Transcript No Slide Title

16
Statement of Cash Flows
Principles of Financial Accounting, 11e
Reeve • Warren • Duchac
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1
Describe the cash flow
activities reported in the
statement of cash flows
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1
The statement of cash flows reports a
firm’s major cash inflows and outflows
for a period. It provides useful
information about a company’s ability
to do the following:
1.
2.
3.
4.
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Generate cash from operations
Maintain and expand its operating capacity
Meet its financial obligations
Pay dividends
1
Reporting Cash Flows
The statement of cash flows reports cash flows
from three types of activities:
1. Cash flows from operating activities are cash
flows from transactions that affect net income.
2. Cash flows from investing activities are cash
flows from transactions that affect the investments
in noncurrent assets of the company.
3. Cash flows from financing activities are cash
flows from transactions that affect the equity and
debt of the company.
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1
Exhibit 1
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Cash Flows
1
Cash Flows from Operating Activities
The direct method reports the sources
of operating cash and the uses of
operating cash.
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1
The indirect method reports the operating cash
flows by beginning with net income and
adjusting it for revenues and expenses that do
not involve the receipt or payment of cash.
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The primary advantage of the indirect
method is that it reconciles the difference
between net income and net cash flows from
operations. Also, the indirect method is less
costly to use than the direct method.
Over 99% of companies
use the indirect method.
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1
Exhibit 2
Cash Flows from Operations: Direct
and Indirect Methods—NetSolutions
The same
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Cash Flows from Investing Activities
• Cash inflows from investing activities
•
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normally arise from selling fixed assets,
investments, and intangible assets.
Cash outflows from investing activities
normally include payments to acquire
fixed assets, investments, and intangible
assets.
1
Cash Flows from Financing Activities
• Cash inflows from financing activities
•
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normally arise from issuing debt or equity
securities.
Cash outflows from financing activities
normally include paying cash dividends,
repaying debt, and acquiring treasury
stock.
1
Noncash Investing and
Financing Activities
Noncash investing and financing
activities are transactions that do not
directly affect cash. The effect of such
transactions is recorded in a separate
schedule that appears at the bottom of
the statement of cash flows.
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No Cash Flow Per Share
Cash flow per share should not be
reported on a company’s financial
statements for the following reasons:
1. Users may misinterpret cash flow
per share as the per-share amount
available for dividends.
2. Users may misinterpret cash flow
per share as equivalent to earnings
per share.
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1
Example Exercise 16-1
Classifying Cash Flows
Identify whether each of the following would be reported as an
operating, investing, or financing activity in the statement of
cash flows.
a. Purchase of patent i
b. Payment of cash dividend f
c. Disposal of equipment i
d. Cash sale o
e. Purchase of treasury stock f
f. Payment of wages expense o
Follow My Example 16-1
Left-click the mouse for the coded answers (operating = o;
investing
i; financing
Follow
My Example
6-1= f)
For Practice: PE 16-1A, PE 16-1B
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2
Prepare a statement of
cash flows, using the
indirect method.
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Efficient Approach
The indirect method of reporting cash
flows from operating activities uses
the logic that a change in any balance
sheet account (including Cash) can be
analyzed in terms of changes in other
balance sheet accounts.
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2
Exhibit 3
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Income Statement and
Comparative Balance Sheet
(continued)
2
Exhibit 3
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Income Statement and Comparative
Balance Sheet (continued)
2
Retained Earnings
The analysis of Retained Earnings
provides a good starting point for
determining the cash flows from
operating activities.
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The Retained Earnings account for Rundell Inc. reveals
that the balance increased $80,000 during the year.
The net income of $108,000 is the first amount reported
in the Cash Flows from Operating Activities section.
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2
Adjustments to Net Income
Cash flows from operating activities:
Net income
$108,000
Adjustments to reconcile net income
to net cash flow from operating activities:
This phrase is added to
indicate that accrual basis net
income is being adjusted to
arrive at cash flows from
operations.
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2
Exhibit 4
Step 1
Step 2
Step 3
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Adjustments to Net Income
(Loss) Using the Indirect Method
2
Step 1
Expenses that do not affect cash are added.
Such expenses decreased net income, but
did not involve cash payments and, thus,
are added to net income. Examples include
depreciation of fixed assets and
amortization of intangible assets.
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2
Step 2
Loses and gains on disposal of assets are
added or deducted. The disposal (sale) of
assets is an investing activity, rather than
an operating activity. Losses on disposal
of assets are added back to net income.
Gains on disposal of assets are deducted
from net income.
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Step 3
Changes in current operating assets and
liabilities are added or deducted as follows:
• Increases in noncash current operating
assets are deducted.
• Decreases in noncash current operating
assets are added.
• Increases in current operating liabilities are
added.
• Decreases in current operating liabilities
are deducted.
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Example Exercise 16-2
Adjustments to Net Income—Indirect Method
Omni Corporation’s accumulated depreciation
increased by $12,000, while patents decreased by
$3,400 between balance sheet dates. There were
no purchases or sales of depreciable or intangible
assets during the year. In addition, the income
statement showed a gain of $4,100 from sale of
land. Reconcile a net income of $50,000 to net
cash flow from operating activities.
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Example Exercise 16-2 (continued)
2
Follow My Example 16-2
Net income………………………………………. $50,000
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation…………………………………. 12,000
Amortization of patents………………………. 3,400
Gain on sale of land………………………...
(4,100)
Net cash flow from operating activities…….. $61,300
For Practice: PE 16-2A, PE 16-2B
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Exhibit 5
Cash Flows from Operating
Activities—Indirect Method
Step 1
Step 2
Step 3
(continued on Slide 31)
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Step 1: The comparative balance sheets indicate that
Accumulated Depreciation—Building increased by $7,000.
