Transcript LO 3
12-1 Copyright ©2015 Pearson Education Inc. All rights reserved. Prepared by Coby Harmon University of California, Santa Barbara Westmont College Learning Objective 1. Identify the purposes of the statement of cash flows 12-2 Copyright ©2015 Pearson Education Inc. All rights reserved. IDENTIFY THE PURPOSES OF THE STATEMENT OF CASH FLOWS Statement of cash flows 12-3 Reports cash flows Cash receipts Cash payments Covers a span of time (month, quarter, year) Includes cash equivalents Copyright ©2015 Pearson Education Inc. All rights reserved. LO 1 IDENTIFY THE PURPOSES OF THE STATEMENT OF CASH FLOWS Serves these purposes: 12-4 Predicts future cash flows Evaluates management decisions Determines ability to pay dividends and interest Shows relationship of net income to cash flows Copyright ©2015 Pearson Education Inc. All rights reserved. LO 1 Timing of the Financial Statements 12-5 Copyright ©2015 Pearson Education Inc. All rights reserved. Exhibit 12-1 LO 1 Learning Objective 2. Distinguish among operating, investing, and financing activities 12-6 Copyright ©2015 Pearson Education Inc. All rights reserved. DISTINGUISH AMONG OPERATING, INVESTING, AND FINANCING ACTIVITIES Three types of business activities: Operating Investing Financing 12-7 Create revenue, expenses, gains and losses—net income Cash flows related to long-term assets Cash flows related to long-term liabilities and owners’ equity Copyright ©2015 Pearson Education Inc. All rights reserved. LO 2 DISTINGUISH AMONG OPERATING, INVESTING, AND FINANCING ACTIVITIES Exhibit 12-2 | How Operating, Investing, and Financing Activities Affect the Balance Sheet 12-8 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 2 Two Formats for Operating Activities Indirect Direct 12-9 Reconciles from net income to net cash provided by operating activities Reports all cash receipts and cash payments from operating activities Copyright ©2015 Pearson Education Inc. All rights reserved. LO 2 Learning Objective 3. Prepare a statement of cash flows by the indirect method 12-10 Copyright ©2015 Pearson Education Inc. All rights reserved. Exhibit 12-3 | Part 1 PREPARE A STATEMENT OF CASH FLOWS BY THE INDIRECT METHOD LO 3 12-11 Copyright ©2015 Pearson Education Inc. All rights reserved. INDIRECT METHOD Operating Activities Positive Items Negative Items Net income Net loss Depreciation and Gain on sale of long-term amortization assets Loss on sale of long-term assets other than cash Decreases in current assets other than cash 12-12 Increase in current assets Decrease in current liabilities Increase in current liabilities Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 INDIRECT METHOD Investing Activities Positive Items Negative Items Sale of plant assets Acquisition of plant assets Sale of investments that are Purchase of investments not cash equivalents Collections of loans receivable 12-13 that are not cash equivalents Making loans to others Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 INDIRECT METHOD Financing Activities Positive Items 12-14 Negative Items Issuing stock Payment of dividends Selling treasury stock Purchase of treasury stock Borrowing money Payment of principal amounts of debts Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 PREPARE A STATEMENT OF CASH FLOWS BY THE INDIRECT METHOD To illustrate the statement of cash flows, we use The Roadster Factory, Inc. (TRF), a dealer in auto parts for sports cars. Using the comparative balance sheets for 2014 and 2013 and the income statement for 2014, prepare the statement of cash flows using the indirect method. 12-15 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Exhibit 12-4 12-16 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Exhibit 12-5 12-17 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Cash Flows from Operating Activities Transactions that make up net income From the income statement Net income Depreciation, depletion and amortization expense Gains and losses on sales of long-term asset From the comparative balance sheets Increase or decrease in each current asset (other than cash) 12-18 Increase or decrease in each current liability Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Cash Flows Template: Operating Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: 12-19 + Depreciation/depletion/amortization expense + Loss on sale of long-term assets - Gain on sale of long-term assets - Increases in current assets other than cash + Decreases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities = Net cash provided by (used for) operating activities Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: From the Income Statement Net cash provided by (used for) operating activities 12-20 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Depreciation, Depletion, and Amortization Added back to net income to convert net income to cash flow No effect on cash, decreases net income Add-back cancels the deduction on the income statement The Roadster Factory, Inc. (TRF) reports Depreciation Expense of $18,000 on their 2014 income statement (Exhibit 12-5) 12-21 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 18,000 From the Income Statement Net cash provided by (used for) operating activities 12-22 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Gains and Losses on Sale of Long-Term Assets Gain or loss is an adjustment to net income The Roadster Factory sold equipment for $62,000. The book value was $54,000, so there was a gain of $8,000. Net income also includes the gain Must subtract gain from operating activities as it is included in $62,000 reported in investing section ($54,000 + $8,000 = $62,000) 12-23 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 18,000 Gain on sale of plant assets (8,000) From the Income Statement Net cash provided by (used for) operating activities 12-24 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Changes in Current Assets and Current Liabilities, Excluding Cash 1. An increase in a noncash current asset decreases cash Accounts receivable increased $15,000 Sales revenue includes $15,000 not collected in cash Subtract from net income in operating section Prepaid expenses increased by $1,000, cash decreases 12-25 Paid cash of $1,000 not deducted from net income Subtract from net income in operating section Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 18,000 Gain on sale of plant assets (8,000) Increase in accounts receivable Increase in prepaid expense (15,000) (1,000) Net cash provided by (used for) operating activities 12-26 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Changes in Current Assets and Current Liabilities, Excluding Cash 2. An decrease in a noncash current asset increases cash Inventory decreased $3,000 Decrease causes increase in Cost of Goods Sold, decrease in net income, but no corresponding decrease in cash 12-27 Add to net income in operating section Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 18,000 Gain on sale of plant assets (8,000) Increase in accounts receivable (15,000) Increase in prepaid expense (1,000) Decrease in inventory 3,000 Net cash provided by (used for) operating activities 12-28 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Changes in Current Assets and Current Liabilities, Excluding Cash 3. An increase in a current liability increases cash Accounts payable increased $34,000 Cash was not spent to pay this debt Cash payments are therefore less than expenses, and TRF has more cash on hand 12-29 Increases in current liabilities increase cash Add to net income in operating section Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 18,000 Gain on sale of plant assets (8,000) Increase in accounts receivable (15,000) Increase in prepaid expense (1,000) Decrease in inventory 3,000 Increase in accounts payable 34,000 Net cash provided by (used for) operating activities 12-30 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Changes in Current Assets and Current Liabilities, Excluding Cash 4. An decrease in a current liability decreases cash Salary and wages payable decreased $2,000 and Accrued liabilities decreased by $2,000 12-31 Payment of a current liability decreases cash but does not affect net income Subtract from net income in operating section Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 The Roadster Factory, Inc. (TRF) Partial Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2014 Cash Flows From Operating Activities Net income $50,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 18,000 Gain on sale of plant assets (8,000) Increase in accounts receivable Increase in prepaid expense (1,000) Decrease in inventory 3,000 Increase in accounts payable 34,000 Decrease in salary and wages payable (2,000) Decrease in accrued liabilities (2,000) Net cash provided by operating activities 12-32 (15,000) Copyright ©2015 Pearson Education Inc. All rights reserved. $77,000 LO 3 Cash Flows from Investing Activities Transactions that affect long-term assets Increases in these