Transcript 5-1 Chapter F5 Reporting Cash Flows Electronic Presentation by Douglas Cloud Pepperdine University 5-2 Objectives 1. Explain information on a Once you reported have statement of cash this flows using the direct completed chapter, format.

5-1
Chapter F5
Reporting Cash
Flows
Electronic Presentation
by Douglas Cloud
Pepperdine University
5-2
Objectives
1. Explain information
on a
Once you reported
have
statement
of cash this
flows
using the direct
completed
chapter,
format. you should be able to:
2. Explain information reported on a
statement of cash flows using the
indirect format.
3. Interpret cash flow information as a
basis for analyzing financial
performance.
5-3
The Statement of Cash Flows
The statement of cash flows
explains the changes in a
company’s cash balance during
the fiscal period.
5-4
The Statement of Cash Flows
GAAP permit the
statement to be presented
in either of two formats:
direct or indirect.
5-5
Objective
1
Explain information
reported on a
statement of cash
flows using the
direct format.
5-6
The Direct Format
Cash Flow from Operating Activities
Cash Received from Operating Activities

–
=
Cash Paid for Operating Activities
Net Cash from (for) Operating Activities
5-7
The Direct Format
Cash Flow from Investing Activities
Cash Received from Investing Activities

–
=
Cash Paid for Investing Activities
Net Cash from (for) Investing Activities
5-8
The Direct Format
Cash Flow from Financing Activities
Cash Received from Financing Activities

