Chapter 12 Statement of Cash Flows - PowerPoint PPT Presentation

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Chapter 12 Statement of Cash Flows

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Both methods arrive at the same total amount for 'Net cash' provided by operating activities. ... Determine Net Cash Provided/Used By Operating Activities ... – PowerPoint PPT presentation

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Title: Chapter 12 Statement of Cash Flows


1

Chapter 12
2
Chapter 12 Statement of Cash Flows
  • After studying Chapter 12, you should be able
    to
  • Indicate the primary purpose of the statement of
    cash flows.
  • Distinguish among operating, investing, and
    financing activities.
  • Explain the impact of the product life cycle on a
    company's cash flows.
  • Prepare a statement of cash flows using one of
    two approaches
  • (a) the indirect method, or
  • (b) the direct method.
  • Use the statement of cash flows to evaluate a
    company.

3
The Primary Purpose of the Statement of Cash
Flows Is...
  • To provide information about
  • cash receipts,
  • cash payments, and
  • the net change in cash resulting from
  • operating,
  • investing, and
  • financing activities of a company during a period.

4
Operating Activities...
  • Include
  • The cash effects of transactions that create
    revenues and expenses and
  • Enter into determination of net income.

5
Investing Activities...
  • Include
  • Purchasing and disposing of investments and
    productive long-lived assets using cash and
  • Lending money and collecting the loans.

6
Financing Activities...
  • Include
  • Obtaining cash from issuing debt and repaying the
    amounts borrowed and
  • Obtaining cash from stockholders and paying
    dividends.

7
Types of Cash Flows -Operating Activities
  • Cash inflows
  • From sale of goods or services
  • From interest on loans (interest received) and
    dividends on equity security investments
  • Cash outflows
  • To suppliers for inventory
  • To employees for services
  • To government for taxes
  • To lenders for interest
  • To others for expenses

8
Types of Cash Flows -Investing Activities
  • Cash inflows
  • From sale of property, plant, and equipment
  • From sale of debt or equity securities of other
    entities
  • From collection of principal on loans to other
    entities
  • Cash outflows
  • To purchase property, plant, and equipment
  • To purchase debt or equity securities of other
    entities
  • To make loans to other entities

9
Types of Cash Flows -Financing Activities
  • Cash inflows
  • From sale of equity securities (company's own
    stock)
  • From issuance of debt (bonds and notes)
  • Cash outflows
  • To stockholders as dividends
  • To redeem long-term debt or reacquire capital
    stock

10
Operating Activities - ALERT
  • Some cash flows relating to investing or
    financing activities are classified as operating
    activities. For example...
  • Receipts of investment revenue (interest and
    dividends) and
  • Payments of interest to lenders are classified as
    operating activities because these items are
    reported in the income statement.

11
Format of the Statement of Cash Flows
  • Three activities
  • operating
  • investing
  • financing
  • PLUS
  • noncash investing and financing activities

12
Statement of Cash Flows Helps Users Evaluate
  • 1. The entity's ability to generate future cash
    flows
  • 2. The entity's ability to pay dividends and meet
    obligations
  • 3. The reasons for the difference between net
    income and net cash provided (used) by operating
    activities
  • 4. The investing and financing transactions
    during the period

13
COMPUTER SERVICES COMPANY Comparative Balance
Sheet December 31, 2003
14
Income Statement and Additional Information
  • COMPUTER SERVICES COMPANY
  • Income Statement
  • For the Year Ended December 31, 2003
  • Revenues 85,000
  • Operating expenses 40,000
  • Income before income taxes 45,000
  • Income tax expense 10,000
  • Net income 35,000
  • Additional Information
  • (a) Examination of selected data indicates that a
    dividend of 15,000 was declared and paid during
    the year.
  • (b) The equipment was purchased at the end of
    2003. No depreciation was taken in 2003.

15
Indirect and Direct Methods
  • Convert net income from an accrual basis to a
    cash basis.
  • This conversion may be done by two
    methods
  • indirect
  • direct

16
Indirect and Direct Methods
  • Both methods arrive at the same total amount for
    Net cash provided by operating activities.
  • The methods differ in disclosing the items that
    make up the total amount.
  • The choice of methods affects only the operating
    activities section the investing and financing
    activities sections are the same.

17
Indirect Method
  • The indirect method is used extensively in
    practice.
  • Most companies favor the indirect method for the
    following reasons
  • it is easier to prepare
  • it focuses on the differences between net income
    and net cash flow from operating activities
  • it tends to reveal less company information to
    competitors.

18
Direct Method
  • The FASB prefers the direct method but allows the
    use of either method.
  • When the direct method is used, the net cash flow
    from operating activities as computed using the
    indirect method must also be reported in a
    separate schedule.