accounts represent purchase Decreases to cash Decreases to these accounts represent sales 12-33 Plant Assets, Investments, and Notes Receivable Increases to cash Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Cash Flows Template: Investing Cash Flows From Investing Activities 12-34 + Sale of long-term assets - Purchases of long-term assets + Collections of note receivable - Loans to others = Net cash provided by (used for) investing activities Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Purchases and Sales of Plant Assets For computing cash flows, it is helpful to combine all the plant assets into a single summary account Plant Assets, Net Beginning 219,000 18,000 Depreciation expense Acquisitions 196,000 54,000 Book value of assets sold Ending balance 343,000 Calculating the proceeds from the sale of plant assets Book value $54,000 12-35 + Gain + $8,000 – loss = Proceeds – $0 = $62,000 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Purchases and Sales of Investments and Loans Investments Beginning 100,000 Purchases 50,000 Ending balance 10,000 Book value invest. sold 140,000 Notes Receivable Beginning 0 New loans made 21,000 Ending balance 21,000 12-36 0 Copyright ©2015 Pearson Education Inc. All rights reserved. Collections LO 3 Cash Flows from Financing Activities Transactions affecting liabilities and stockholders’ equity Notes Payable, Bonds Payable, Long-Term Debt, Common Stock, Paid-in Capital in Excess of Par, and Retained Earnings 12-37 Most of the data comes from the balance sheet Increases are offset by increases in cash Decreases are offset by decreases in cash Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Cash Flows Template: Financing Cash Flows From Financing Activities 12-38 + Issuance of stock - Purchases of treasury stock + Borrowing - Payment of notes and bonds payable - Payment of dividends = Net cash provided by (used for) financing activities Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Issuance and Payments of Long-Term Debt Long-Term Debt Payments 11,000 77,000 Beginning balance 94,000 Issuance of new debt 160,000 Ending balance If either new issuances or payments are known, the other amount can be computed. 12-39 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Issuance of Stock and Purchases of Treasury Stock Common Stock 158,000 Beginning balance 4,000 Issuance of new stock 162,000 Ending balance Treasury Stock Beginning balance Purchase treasury stock Ending balance 12-40 16,000 3,000 19,000 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Dividend Declarations and Payments Retained Earnings Dividend declarations and payments 12-41 17,000 86,000 Beginning balance 50,000 Net income 119,000 Ending balance Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Classify each of the following as an operating activity, an investing activity, or a financing activity as reported on the statement of cash flows prepared by the indirect method. a. b. c. d. e. f. Issuance of stock Borrowing long-term Sales revenue Payment of dividends Purchase of land with cash Purchase of treasury stock g. h. i. j. k. l. Paying bonds payable Interest expense Sale of equipment Cost of goods sold Purchase of another company with cash Making a loan g. h. i. j. k. l. Financing Operating Investing Operating Investing Investing Answers a. b. c. d. e. f. 12-42 Financing Financing Operating Financing Investing Financing Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Noncash Investing and Financing Activities Exhibit 12-10 illustrates noncash investing and financing activities (all amounts are assumed) Thousands Noncash investing and financing activities: Acquisition of building by issuing common stock Acquisition of land by issuing note payable Payment of long-term debt by issuing common stock Total noncash investing and financing activities 12-43 Copyright ©2015 Pearson Education Inc. All rights reserved. $ 300 70 100 $ 470 LO 3 Illustration Income statement of Mueller Travel Products, Inc., for the year ended December 21, 2014: Income Statement Revenues: Service revenue $237,000 Dividend income 8,700 $245,700 Expenses: Cost of goods sold 100,000 Salary expense 59,000 Depreciation expense 28,000 Advertising expense 2,900 Interest expense 2,100 Income tax expense Net income 12-44 14,000 206,000 $39,700 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Illustration Additional data: a. Acquisition of plant assets was $130,000. Of this amount, $75,000 was paid in cash and $55,000 by signing a note payable. b. Proceeds from sale of land totaled $25,000. c. Proceeds from issuance of common stock totaled $50,000. d. Payment of long-term note payable was $16,000. e. Payment of dividends was $11,000. 