Transcript Cash Flows - Loyola University Maryland

16-1
CHAPTER 16
ANALYSIS USING THE
STATEMENT OF
CASH FLOWS
16-2
Statement of Cash Flows
As the cartoon implies, business investments
with good long-term cash flow prospects
frequently provide poor cash flow in their early
years. Measuring net income by means of the
accrual basis of accounting mitigates the
short-sightedness of cash flow measures.
Purpose of the Statement of
Cash Flows
16-3
The statement summarizes the effects
on cash of the operating, investing, and
financing activities of a company
during an accounting period.
(i.e., it tells where the cash came from
and where it went while explaining the
change in the cash balance.)
Purpose of the Statement of
Cash Flows
16-4
The statement summarizes the effects
on cash of the operating, investing, and
financing activities of a company
during an accounting period.
We need to sell our
inventory and collect
our receivables, if we plan
to have a good year.
Purpose of the Statement of
Cash Flows
16-5
The statement summarizes the effects
on cash of the operating, investing, and
financing activities of a company
during an accounting period.
In addition, we have to
make an investment in
new equipment to improve
our productivity.
Purpose of the Statement of
Cash Flows
16-6
The statement summarizes the effects
on cash of the operating, investing, and
financing activities of a company
during an accounting period.
I guess we will have to
borrow some money to
afford all this new
equipment.
Helps Financial Statement
Users Assess the...
Ability to
generate positive
future net cash flows.
Ability to
meet obligations.
P. 582
Need for external
financing.
Ability to
pay dividends.
Reasons for differences
between accrual and
cash-basis income.
16-7
16-8
Cash Flow Terminology

Operating Activities
Transactions that enter into the
determination of net income

Investing Activities
Transactions involving acquisition
or disposal of noncurrent assets

Financing Activities
Transactions involving creditors
and stockholders
16-9
Operating Activities
Cash inflows from:
 Sale of goods or
services
 Interest revenue
 Dividend revenue
 Sale of trading
securities
 Other
583
16-10
Operating Activities
Cash outflows for:
 Purchase of
inventory
 Payment of salaries
and wages
 Interest expense
 Other expenses
 Purchase of trading
securities
583
16-11
Operating Activities
Direct Method
Deducts from cash sales only those
operating expenses that consumed
cash.
16-12
Operating Activities
Indirect Method
Starts with accrual basis net income and
adjusts net income for items that affected
net income but did not involve cash.
This is the most
popular method
and is used by
about 95% of
companies.
16-13
Investing Activities
Cash inflows from:



Sale of property,
plant, and equipment.
Sale of securities.
Collections of longterm loans.
Cash outflows for:



Purchase of property,
plant, and equipment.
Purchase of
securities.
Making loans.
583
16-14
Financing Activities
Cash inflows from:

Issuing capital stock.
Cash outflows for:



Issuing debt.

