Transcript SESSION XI: - University of North Carolina at Chapel Hill

STATEMENT OF CASH
FLOWS
Accounting ASW
Summer 2007
Overview of statement of cash flows
• Explains changes in “Cash” during the period
• “Cash” is cash plus cash equivalents
- Equivalents are highly liquid short-term
investments
- E.g., bank accounts, certificates of deposits,
treasury bills and uncashed checks
• There are typically no “SCF” accounts
- infer SCF amounts from income statement
and balance sheet
- typically prepared after the other statements
- hardest statement to interpret
Uses of SCF
• Assess liquidity
• Alternate measure of performance
• Helpful in predicting free cash flows
Free Cash Flows
• Free cash flows=Cash from Operations +
Cash from Investing
• Popular valuation approaches uses FCF
- Firm value = net present value of future FCF
• However, net income is the best predictor of
future free cash flows
Relation between NI and FCF
• In general, over the life of the firm
Total(FCF) = Total(NI)
• The only difference is timing
• Most differences between NI and FCF
reverse quickly
- E.g., credit sales
CF < NI
CF > NI
now
late r
now
later
Classification on the SCF
• Specified by the FASB
• Follows the structure of the firm
- Operating
- Investing
- Financing
Components of the Statement of Cash Flows
Operating
Cash Inflows
Cash Outflows
Collect from customers
Pay suppliers
Collect interest and dividends
Pay interest
Other operating receipts
Other operating payments
Pay taxes
Pay employees
Investing
Cash Inflows
Sell PP&E
Cash Outflows
Purchase PP&E
Sell securities owned
Purchase securities
Receive loan repayments
Make loans
Financing
Cash Inflows
Cash Outflows
Borrow from creditors
Repay amounts borrowed
Issue equity securities
Repurchase stock
Pay dividends
Formats for SCF
• Both direct and indirect are allowed
• In both formats
– investing and financing formats are the same
• list sources and uses of cash
– total operating cash flows is the same
• format for getting there differs
• Direct method also lists sources and uses of
cash for operating
– preferred by FASB
– rare in practice
• Indirect method operating section starts
with net income
– explains why cash from operations  NI
– uses changes in other accounts to explain
• When CF  NI, slack is picked up by
changes in other balance sheet accounts
–
–
–
–
–
–
if sales > cash receipts, Accts. Receivable s
if sales < cash receipts, Accts. Receivable s
if purchases > cash paid, Accts. Payable s
if purchases < cash paid, Accts. Payable s
if purchases > cost of goods sold, Inventory s
if purchases < cost of goods sold, Inventory s
Preparing SCF (Indirect Method)
• Start with attached worksheet with
beginning and ending balances of non-cash
accounts at ends & change in middle
• As you work through, note each change that
you’ve accounted for
• If every change is accounted for, it must add
Preparing the Statement of Cash Flows
Changes in Assets
Operating Investing Financing
(1) Accounts Receivable
x(-)
(2) Inventories
x(-)
(3) Other Current Assets
(Usually)
x(-)
(4) Investments in Securities1
Property, Plant & Equipment
(5) Cost2 (Purchases)
(6) Acc. Depr.2
(Current Yr’s Depr.)
(7) Other Noncurrent Assets
(Usually)1
x(-)
x(-)
x(+)
x(-)
Changes in Liabilities and Shareholders’ Equity
Operating Investing Financing
(8) Accounts Payable
x(+)
(9) Notes Payable1
(10) Current Portion of LongTerm Debt3
(11) Other Current Liabilities
(Usually)
x(+)
(12) Long-Term Debt1
(13) Deferred income Taxes
x(+)
(14) Other Noncurrent Liabilities
(Usually)1
(15) Contributed Capital
x(+)
x(+)
x(+)
x(+)
x(+)
Changes in Liabilities and Shareholders’ Equity
Operating
(16) Retained Earnings
(17) Treasure Stock
(18) Cash
Investing
x(Net Inc)(+)
__________ _________
Financing
x (Div.)(-)
x(-)
Increases and decreases are generally disclosed separately.