12-45 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Illustration Balance sheet data of Mueller Travel Products, Inc., follow: December 31, 2014 2013 Change $125,000 $50,800 $74,200 Accounts receivable 41,000 57,000 (16,000) Inventory 94,000 73,000 21,000 9,200 8,700 500 Accounts payable 32,000 18,000 14,000 Accrued liabilities 82,000 57,000 25,000 Current assets: Cash Prepaid expenses Current liabilities: 12-46 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Mueller reported net income of $39,700. Cash Flows from Operating Activities Net income $ 39,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 28,000 Decrease in accounts receivable 16,000 Increase in inventory (21,000) Increase in prepaid expense Increase in accounts payable 14,000 Increase in accrued liabilities 25,000 Net cash provided by operating activities 12-47 (500) Copyright ©2015 Pearson Education Inc. All rights reserved. $101,200 LO 3 Mueller reported depreciation expense of $28,000. Cash Flows from Operating Activities Net income $ 39,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 28,000 Decrease in accounts receivable 16,000 Increase in inventory (21,000) Increase in prepaid expense Increase in accounts payable 14,000 Increase in accrued liabilities 25,000 Net cash provided by operating activities 12-48 (500) Copyright ©2015 Pearson Education Inc. All rights reserved. $101,200 LO 3 Mueller reports the change in all current assets and current liabilities, other than cash, as follows: Cash Flows from Operating Activities Net income $ 39,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 28,000 Decrease in accounts receivable 16,000 Increase in inventory (21,000) Increase in prepaid expense Increase in accounts payable 14,000 Increase in accrued liabilities 25,000 Net cash provided by operating activities 12-49 (500) Copyright ©2015 Pearson Education Inc. All rights reserved. $101,200 LO 3 Proceeds from sale of land totaled $25,000. Cash Flows from Investing Activities Sale of land $ 25,000 Purchases of plant assets Net cash used for investing activities (75,000) ($50,000) Cash Flows from Financing Activities Issuance of common stock 50,000 Payment of note payable (16,000) Payment of dividends (11,000) Net cash provided by financing activities 12-50 Copyright ©2015 Pearson Education Inc. All rights reserved. $23,000 LO 3 Acquisition of plant assets was $130,000. Of this amount, $75,000 was paid in cash and $55,000 by signing a note payable. Cash Flows from Investing Activities Sale of land $ 25,000 Purchases of plant assets Net cash used for investing activities (75,000) ($50,000) Cash Flows from Financing Activities Issuance of common stock 50,000 Payment of note payable (16,000) Payment of dividends (11,000) Net cash provided by financing activities 12-51 Copyright ©2015 Pearson Education Inc. All rights reserved. $23,000 LO 3 Proceeds from issuance of common stock totaled $50,000. Cash Flows from Investing Activities Sale of land $ 25,000 Purchases of plant assets Net cash used for investing activities (75,000) ($50,000) Cash Flows from Financing Activities Issuance of common stock 50,000 Payment of note payable (16,000) Payment of dividends (11,000) Net cash provided by financing activities 12-52 Copyright ©2015 Pearson Education Inc. All rights reserved. $23,000 LO 3 Payment of long-term note payable was $16,000. Cash Flows from Investing Activities Sale of land $ 25,000 Purchases of plant assets Net cash used for investing activities (75,000) ($50,000) Cash Flows from Financing Activities Issuance of common stock 50,000 Payment of note payable (16,000) Payment of dividends (11,000) Net cash provided by financing activities 12-53 Copyright ©2015 Pearson Education Inc. All rights reserved. $23,000 LO 3 Payment of dividends was $11,000. Cash Flows from Investing Activities Sale of land $ 25,000 Purchases of plant assets Net cash used for investing activities (75,000) ($50,000) Cash Flows from Financing Activities Issuance of common stock 50,000 Payment of note payable (16,000) Payment of dividends (11,000) Net cash provided by financing activities 12-54 Copyright ©2015 Pearson Education Inc. All rights reserved. $23,000 LO 3 Summary totals for the Statement of Cash Flows Net cash provided by operating activities 12-55 $101,200 Net cash used for investing activities (50,000) Net cash provided by financing activities 23,000 Net increase in cash 74,200 Cash balance, December 31, 2013 50,800 Cash balance, December 31, 2014 $125,000 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 3 Learning Objective 4. Prepare a statement of cash flows by the direct method 12-56 Copyright ©2015 Pearson Education Inc. All rights reserved. PREPARE A STATEMENT OF CASH FLOWS BY THE DIRECT METHOD FASB and IASB prefer the direct method of reporting operating cash flows Provides clearer information about sources and uses of cash Used by a small percentage of companies 12-57 Requires more computations than indirect method Investing and financing cash flows are unaffected by the method used Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 DIRECT METHOD Operating Activities Positive Items Negative Items Collections from customers Payments to suppliers Receipts of interest and Payments to employees Payments of interest and dividends on investments Other operating receipts income taxes Other operating payments Investing and financing cash flows are the same as the indirect method 12-58 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Exhibit 12-15 | Direct Method of Computing Cash Flows from Operating Activities 12-59 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Direct Method Template: Operating Cash Flows From Operating Activities 12-60 + Collections from customers + Interest received - Payments to suppliers - Payments to employees - Payments for income tax - Payments for interest = Net cash provided by (used for) operating activities Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Using the direct method, classify each of the following as an operating activity, an investing activity, or a financing activity. a. Net income a. Not reported b. Payment of dividends b. Financing c. c. Borrowing long-term Financing d. Payment of cash to suppliers d. Operating e. Making a loan e. Investing f. f. Sale of treasury stock Financing g. Depreciation expense g. Not reported h. Purchase of equipment with cash h. Investing 12-61 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Using the direct method, classify each of the following as an operating activity, an investing activity, or a financing activity. i. Issuance of stock i. Financing j. Purchase of another company with cash j. Investing k. Payment of a long-term note payable k. Financing l. Payment of income taxes l. Operating m. Collections from customers m. Operating n. Accrual of interest revenue n. Not reported o. Expiration of prepaid expense o. Not reported p. Receipt of cash dividends p. Operating 12-62 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Cash Collections from Customers Accounts Receivable Beginning balance Sales 81,000 303,000 Ending balance 288,000 Collections 96,000 $303,000 (Sales) - $15,000 (↑ A/R) = $288,000 12-63 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Payments for Inventory $150,000 (COGS) - $3,000 (↓ Inventory) - $34,000 (↑ A/P) = $113,000 Inventory Beginning balance Purchases Ending balance 38,000 147,000 150,000 Cost of goods sold 35,000 Accounts Payable Payments 12-64 113,000 57,000 Beginning balance 147,000 Purchases 91,000 Ending balance Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Payments for Operating Expenses $17,000 (Expense) + $1,000 (↑ Prepaids) + $2,000 (↓Liabilities) = $20,000 Prepaid Expenses Beg. balance 7,000 Payments 8,000 End. balance 8,000 Other Operating Expenses Accrual 7,000 Expired costs Payments 12-65 3,000 Expired costs 7,000 Payments Accrued Liabilities 1,000 9,000 End. balance 17,000 3,000 Beg. balance 1,000 Accrual 1,000 End. balance Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Payments to Employees Salary and Wages Payable Payments 58,000 6,000 Beginning balance 56,000 Expense 4,000 Ending balance $56,000 (Expense) + $2,000 (↓Payable) = $58,000 12-66 Process is the same for determining cash payments for interest and income taxes Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Measuring Cash Adequacy: Free Cash Flow Free Cash Flow Net cash provided by operating = activities - Cash payments earmarked for investment in plant assets Amount of cash available from operations after paying for planned investments in plant assets 12-67 Copyright ©2015 Pearson Education Inc. All rights reserved. LO 4 Copyright This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright ©2015 Pearson Education Inc. All rights reserved.