Transcript Slide 1
Reporting the Statement of Cash Flows Chapter 12
PowerPoint Editor: Beth Kane, MBA, CPA Wild, Shaw, and Chiappetta Financial & Managerial Accounting 6th Edition
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Purpose of the Statement of Cash Flows
How does a company receive its cash?
Where does a company spend its cash?
What explains the change in the cash balance?
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Importance of Cash Flows
What explains the change in the cash balance?
Where does a company spend its cash?
How does a company receive its cash?
Why do income and cash flows differ?
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Measurement of Cash Flows
Cash equivalents are…
short-term, highly liquid investments.
readily convertible into cash.
sufficiently close to maturity so that market value is unaffected by interest rate changes.
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12-C1: Classification of Cash Flows
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Classification of Cash Flows
The Statement of Cash Flows includes the following three sections:
–
Operating Activities
–
Investing Activities
–
Financing Activities
C1 6
C1
Operating Activities
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C1
Investing Activities
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C1
Financing Activities
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C1
Noncash Investing and Financing
Examples of Noncash Investing and Financing Activities 10
12-P1: Preparing the Statement of Cash Flows
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P1
Format of the Statement of Cash Flows
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P1
Preparing the Statement of Cash Flows
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P1
Analyzing the Cash Account
The Cash account is a natural place to look for information about cash flows from operating, investing, and financing activities. 14
P1
Analyzing Noncash Account
A second approach to preparing the statement of cash flows is analyzing noncash accounts. 15
P1
Information to Prepare the Statement
Information to prepare the statement of cash flows usually comes from three sources: Comparative Balance Sheets Current Income Statement Additional Information 16
C1 NEED-TO-KNOW
Classify the following cash flows as operating, investing, or financing activities.
a. Purchase equipment for cash b. Cash payment of wages c. Issuance of stock for cash d. Receipt of cash dividends from investments e. Cash collections from customers f. Note payable issued for cash g. Cash paid for utilities h. Cash paid to acquire investments i. Cash paid to retire debt j. Cash received as interest on investments k. Cash received from selling investments l. Cash received from a bank loan
Operating activities - Day-to-day cash receipts and disbursements that determine net income (Generally related to current assets and current liabilities.) Investing activities - Cash receipts and disbursements generally related to the purchase and sale of long-term assets. (And non-operating short-term investments) Financing Activities - Cash receipts and disbursements generally related to long-term liabilities and equity. (And non-operating short-term debts)
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P1
Current assets Assets
NEED-TO-KNOW
XYZ Company
Balance Sheet December 31, 20X1
Current liabilities Liabilities Plant assets Total assets
Investing
Long-term liabilities Equity Total liabilities and equity
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P1 NEED-TO-KNOW
Classify the following cash flows as operating, investing, or financing activities.
a. Purchase equipment for cash b. Cash payment of wages c. Issuance of stock for cash d. Receipt of cash dividends from investments e. Cash collections from customers f. Note payable issued for cash g. Cash paid for utilities h. Cash paid to acquire investments i. Cash paid to retire debt j. Cash received as interest on investments k. Cash received from selling investments l. Cash received from a bank loan
Operating activities - Day-to-day cash receipts and disbursements that determine net income (Generally related to current assets and current liabilities.)
b. Cash payment of wages d. Receipt of cash dividends from investments e. Cash collections from customers g. Cash paid for utilities j. Cash received as interest on investments
Investing activities - Cash receipts and disbursements generally related to the purchase and sale of long-term assets. (And non-operating short-term investments)
a. Purchase equipment for cash h. Cash paid to acquire investments k. Cash received from selling investments
Financing Activities - Cash receipts and disbursements generally related to long-term liabilities and equity. (And non-operating short-term debts)
c. Issuance of stock for cash f. Note payable issued for cash i. Cash paid to retire debt l. Cash received from a bank loan 19
Cash Flows from Operating
Indirect and Direct Methods of Reporting
Direct Method Indirect Method
P1
The net cash amount provided by operating activities is identical under both the direct and indirect methods.
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12-P2: Applying the Indirect Method of Reporting
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These financial statements will help us prepare the statement of cash flows for Genesis using the indirect method. 22
Applying the Indirect Method of Reporting
Additional information on Genesis Inc.’s 2015 transactions: a. The accounts payable balances result from inventory purchases. b. Purchased $60,000 in plant assets by issuing $60,000 of notes payable. c. Sold plant assets with a book value of $8,000 (original cost of $20,000 and accumulated depreciation of $12,000) for $2,000 cash, yielding a $6,000 loss. d. Received $15,000 cash from issuing 3,000 shares of common stock. e. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain. f. Declared and paid cash dividends of $14,000.