Purchase of treasury
stock.
Payment of cash
dividends.
Payment of debt.
What about payment
of interest on debt?
583
Steps in Preparing the
Statement of Cash Flows
Determine cash flows from operating
activities using the indirect method.
Analyze all noncurrent accounts for
changes in cash resulting from investing
or financing activities.
Arrange the information
from 1 and 2 in the
proper format.
16-15
16-16
Indirect Method
Operating Activities
Accrual basis net income
Add: Non-cash expenses
(e.g., Depreciation, Depletion
and Amortization)
Add: Losses not affecting cash
Deduct: Gains not affecting cash
Adjust: For changes in current assets and
current liabilities
Cash provided by operating activities
(i.e., cash-basis net income)
16-17
Indirect Method
Operating Activities Section
For Changes in:
Current assets. . . .
Current liabilities. .
Add Change
to Net Income
Decreases
Increases
Deduct Change
from Net Income
Increases
Decreases
589
16-18
Operating Activities Example
East, Inc. reports $125,000 Net Income for the
year ended December 31, 1999. Accounts
Receivable increased by $7,500 during the
year and Accounts Payable increased by
$10,000. During 1999, East reported
$12,500 of Depreciation Expense.
Calculate cash provided by operating
activities during 1999.
16-19
Operating Activities Solution
Net Income
$ 125,000
Add: Depreciation Expense
12,500
Add: Increase in A/P
10,000
Deduct: Increase in A/R
(7,500)
Cash provided by
operating activities
$ 140,000
16-20
Cash Flow Statement
XYZ Corporation
Statement of Cash Flows
For the year ended December 31, 1999
Operating Activities
$xx,xxx
Investing Activities
x,xxx
Financing Activities
x,xxx
Net Increase (decrease) in cash
xxx
Cash at beginning of year
x,xxx
Cash at end of year
$ x,xxx
Optional - see p. 593
16-21
Cash Flows Question
a.
b.
c.
d.
On the Statement of Cash Flows, the
sale of the company’s own Capital
Stock for cash would be classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-22
Cash Flows Question
a.
a.
b.
b.
c.
c.
d.
d.
On the Statement of Cash Flows, the
sale of the company’s own Capital
Stock for cash would be classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-23
Cash Flows Question
a.
b.
c.
d.
On the Statement of Cash Flows, the
purchase of plant assets would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-24
Cash Flows Question
a.
a.
b.
b.
c.
c.
d.
d.
On the Statement of Cash Flows, the
purchase of plant assets would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-25
Cash Flows Question
a.
b.
c.
d.
On the Statement of Cash Flows, the
payment of cash dividends would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-26
Cash Flows Question
a.
a.
b.
b.
c.
c.
d.
d.
On the Statement of Cash Flows, the
payment of cash dividends would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-27
Cash Flows Question
a.
b.
c.
d.
On the Statement of Cash Flows, the
change in Accounts Receivable
balance for the year would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-28
Cash Flows Question
a.
a.
b.
b.
c.
c.
d.
d.
On the Statement of Cash Flows, the
change in Accounts Receivable
balance for the year would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-29
Cash Flows Question
a.
b.
c.
d.
On the Statement of Cash Flows, the
purchase of plant assets through the
issuance of Capital Stock would be
classified as
Cash flow from operating activities.
Cash flow from investing activities.
Cash flow from financing activities.
None of the above.
16-30
Cash Flows Question
a.
a.
b.
b.
c.
c.
d.
d.
On the Statement of Cash Flows, the
purchase of plant assets through the
issuance of Capital Stock would be
classified as
This
should
be classified
as a non-cash
financing
Cash
flow
from operating
activities.
and investing activity and disclosed in a separate
Cash flow
from toinvesting
activities.
schedule
or footnote
the financial
statements.
Cash flow from financing activities.
None of the above.
16-31
Non-Cash Activities
The reason that non-cash investing and
financing activities must be disclosed in
notes to the statement of cash flows:
The reader wants to know why all amounts on
the comparative balance sheet changed from
the beginning to end of year, whether cash was
involved or not. Therefore, this is a good place
to disclose it.
16-32
Cash Flow Statement Example
Sample Company is preparing its annual
financial statements. The Company
provides you with Balance Sheets for
12/31/98 and 12/31/99, and the Income
Statement for the year ended 12/31/99.
During 1999, the Company paid cash
dividends of $10,000.
Prepare a Statement of Cash Flows,
using the indirect method.
16-33
Cash Flow Statement Example
Additional information:
On June 8, 1999, Sample purchased land
for cash of $11,000.
 During 1999, Sample purchased new
equipment for $13,000 cash.
 On March 18, 1999, Sample sold additional
shares of common stock for cash of
$10,000.