2For sales of PP&E (or other investments), profits are subtracted from
net income in the operating section and the entire proceeds is included
as a source of cash in the investing section.
3Generally combined with long-term debt.
1
Problem 4-26
Cash
Problem 4.26: Southwest Airlines
Change
+ 40
Accounts Receivable
Inventories
Prepayments
Property, Plant and Equipment
Accumulated Depreciation
Other Noncurrent Assets
- 15
+ 15
+ 17
+ 1,135
+ 264
+9
Accounts Payable
Other Current Liabilities
Long-Term Debt
Other Nonoperating Liabilities
Common Stock
Retained Earnings
-1
+ 115
+ 244
+ 140
+ 97
+ 341
Note: Net income was $474. Southwest did not sell any Property, Plant & Equipment.
Formats for the SCF
Indirect Format (most common)
Cash From Operations
Net Income
+ Depreciation
Gain on Sale of PP&E
Increase in Accounts Receivable
Increase in Inventory
Increase in Other Current Assets
+ Increase in Accounts Payable
+ Increase in Other Current Liab.
+ Increase in Def. Income Taxes
Cash From Investing
Investments in Securities
+ Proceeds from Sales of Sec.
Investments in PP&E
+ Proceeds from Sales of PP&E
Invest. in Other NC Assets
+ Proceeds from Other NC Assets
Cash From Financing
+ Issuance of Notes Payable
Repayments of Notes Payable
+ Issuance of Long-Term Debt
Repayments of Long-Term Debt
+ Issuance of Common Stock
Dividends Paid
Repurchase of Common Stock
Problem 4.37: Flight Training
1/1
Cash
583
Accounts Receivable
4,874
Inventories
2,514
Prepayments
829
Property, Plant & Equipment
76,975
Less: Accumulated Depreciation
- 8,843
Other (Investing) Assets
665
77,597
Accounts Payable
Other Current (Operating) Liabilities
Notes Payable
Current Portion of Long-Term Debt
Noncurrent Portion of Long-Term Debt
Other Noncurrent (Operating) Liabilities
Contributed Capital
Retained Earnings
Note: No dividends or sales of PP&E
6,279
12,124
945
7,018
41,021
900
5,508
3,802
77,597
12/31
159
6,545
5,106
665
106,529
- 17,231
470
102,243
12,428
12,903
0
60,590
0
0
16,351
(29)
102,243
Chg.
- 424
1,671
2,592
- 164
29,554
- 8,388
- 195
24,646
6,149
779
- 945
53,572
- 41,021
- 900
10,843
- 3,831
24,646
Sales of PP&E
• Recreate the journal entry
Cash
Selling Price
Acc. Depr.
AD on Asset
PP&E
HC on Asset
Gain on Sale
Plug
• goal is for only selling price to appear in investing
• to do that, subtract gain (add loss) in operating
• show selling price as a source of investing cash
• that takes care of the AD and PP&E on worksheet
• Problem 4-34, etc.
Steps for preparing the statement of cash flows (numbers based on problem 4.34):
1. Compute changes in each balance sheet account.
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Accumulated Depreciation
1/1
52
93
151
30
790
460
12/31
58
106
162
30
830
504
Chg.
6
13
11
0
40
44
Accounts Payable
Interest Payable
Mortgage Payable
Contributed Capital
Retained Earnings
136
10
120
250
140
141
8
109
250
174
5
-2
-11
0
34
Other: Net income = 44, Dividends = 10, Depreciation Expense = 54,
Sold for 5 machinery originally costing 15 with accumulated depreciation of 10 (no gain/loss)
Purchased building and equipment for 55
2. Fill in the indirect format worksheet for each of the changes other than PP&E and
accumulated depreciation. Use the Balance Sheet Accounts on the Statement of Cash Flows
worksheet if you don’t know where something goes. Check to make sure you have picked up
each account. I have filled in the numbers for this step in italics in the SCF below. You
should have blanks on the SCF for “Investments in PP&E,” “Proceeds from Sale of PP&E,”
“Depreciation” and “Gain on Sale of PP&E.”