P2 23
P2
Applying the Indirect Method of Reporting
Changes in noncash current assets and current liabilities 1 Net Income 2 + Noncash expenses such as depreciation and amortization 3 + Losses and - Gains Cash Flows from Operating Activities
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Adjustments for Changes in Current Assets and Current Liabilities
Current Assets Current Liabilities Change in Account Balance During Year Increase Decrease Subtract from net income.
Add to net income.
Add to net income.
Subtract from net income.
P2
Use this table when adjusting Net Income to Operating Cash Flows.
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P2
Adjustments for Changes in Current Assets and Current Liabilities
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P2
Adjustments for Operating Items Not Providing or Using Cash
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P2
Adjustments for Nonoperating Items
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Summary of Adjustments for Indirect Method
Common adjustments to net income when computing net cash provided or used by operating activities under the indirect method: P2 29
P2 NEED-TO-KNOW A company’s current year income statement and selected balance sheet data at December 31 of the current and prior years follow. Prepare the cash flows from operating activities section only of its statement of cash flows using the indirect method for the current year.
Income Statement For Current Year Ended December 31
Sales revenue Expenses: Cost of goods sold Depreciation expense Salaries expense Interest expense Net income $120 50 30 17 3 $20
Selected Balance Sheet Accounts
At December 31 Current Yr.
Prior Yr.
Accounts receivable Inventory Accounts payable Salaries payable Interest payable $12 6 7 8 1 $10 9 11 3 0 30
P2 NEED-TO-KNOW
General Format - Operating Activities section - Indirect method Net income Adjustments to reconcile net income to net cash provided by operating activities Adjust for changes in current operating assets (other than cash)
Opposite direction
Add the decreases Subtract the increases
Adjust for changes in current operating liabilities
Same direction
Add the increases Subtract the decreases
Adjust for non-cash revenues and expenses
Opposite direction
Add any expenses that don't require cash Subtract any revenues that don't provide cash
Adjust for any gains/losses related to long-term accounts
Opposite direction
Add the losses Subtract the gains
Net cash provided (used) by operating activities
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P2 NEED-TO-KNOW
Income Statement For Current Year Ended December 31
Sales revenue Expenses: Cost of goods sold Depreciation expense Salaries expense Interest expense Net income $120 50 30 17 3 $20
Selected Balance Sheet Accounts
At December 31 Current Yr.
Prior Yr.
Accounts receivable Inventory Accounts payable Salaries payable Interest payable $12 6 7 8 1 $10 9 11 3 0
General Format - Operating Activities section - Indirect method Net income Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense Increase in accounts receivable Decrease in inventory Decrease in accounts payable Increase in salaries payable Increase in interest payable 30 (2) 3 (4) 5 1 $20
Net cash provided by operating activities
33 $53 32
12-P3: Cash Flows from Investing and Financing Activities
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P3
Cash Flows from Investing
A three-stage process to determine cash provided or used by investing activities:
Identify changes in investing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects 34
P3
Cash Flows from Investing
This analysis reveals a $40,000 increase in plant assets from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,000.
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Cash Flows from Investing
Item b: Genesis purchased plant assets of $60,000 by issuing $60,000 in notes payable to the seller. Item c reports that Genesis sold plant assets costing $20,000 (with $12,000 of accumulated depreciation) for $2,000 cash, resulting in a $6,000 loss.
P3 We also reconstruct the entry for Depreciation Expense using information from the income statement. 36
P3 NEED-TO-KNOW Use the following information to determine this company’s cash flows from investing activities.
a. A factory with a book value of $100 and an original cost of $800 was sold at a loss of $10.
b. Paid $70 cash for new equipment.
c. Long-term stock investments were sold for $20 cash, yielding a loss of $4.
d. Sold land costing $175 for $160 cash, yielding a loss of $15.
We use a three-stage process to determine cash provided or used by investing activities: (1) identify changes in investing-related accounts, (2) explain these changes using reconstruction analysis, and (3) report their cash flow effects 37
P3 NEED-TO-KNOW a. A factory with a book value of $100 and an original cost of $800 was sold at a loss of $10.
