid for
    interest exceeds interest expense. The 1,000 is
    subtracted from net income.

44
Income tax payable
Income tax payable
Beg Bal 12,000 Income tax expense
15,000
Cash paid for taxes 5,000
End Bal 22,000
  • The increase in income tax payable balance from
    12,000 to 15,000 indicates that reported income
    tax taxes exceed the cash paid for tax. The
    10,000 is added to net income.

45
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46
Adjustments for operating items not providing or
using cash
  • Expenses with no cash outflows are added back to
    net income
  • Revenues with no cash inflows are subtracted from
    net income
  • Depreciation expense is the only operating item
    that has no effect on cash flows in the period.
    The 24,000 is added to net income.

47
Adjustments for nonoperating items
  • Nonoperating losses are added back to net income
  • Nonoperating gains are subtracted from net income

48
Loss on sale of plant assets
  • c.Sold plant assets with an original cost of
    30,000 and accumulated depreciation of 12,000
    for 12,000 cash, yielding a 6,000 loss.
  • The loss is not part of operating activities. The
    sale of plant assets is part of investing
    activities. Thus, the 6,000 loss is added back to
    net income.

49
  • e. Paid 18,000 cash to retire bonds with a
    34000 book value, yielding a 16000 gain.
  • A gain on retirement of debt is not part of
    operating activities, but financing activities.
    Thus, the 16,000 nonoperating gain is subtracted
    from net income.

50
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51
Cash Flow from Investing
  • (1) Identify changes in investing related
    accounts.
  • (2) Report their cash flow effects.

52
Cash Flow from Investing
  • b. Purchased plant assets costing 70,000 by
    paying 10,000 cash and issuing 60,000 of bonds
    payable.
  • Dr. Plant assets 70,000
  • Cr. Bonds payable 60,000
  • Cr. Cash
    10,000
  • Cash outflow for purchase of plant assets
    10,000

53
Cash Flow from Investing
  • C. Sold plant assets with an original cost of
    30,000 and accumulated depreciation of 12,000
    for 12,000 cash, yielding a 6,000 loss.
  • Dr. Cash
    12,000
  • Dr. Accumulated Dep. 12,000
  • Dr. Loss on sale of plant assets 6,000
  • Cr. Plant assets
    30,000
  • Cash inflow from sale of plant assets 12,000

54
Now, lets complete the financing section.
55
Cash Flow from Financing
  • (1) Identify changes in financing related
    accounts.
  • (2) Report their cash flow effects

56
Cash Flow from Financing
  • Analysis of noncurrent liabilities
  • e. Paid 18,000 cash to retire bonds with a
    34000 book value, yielding a 16,000 gain.
  • Dr. Bonds payable 34,000
  • Cr. Gain on retirement of debt 16,000
  • Cr. Cash
    18,000
  • Cash paid to retire bonds 18,000

57
Cash Flow from Financing
  • Analysis of equity
  • d. Received cash of 15,000 from issuing 3,000
    shares of common stock.
  • Dr. Cash 15,000
  • Cr. Common Stock
    15,000
  • Cash received from issuing stock 15,000

58
Cash Flow from Financing
  • f. Cash dividends declared and paid were 14,000.
  • Dr. Retained earnings 14,000
  • Cr. Cash
    14,000
  • Cash paid for dividends 14,000

59
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60
Analyzing Cash Sources and Uses
61
Homework for Chap 16
  • Ex 16-1, 16-2
  • Problem 16-4A

62
End of Chapter 16
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