Title: Reporting the Statement of Cash Flows(refer to HOU
1Reporting the Statement of Cash Flows(refer to
HOUs)
Chapter
16
2Purpose 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?
3Importance 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?
4Measurement 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.
5Classifying Cash Flows
- The Statement of Cash Flows includes the
following three sections - Operating Activities
- Investing Activities
- Financing Activities
6Operating 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.
7Investing 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.
8Financing 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.
9Noncash 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.
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11There are two acceptable methods to determine
Cash Flows from Operating Activities Direct
Method Indirect Method
12Lets look at the Direct Method for preparing the
Cash Flows from Operating Activities section.
13Analyzing the Cash Account
Lets use this Cash account to prepare BG
Companys Statement of Cash Flows under the
Direct Method.
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15Lets look at the Indirect Method for preparing
the Cash Flows from Operating Activities section.
16Indirect 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.
17Indirect Method of Reporting Operating Cash Flows
Use this table when adjusting Net Income to
Operating Cash Flows.
18Indirect 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?
19Indirect MethodExample
For the indirect method, start with net income.
20Indirect MethodExample
Add noncash expenses such as depreciation,
depletion, amortization, or bad debt expense.
21Indirect MethodExample
22Indirect MethodExample
23Indirect MethodExample
If we used the Direct Method, we would get the
same 140,000 for Cash Provided by Operating
Activities.
24Lets prepare a Statement of Cash Flows for BG
Company using the Indirect Method.
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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.
27Add noncash expenses and losses. Subtract noncash
revenues and gains.
Then, analyze the changes in current assets and
current liabilities.
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29Now, lets complete the investing section.
30Now, lets complete the financing section.
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32CASE TWO
- Prepare a statement of cash flow using the
indirect method
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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.
35Add noncash expenses and losses. Subtract noncash
revenues and gains.
Then, analyze the changes in current assets and
current liabilities.
36Adjustments 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
37Accounts 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.
38Merchandise 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.
39Prepaid 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.
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41Adjustments for changes in current liabilities
- Increases in current liabilities are added to net
income - Decreases in current liabilities are subtracted
from net income
42Accounts 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.
43Interest 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.
44Income 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.
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46Adjustments 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.
47Adjustments for nonoperating items
- Nonoperating losses are added back to net income
- Nonoperating gains are subtracted from net income
48Loss 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.
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51Cash Flow from Investing
- (1) Identify changes in investing related
accounts. - (2) Report their cash flow effects.
52Cash 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
53Cash 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
54Now, lets complete the financing section.
55Cash Flow from Financing
- (1) Identify changes in financing related
accounts. - (2) Report their cash flow effects
56Cash 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
57Cash 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
58Cash 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
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60Analyzing Cash Sources and Uses
61Homework for Chap 16
- Ex 16-1, 16-2
- Problem 16-4A
62End of Chapter 16