Cost
Factory
800
Book Value = $100 Accumulated Depreciation
To date 700 a)
General Journal
Cash Loss on sale of factory Accumulated Depreciation Factory
Debit
90 10 700
Credit
800
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of factory 10 $XXX
Cash flows from investing activities:
Cash received from sale of factory 90 38
P3 NEED-TO-KNOW b. Paid $70 cash for new equipment.
b)
General Journal
Equipment Cash
Debit
70
Credit
70
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of factory 10 $XXX
Cash flows from investing activities:
Cash received from sale of factory Cash paid for new equipment 90 (70) 39
P3 NEED-TO-KNOW c. Long-term stock investments were sold for $20 cash, yielding a loss of $4.
c)
General Journal
Cash Loss on sale of investments Long-term investments
Debit
20 4
Credit
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Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of factory Loss on sale of investments 10 4 $XXX
Cash flows from investing activities:
Cash received from sale of factory Cash paid for new equipment Cash received from sale of long-term investments 90 (70) 20 40
P3 NEED-TO-KNOW d. Sold land costing $175 for $160 cash, yielding a loss of $15.
d)
General Journal
Cash Loss on sale of land Land
Debit
160 15
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of factory Loss on sale of investments Loss on sale of land 10 4 15
Cash flows from investing activities:
Cash received from sale of factory Cash paid for new equipment Cash received from sale of long-term investments Cash received from sale of land Net cash provided by investing activities 90 (70) 20 160
Credit
$XXX $200 175 41
P3
Cash Flows from Financing
A three-stage process to determine cash provided or used by financing activities:
Identify changes in financing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects
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P3
Cash Flows from Financing
This analysis reveals: 1. an increase in notes payable from $64,000 to $90,000. 43
P3
Cash Flows from Financing
Item e: Notes with a carrying value of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain. 44
P3
Cash Flows from Financing
Item d: Issued 3,000 shares of common stock at par for $5 per share. Item f: Cash dividends of $14,000 are paid. 45
P3 46
P3 NEED-TO-KNOW Use the following information to determine this company’s cash flows from financing activities.
a.
Issued common stock for $40 cash.
b.
c.
Paid $70 cash to retire a note payable at its $70 maturity value.
Paid cash dividend of $15.
d.
Paid $5 cash to acquire its treasury stock
Cash flows from financing activities:
Cash received from issuance of common stock Cash paid to settle note payable Cash paid for dividend Cash paid to acquire treasury stock Net cash used by financing activities $40 (70) (15) (5) ($50) a) b) c) d)
General Journal
Cash Common Stock Notes payable Cash Retained earnings Cash Treasury stock Cash
Debit
40
Credit
40 70 70 15 15 5 5 47
P3
Overall Summary Using T-Accounts
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Global View
Reporting Cash Flows from Operating Both U.S. GAAP and IFRS permit the reporting of cash flows from operating activities using either the direct or indirect method. However, two notable differences include: 1.
U.S. GAAP requires cash inflows from interest revenue and dividend revenue be classified as operating, whereas IFRS permits classification under operating or 2.
investing provided that this classification is consistently applied across periods.
U.S. GAAP requires cash outflows for interest expense be classified as operating, whereas IFRS again permits classification under operating or financing provided that it is consistently applied across periods.
Reporting Cash Flows from Investing and Financing U.S. GAAP and IFRS are broadly similar in computing and classifying cash flows from investing and financing activities. One notable exception is that U.S. GAAP requires cash outflows for income tax be classified as operating, whereas IFRS permits the splitting of those cash flows among operating, investing, and financing depending on 49 the sources of that tax.
12-A1: Cash Flow Analysis
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A1
Analyzing Cash Sources and Uses
Most managers stress the importance of understanding and predicting cash flows for business decisions.
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A1
Cash Flow on Total Assets
Used, along with income-based ratios, to assess company performance.
Cash flow on total assets = Operating cash flows Average total assets 52
12-P4: Spreadsheet Preparation of the Statement of Cash Flows
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P4 Appendix 12A: Spreadsheet Preparation of the Statement of Cash Flows A spreadsheet, also called work sheet or working paper, can help us organize the information needed to prepare a statement of cash flows.
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12-P5: Direct Method of Reporting Operating Cash Flows
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P5 Appendix 12B: Direct Method of Reporting Operating Cash Flows
Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts: Framework for reporting cash receipts and cash payments
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P5 Appendix 12B: Direct Method of Reporting Operating Cash Flows 57
End of Chapter 12
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