–
=
Cash Paid for Financing Activities
Net Cash from (for) Financing Activities
5-9
The Direct Format
The
Operating
direct format
cash flows
answers
are
the
the cash
question,
equivalent
“Where
of did
the
cash
accrual
come
results
fromreported
and where
on
the income
did cashstatement.
go?”
Mom’s Cookie Company
Exhibit 1
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating Activities
Receipts: Collections from customers
Payments:
For inventory
To employees
For rent
For utilities
For supplies
For insurance
For advertising
For interest
For income tax
Net cash flow from operating activities
Continued
5-10
$682,080
(471,590)
(70,800)
(24,000)
(4,500)
(15,990)
(3,700)
(6,500)
(4,150)
(22,710)
58,140
5-11
Carried forward
Investing Activities
Payments for purchase of equipment
Receipts from sale of equipment
Net cash flow for investing activities
Financing Activities
Receipts from sale of common stock
Payment of dividends
Receipts from borrowing
Repayment of debt
Net cash flow from financing activities
Net increase in cash
Cash balance, December 31, 2003
Cash balance, December 31, 2004
Exhibit 1
$ 58,140
(216,000)
340
(215,660)
100,000
(10,000)
80,000
(1,800)
168,200
10,680
0
$ 10,680
Statement of Cash Flows, Direct Format
5-12
Operating Activities
Operating activities are transactions involving the
acquisition or production of goods and services
and the sale and distribution of these goods and
services to customers.
5-13
Exhibit 2
Income Statement and Balance
Sheet for Mom’s Cookie Company
Continued
5-14
Exhibit 3
Calculation of Operating Cash Flows
5-15
5-16
Investing Activities
Investing activities involve acquisition
or sale of long-term term assets and
financial investments during a fiscal
period.
5-17
Financing Activities
Financing activities are transactions
between a company and its owners or
between a company and its creditors.
5-18
GAAP require a schedule
reconciling cash flows
from operating activities
with net income when the
direct format is used.
5-19
Objective
2
Explain information
reported on a
statement of cash
flows using the
indirect format.
5-20
The Indirect Format
The differences between the
direct and indirect formats
are in the operating
activities section only.
Mom’s Cookie Company
Exhibit 4
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating Activities
Net income
From the
Depreciation expense
income
Increase in accounts receivable
statement
Increase in merchandise inventory
Increase in supplies
Increase in prepaid rent
Increase in accounts payable
Increase in unearned revenue
Increase in interest payable
Net cash flow from operating activities
Continued
5-21
$ 52,990
25,500
(8,570)
(23,600)
(690)
(2,000)
9,610
4,250
650
58,140
5-22
Carried forward
Investing Activities
Payments for purchase of equipment
Receipts from sale of equipment
The investing and
Net cash flow for investing activities
Financing financing
Activities sections are
Receipts from
sale of for
common
identical
the stock
direct
Payment of dividends
and
indirect
formats.
Receipts from borrowing
Repayment of debt
Net cash flow from financing activities
Net increase in cash
Cash balance, December 31, 2003
Cash balance, December 31, 2004
Exhibit 4
$ 58,140
(216,000)
340
(215,660)
80,000
(1,800)
100,000
(10,000)
168,200
10,680
0
$ 10,680
Indirect Format of
Statement of Cash Flows
5-23
The Indirect Format
Increases in current assets are
subtracted from net income to
calculate operating cash flows.
Mom’s Cookie Company
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating Activities
Net income
Depreciation expense
Increase in accounts receivable
Increase in merchandise inventory
Increase in supplies
2004
2003
Increase in prepaid rent$8,570
$0
Increase in accounts payable
Increase in unearned revenue
Increase in interest payable
Net cash flow from operating activities
Exhibit 4
Change
$8,570
5-24
$ 52,990
25,500
(8,570)
(23,600)
(690)
(2,000)
9,610
4,250
650
58,140
Mom’s Cookie Company
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating Activities
Net income
Depreciation expense
Increase in accounts receivable
Increase in merchandise inventory
Increase in supplies
Increase in prepaid rent
2004
2003
Increase in accounts payable
$23,600
$0
Increase in unearned revenue
Increase in interest payable
Net cash flow from operating activities
Exhibit 4
Change
$23,600
5-25
$ 52,990
25,500
(8,570)
(23,600)
(690)
(2,000)
9,610
4,250
650
58,140
5-26
The Indirect Format
Because this is the first year of
Decreases
current
assets
are
operationsinfor
Mom’s
Cookie
added
to netthere
income
to calculate
Company,
are no
decreases
operating
cashassets.
flows.
in current
5-27
The Indirect Format
Increases in current liabilities are
added to net income to calculate
operating cash flows.
Mom’s Cookie Company
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating Activities
Net income
Depreciation expense
Increase in accounts receivable
Increase in merchandise inventory
Increase in supplies
Increase in prepaid rent
Increase in accounts payable
Increase in unearned revenue
Increase in interest payable
2004
2003
Net cash flow from operating
activities$0
$9,610
Exhibit 4
5-28
$ 52,990
25,500
(8,570)
(23,600)
(690)
(2,000)
9,610
4,250
650
Change
58,140
$9,610
5-29
The Indirect Format
As with current assets, there were
Decreases
in current
liabilities
are
no decreases
in current
liabilities
subtracted
from
income
to
because
this is
the net
firm’s
first year
calculate of
operating
cash flows.
operation.
Mom’s Cookie Company
Statement of Cash Flows
For the Year Ended December 31, 2004
5-30
Operating Activities
Net income
$ 52,990
Depreciation expense
25,500
Increase in accounts receivable
(8,570)
Increase
in merchandise
inventoryis added to net (23,600)
Depreciation
Expense
Increase in supplies
(690)
income
because
Increase
in prepaid
rent it is an expense that
(2,000)
Increasedoes
in accounts
payable a cash outlay.
9,610
not require
Increase in unearned revenue
4,250
Increase in interest payable
650
Net cash flow from operating activities
58,140
Exhibit 4
Mom’s Cookie Company
Statement of Cash Flows
For the Year Ended December 31, 2004
Operating Activities
Net income
Depreciation expense
Increase in accounts receivable
Increase
in merchandise
inventory
The
same treatment
is used for
Increase in supplies
IncreaseAmortization
in prepaid rent Expense and
Increase in accounts
payable
Depletion
Expense.
Increase in unearned revenue
Increase in interest payable
Net cash flow from operating activities
Exhibit 4
5-31
$ 52,990
25,500
(8,570)
(23,600)
(690)
(2,000)
9,610
4,250
650
58,140
5-32
Exhibit 6
Indirect
Format of
Statement of
Cash Flows
5-33
The Indirect Format
Review of Rules for Adjusting Net Income to
Calculated Operating Cash Flow
 When a current asset account increases, the increase
is subtracted from net income.
 When a current asset decreases, the amount of the
decrease is added to net income.
 An increase in a current liability is added to net
income to calculate operating cash flow.
 A decrease in a current liability is subtracted from
net income to calculate operating cash flow.
5-34
Summary of Adjustments for
the Indirect Format
Net income
+ Depreciation and Amortization Expense
– Increases in Current Asset Accounts
+ Decreases in Current Asset Accounts
+ Increases in Current Liability Accounts
– Decreases in Current Liability Accounts
= Cash Flow from Operating Activities
5-35
Objective
3
Interpret cash flow
information as a
basis for analyzing
financial
performance.
5-36
The amount of cash flow from
operating activities normally is
approximately equal to the amount
of cash flow from or for investing
activities plus the amount of cash
flow from or for financing
activities.
5-37
Cash Flow Patterns and the
Financial Health of a Company
Operating cash flows are
positive
Investing cash flows are
negative
Financing cash flows are
positive
These normally are a sign of a
prosperous and growing company.
5-38
Cash Flow Patterns and the
Financial Health of a Company
Operating cash flows are
negative
Investing cash flows are
positive
Financing cash flows are
positive
The company is facing serious financial
problems. It is selling assets and using
financing activities to meet current cash needs.
5-39
Cash Flow Patterns and the
Financial Health of a Company
Operating cash flows are
positive
Investing cash flows are positive
or negative
Financing cash flows are
negative
The company is prosperous but may not
have a lot of good growth opportunities. It
is using operating cash to pay off debt and
pay stockholders.
5-40
Cash Flow Patterns and the
Financial Health of a Company
Operating cash flows are
positive or negative
Investing cash flows are
positive
Financing cash flows are
negative
The company may be facing a current cash flow
problem. It is selling assets to supplement
current cash flows to cover its financing needs.
5-41
CHAPTER F5
THE END
5-42