3. Recreate the PP&E journal entries for the purchase of PP&E, depreciation for the period and
dispositions of PP&E:
Buildings and Equipment
Cash
55
Depr. Exp. (generally)
Accumulated Depreciation
54
Cash (proceeds from sale)
Accumulated Depreciation (accum. deprec. on assets sold)
Loss on Sale of PP&E (Proceeds - BV)
Property, Plant and Equipment (historical cost of assets sold)
5
10
0
55
54
15
4. In some cases you may have to figure out some missing numbers in the journal entries. To
do that, fill in any pieces you know and solve t-accounts for missing pieces. In 4-34, you
knew that you sold for 5 machinery costing 15 with accumulated depreciation of 10. You
could solve the t-accounts for buildings and equipment purchased.
Indirect Format (most common)
Cash From Operations
Net Income
+ Depreciation
- Gain on Sale of PP&E (or other investments)
- Increase in Accounts Receivable
- Increase in Inventories
- Increase in Other Current Assets
+ Increase in Accounts Payable
+ Increase in Other Current Liabilities
+ Increase in Deferred Income Taxes
Net Cash From Operations
Cash From Investing
- Investments in Securities
+ Proceeds from Sales of Securities
- Investments in Property, Plant and Equipment
+ Proceeds from Sales of Property, Plant and Equipment
- Investments in Other Noncurrent Assets
+ Proceeds from Sales of Other Noncurrent Assets
Net Cash from Investing
44
+ 54
0
- 13
- 11
0
+ 5
-2
0
77
0
0
- 55
+5
0
0
Cash From Financing
+ Issuance of Notes Payable
- Repayments of Notes Payable
+ Issuance of Long-Term Debt
- Repayments of Long-Term Debt
+ Issuance of Common Stock
- Dividends Paid
- Repurchase of Common Stock
Net Cash from Financing
Net Change in Cash
0
0
0
-11
0
- 10
0
- 21
6
Cash
Old Book: Green Mountain Coffee
Change
+ 74
Accounts Receivable
Inventories
Prepayments
Property Plant and Equipment
Accumulated Depreciation
Other Noncurrent Assets
+ 2,231
- 59
- 475
+ 2,129
+ 1,038
+ 434
Accounts Payable
Other Current Liabilities
Bonds Payable
Common Stock
Retained Earnings
+ 1,574
+ 560
+ 2,827
- 5,878
+ 4,213
Note: No dividends, sold equipment for 538 costing 2,468, with accumulated depreciation of
1,930. Purchased equipment for 4,597. Recorded depreciation of 2,968.
Direct Format (rare)
• Financing and investing sections are the
same as in the indirect method
• The operating section is stated in terms of
sources and uses of cash
Cash From Operations
Cash Inflows
+ Collections from Customers
+ Interest and Dividends Received
+ Other Operating Receipts
Cash Outflows
Payments to Suppliers
Payments to Employees
Interest Paid
Taxes Paid
Other Operating Cash Payments
Indirect Format Worksheet (spare)
Cash From Operations
Net Income
+ Depreciation
- Gain on Sale of PP&E
- Increase in Accounts Receivable
- Increase in Inventory
- Increase in Other Current Assets
+ Increase in Accounts Payable
+ Increase in Other Current Liab.
+ Increase in Def. Income Taxes
Net Cash From Operations
Cash From Investing
- Investments in Securities
+ Proceeds from Sales of Sec.
- Investments in PP&E
+ Proceeds from Sales of PP&E
- Invest. in Other NC Assets
+ Proceeds from Other NC Assets
Net Cash from Investing
Cash From Financing
+ Issuance of Notes Payable
- Repayments of Notes Payable
+ Issuance of Long-Term Debt
- Repayments of Long-Term Debt
+ Issuance of Common Stock
- Dividends Paid
- Repurchase of Common Stock
Net Cash from Financing
Net Change in Cash