19
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20
Statement Of Cash Flows - Indirect Method
  • The transactions of Computer Services Company for
    the year ended 2003 are used to illustrate the
    preparation of a statement of cash flows .
  • Computer services Company started in January 1,
    2003, when it issued 50,000 shares of 1 par
    value common stock for 50,000 cash.
  • The company rented its office space and furniture
    and performed consulting services throughout the
    first year.

21
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22
Determine Net Cash Provided/Used By Operating
Activities
  • Adjust net income for items that did not affect
    cash.
  • Net income must be converted because earned
    revenues may include credit sales that have not
    been collected in cash and expenses incurred that
    may not have been paid in cash.

23
Determine Net Cash Provided/Used By Operating
Activities
  • Receivables, payables, prepayments, and
    inventories must be analyzed for their effects on
    cash.

24
Determine Net Cash Provided/Used By Operating
Activities
  • Computer Services Company had revenues of 85,000
    in its first year of operations.
  • However, CSC collected only 55,000 in cash.
    Accrual basis revenue was 85,000, cash basis
    revenue would be 55,000.
  • The increase in accounts receivable of 30,000
    must be deducted from net income.
  • If accounts receivable decrease, the decrease
    must be added to net income.

25
  • COMPUTER SERVICES COMPANY
  • Statement of Cash Flows--Indirect Method
    (Partial)
  • For the Year Ended December 31, 2003
  • Cash flows from operating activities
  • Net income 35,000
  • Adjustments to reconcile net income to
  • net cash provided by operating activities
  • Increase in accounts receivable (30,000)

26
Determine Net Cash Provided/Used By Operating
Activities
  • Accounts payable - When accounts payable increase
    during a year, operating expenses on an accrual
    basis are higher than they are on a cash basis.
  • For CSC, operating expenses reported in the
    income statement were 40,000.
  • Since Accounts Payable increased 4,000, 36,000
    (40,000 4,000) of the expenses were paid in
    cash.
  • To convert net income to net cash provided by
    operating activities, an increase in accounts
    payable must be added to net income, a decrease
    subtracted.

27
  • COMPUTER SERVICES COMPANY
  • Statement of Cash Flows--Indirect Method
    (Partial)
  • For the Year Ended December 31, 2003
  • Cash flows from operating activities
  • Net income 35,000
  • Adjustments to reconcile net income to
  • net cash provided by operating activities
  • Increase in accounts receivable (30,000)
  • Increase in accounts payable
    4,000 (26,000)
  • Net cash provided by operating activities
    9,000

28
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29
Determine Net Cash Provided/Used By Investing
and Financing Activities
  • No data are given for the increases in Equipment
    of 10,000 and Common Stock of 50,000. Assume
    any differences involve cash.
  • The increase in equipment is from a purchase of
    equipment for 10,000 cash. This purchase is
    reported as a cash outflow in the investing
    activities section.
  • The increase of common stock results from the
    issuance of common stock for 50,000 cash. It is
    reported as an inflow of cash in the financing
    activities section of the statement of cash flows.

30
COMPUTER SERVICES COMPANY Comparative Balance
Sheet December 31, 2003
31
Determine Net Cash Provided/Used By Investing
and Financing Activities
  • Reasons for the increase of 20,000 in the
    Retained Earnings.
  • Net income increased retained earnings by
    35,000. REPORTED IN THE OPERATING ACTIVITIES
    SECTION.
  • The additional information indicates that a cash
    dividend of 15,000 was declared and paid.
    REPORTED IN THE FINANCING ACTIVITIES SECTION.

32
  • COMPUTER SERVICES COMPANY
  • Statement of Cash Flows--Indirect Method
    (Partial)
  • For the Year Ended December 31, 2003
  • Cash flows from operating activities
  • Net income 35,000
  • Adjustments to reconcile net income to
  • net cash provided by operating activities
  • Increase in accounts receivable (30,000)
  • Increase in accounts payable
    4,000 (26,000)
  • Net cash provided by operating activities
    9,000
  • Cash flows from investing activities
  • Purchase of equipment (10,000)
  • Cash flows from financing activities
  • Issuance of Common Stock 50,000
  • Payment of cash dividends (15,000)
  • Net cash provided by financing activities
    35,000
  • Net increase in cash 34,000

33
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34
  • COMPUTER SERVICES COMPANY
  • Statement of Cash Flows--Direct Method
    (Partial)
  • For the Year Ended December 31, 2003
  • Cash flows from operating activities
  • Cash receipts from customers
    765,000
  • Cash payments
  • To supplier 550,000
  • For operating expenses
    158,000
  • For income taxes 48,000 756,000
  • Net cash provided by operating activities
    9,000

35
Free Cash Flow
  • Cash Provided By Operations
  • Capital Expenditures
  • Dividends Paid
  • Free Cash Flow

36

Assessing Liquidity, Solvency, and Profitability
Using Cash Flows
  • Rather than using numbers from the income
    statement for assessment purposes, we use numbers
    from the statement of cash flows.
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