The account, shown below, indicates that Accumulated
Depreciation—Building increased by $7,000.
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Exhibit 5
Cash Flows from Operating Activities—
Indirect Method (continued)
Step 1
(continued on Slide 33)
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Step 2
The proceeds, which included the gain, are reported in
the Investing section of the statement of cash flows.
Thus, the $12,000 is deducted from net income in
determining cash flows from operating activities.
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Exhibit 5
Cash Flows from Operating Activities—
Indirect Method (continued)
Step 2
(continued on Slide 36)
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Step 3
Next, select the current operating
assets and liabilities that impact
cash flows and determine their
increases and decreases. Slide 35
may prove helpful.
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Accounts
Accounts receivable (net)
Inventories
Accounts payable (mdse.)
Accrued expenses payable
Income taxes payable
December 31
2009
2010
Increase
Decrease*
$ 74,000 $ 65,000
172,000 180,000
43,500
46,700
26,500
24,300
7,900
8,400
9,000
8,000*
Note that Cash and Dividends Payable
are not included in this analysis.
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3,200*
2,200
500*
2
Exhibit 5
Step 1
Step 2
Step 3
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Cash Flows from Operating Activities—
Indirect Method (concluded)
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Example Exercise 16-3
Changes in Current Operating Assets and Liabilities—
Indirect Method
Victor Corporation’s comparative balance sheet for current
assets and current liabilities was as follows:
Accounts receivable
Inventory
Accounts payable
Dividends payable
Dec. 31, 2011
Dec. 31, 2010
$ 6,500
12,300
4,800
5,000
$ 4,900
15,000
5,200
4,000
Adjust net income of $70,000 for changes in operating
assets and liabilities to arrive at cash flows from
operating activities.
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Example Exercise 16-3 (continued)
2
Follow My Example 16-3
Net income……………………………………………..
Adjustments to reconcile net income to net
cash flow from operating activities:
Increase in accounts receivable……………….
Decrease in inventory…………………………...
Decrease in accounts payable…………………
Net cash flow from operating activities …..…..….
$70,000
(1,600)
2,700
(400)
$70,700
For Practice: PE 16-3A, PE 16-3B
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Example Exercise 16-4
Cash Flows from Operating Activities—Indirect Method
Omicron, Inc. reported the following data:
Net income
Depreciation expense
Loss on disposal of equipment
Increase in Accounts receivable
Decrease in Accounts payable
$120,000
12,000
15,000
5,000
(2,000)
Prepare the cash flows for operating activities
section of the statement of cash flows using the
indirect method.
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Example Exercise 16-4 (continued)
2
Follow My Example 16-4
Cash flows from operating activities:
Net income……………………………………….. $120,000
Adjustments to reconcile net income
to net cash flow from operating activities:
Depreciation…………………………………..
12,000
Loss from disposal of equipment………...
15,000
Changes in current operating assets
and liabilities:
Increase in accounts receivable…………..
(5,000)
Decrease in accounts payable……………..
(2,000)
Net cash flow from operating activities……...
$140,000
For Practice: PE 16-4A, PE 16-4B
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Dividends
Cash dividends of $28,000 were declared during
2010. Note the entry highlighted in yellow.
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Only $24,000 of the dividends was paid in 2010.
Since dividend payments are a financing activity,
the dividend payment is reported in the Financing
Activities section.
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Common Stock
Rundell, Inc.’s Common Stock account increased
by $8,000 during 2010.
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Paid-in Capital in Excess of Par—Common
Stock increased $40,000 during the year.
Issuing company stock is a financing activity, so
cash flows from financing activities increases by
$48,000 ($8,000 + $40,000).
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Bonds Payable
Bonds Payable decreased $50,000 during 2010. A
check with Rundell’s income statement show that
there was no gain or loss on the retirement.
Retiring a bond payable is a financing activity, so a
cash outflow of $50,000 is reported in the Financing
Activities section of the statement of cash flows.
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Building
The Building account increased by $60,000.
The cash outflow for this purchase is shown in the
Financing Activities section of the statement.
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Land
The $45,000 decline in the Land account was from
two transactions.
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Earlier, as part of Step 2 in preparing the
Operating Activities section, the $12,000 gain was
deducted from net income.
Step 2
The proceeds of $72,000 from the sale of land are
reported in the Investing Activities section of the
statement of cash flows.
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The October 12 transaction is the purchase of land
for cash of $15,000. This transaction is reported as
an outflow of cash in the Cash Flows from
Investing Activities section.
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2
Example Exercise 16-5
Land Transactions on the Statement of Cash
Flows
Alpha Corporation purchased land for
$125,000. Later in the year the company
sold land with a book value of $165,000 for
$200,000. How are the effects of these
transactions reported on the statement of
cash flows?
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Example Exercise 16-5 (continued)
2
Follow My Example 16-5
The gain on sale of land is deducted
from net income as shown below:
Gain on sale of land……………….. $(35,000)
The purchase and sale of land is
reported as part of cash inflow from
investing activities as shown below:
Cash received for sale of land…… $200,000
Cash paid for purchase of land….. (125,000)
For Practice: PE 16-5A, PE 16-5B
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Exhibit 6
Statement
of Cash
Flows—
Indirect
Method
payable
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3
Free Cash Flow
Free cash flow is a measure of
operating cash flow available for
corporate purposes after providing
sufficient fixed asset additions to
maintain current productive
capacity and dividends.
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3
Cash flow from operating activities
Less: Investments in fixed assets to
maintain current production
Free cash flow
Positive free cash flow is considered favorable.
A company that has free cash flow is able to
fund internal growth, retire debt, pay
dividends, and enjoy financial flexibility.
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