16-34
Cash Flow Statement Example
Sample Company
Income Statement
For the Year Ended December 31, 1999
$ 153,000
Revenues
$ 50,000
Cost of sales
30,000
Wages
5,000
Depreciation
89,000
4,000
Insurance
$ 64,000
Net income
16-35
Sample Company
Comparative Balance Sheet
At December 31, 1999 and 1998
1999
1998
Change
Cash
$ 82,000 $ 30,000 $ 52,000
Acct. Receivable
120,000
100,000
20,000
Inventory
87,000
82,000
5,000
Land
101,000
90,000
11,000
Equipment
113,000
100,000
13,000
Accum. Depr.
(20,000)
(15,000)
(5,000)
Total
$ 483,000 $ 387,000 $ 96,000
Acct. Payable
$ 76,000
Wages Payable
33,000
Notes Payable
50,000
Capital Stock
170,000
Retained Earnings
154,000
Total
$ 483,000
$ 60,000
17,000
50,000
160,000
100,000
$ 387,000
$ 16,000
16,000
10,000
54,000
$ 96,000
16-36
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Cash flows from operating activities:
Net income
$ 64,000
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation expense
5,000
Increase
in with
Acct.accrual
Receivable
Start
basis net(20,000)
income and
Increase in
inventory
(5,000)
make
all necessary adjustments.
Increase in Acct. Payable
16,000
Increase in Wages Payable
16,000
Net cash provided by operating
activities
$ 76,000
16-37
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Cash flows from operating activities:
Net income
$ 64,000
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation expense
5,000
Increase in Acct. Receivable
(20,000)
Add depreciation, depletion
Increase in inventory
(5,000)
and amortization.
Increase in Acct. Payable
16,000
Increase in Wages Payable
16,000
Net cash provided by operating
activities
$ 76,000
16-38
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Cash flows from operating activities:
Net income
$ 64,000
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation expense
5,000
Increase in Acct. Receivable
(20,000)
Increase in Inventory
(5,000)
Increase in Acct.
Payable
Deduct
the increase 16,000
in
Increase in Wages
Payable
16,000
the current
assets - accounts
Net cash provided
by operating
receivable
and Inventory.
activities
$ 76,000
16-39
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Cash flows from operating activities:
Net income
$ 64,000
Add the increases
in thenet
Adjustments
to reconcile
current liabilities
- accounts
income
to net cash
provided
payable
and wages
payable.
by
operating
activities
Depreciation expense
5,000
Increase in Acct. Receivable
(20,000)
Increase in Inventory
(5,000)
Increase in Acct. Payable
16,000
Increase in Wages Payable
16,000
Net cash provided by operating
activities
$ 76,000
16-40
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Cash flows from operating activities:
Net income
$ 64,000
Adjustments to reconcile net
income to
netthat
cash
Now
weprovided
have completed the
by operating
activities
cash flows
from operating activities
section expense
of the statement let’s look
at the
Depreciation
5,000
cash
flows
for investing activities.
Increase in
Acct.
Receivable
(20,000)
Increase in Inventory
(5,000)
Increase in Acct. Payable
16,000
Increase in Wages Payable
16,000
Net cash provided by operating
activities
$ 76,000
16-41
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Net cash flows from operating activities:
$ 76,000
Cash flows from investing activities:
Purchase of Land
$(11,000)
Purchase of Equipment
(13,000) (24,000)
Sample purchased land for
cash activities:
during 1999.
Cash flows from financing
Sale of Capital Stock
Payment of Cash Dividends
Net Increase in Cash
Cash, January 1, 1999
Cash, December 31, 1999
$ 10,000
(10,000)
$ 52,000
30,000
$ 82,000
16-42
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Net cash flows from operating activities:
$ 76,000
Cash flows from investing activities:
Purchase of Land
$(11,000)
Purchase of Equipment
(13,000) (24,000)
During the
year Sample
Cash flows from financing
activities:
purchased new equipment
Sale of Capital Stock
$ 10,000
paying $13,000 cash.
Payment of Cash Dividends
(10,000)
Net Increase in Cash
$ 52,000
Cash, January 1, 1999
30,000
Cash, December 31, 1999
$ 82,000
16-43
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Net cash flows from operating activities:
$ 76,000
Cash flows from investing activities:
Purchase of Land
$(11,000)
Purchase of Equipment
(13,000) (24,000)
Cash flows from financing activities:
Sale of Capital Stock
$ 10,000
Payment of Cash
Dividends
(10,000)
To raise
addition capital Sample
Net Increase
in shares
Cash of stock for $10,000 cash. $ 52,000
sold
Cash, January 1, 1999
30,000
Cash, December 31, 1999
$ 82,000
16-44
Sample Company
Statement of Cash Flows
For the Year Ended December 31, 1999
Net cash flows from operating activities:
$ 76,000
Cash flows from investing activities:
Purchase of Land
$(11,000)
Purchase of Equipment
(13,000) (24,000)
Cash flows from financing activities:
Sale of Capital Stock
$ 10,000
Payment of Cash Dividends
(10,000)
Net Increase inThe
Cash
$ 52,000
company paid $10,000 in
Cash, January
1, dividends
1999
cash
to its shareholders. 30,000
Cash, December 31, 1999
$ 82,000
16-45
Sample Company
We have now explained what
Statement of Cash Flows
caused the cash account to
For thebyYear
Ended
December 31, 1999
increase
$52,000
during
Net cash flowsthe
from
operating activities:
$ 76,000
year.
Cash flows from investing activities:
Purchase of Land
$(11,000)
Purchase of Equipment
(13,000) (24,000)
Cash flows from financing activities:
Sale of Capital Stock
$ 10,000
Payment of Cash Dividends
(10,000)
Net Increase in Cash
$ 52,000
Cash, January 1, 1999
30,000
Cash, December 31, 1999
$ 82,000
Analyzing the
Comparative Balance Sheet
Illustration 16.3, p. 587
Retained Earnings
Dividends 4,000 30,000 Beg. Bal.
10,000
X Net Income
30,000 + X - 4,000 = 36,000
X = 10,000
36,000 End.
Bal.
16-46
16-47
Hey, dude, how
about going over
that stuff one
more time?
.