The Statement of Cash Flows pdf

Purposes of the Statementof Cash Flows Statement of Retained Earnings 12/31/x1 For the Year Ended 12/31/x2 12/31/x2 a point in time a period of time a point in time Statement of Cash In

The Statement of Cash

Flows

Chapter

17

The statement of cash flows

reports the entity’s cash flows

(cash receipts and cash payments)

during the period

Purpose of The Statement of Cash Flows: Basic Concepts

Identify the Purposes of

the Statement of Cash Flows.

Objective 1

Purposes of the Statement

of Cash Flows

Statement

of Retained Earnings

12/31/x1 For the Year Ended 12/31/x2 12/31/x2 (a point in time) (a period of time) (a point in time)

Statement

of Cash

Income Statement

Balance

Purposes of the Statement

of Cash Flows

• The statement of cash flows is designed to fulfill the following:

– predict future cash flows

– evaluate management decisions

– determine the ability to pay dividends plus interest and principal

– show the relationship of net income to

changes in the firm’s cash

Cash Balance Includes

– cash on hand

– cash in the bank

– cash equivalents

Cash Equivalents Are

…short-term, highly liquid investments convertible into cash with little delay.– money market accounts

– U.S Government Treasury bills

Distinguish Among Operating, Investing, and Financing Cash

Flows.

Objective 2

Basic Organization of the Statement of Cash Flows

• A business may be evaluated in terms of three types of business activities:

1 Operating activities

2 Investing activities

3 Financing activities

Operating Activities

Operating activities are related to the

transactions that make up net income

Operating activities also affect current assets and current liabilities on the balance sheet

Investing activities increase and decreasethe assets that are available to the business.

Investing Activities

Investing activities are related to the

Long-Term Asset accounts

These are transactions involving obtainingresources from the owners or returning

resources to them

Financing Activities

It also involves obtaining resources

from creditors and repaying the

amount borrowed

Format of the Statement

Prepare a Statement of Cash

Flows

by the Indirect Method.

Objective 3

Preparing the Statement

• Follow the template provided in the text

• Use comparative balance sheets to

determine the change in cash, current

assets and current liabilities

• Use the income statement to gather net income, depreciation, amortization, gains

or losses on asset sales

• Complete the statement of cash flows

Current AssetsAdd to Net Income if this account has decreased

The Indirect Method

Deduct from Net Income if this account has increased

Current LiabilitiesAdd to Net Income if this account has increased

The Indirect Method

Deduct from Net Income if this account has decreased

Revenues and gains:

Gain on sale of plant assets 8

Computing Individual Amounts for the Statement of Cash Flows

Income StatementYear Ended December 31, 2005 (Thousands)

Computing Individual Amounts for the Statement of Cash Flows

Total revenues and gains $313

Liabilities 2005 2004

Inc./(Dec.)

Current:

Accounts payable $ 91 $ 57 $ 34 Accrued liabilities 5 9 (4) Long-term notes payable 160 77 83

Stockholders’ equity:

Common stock 359 258 101 Retained earnings 110 86 24

Comparative Balance Sheets

Statement of Cash Flows (Indirect Method)

Year Ended December 31, 2005 (Thousands) Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Increase in accounts receivable (15)

The Indirect Method

Adjustments to reconcile net income to net cash provided by operating activities:

Increase in accounts payable 34 Decrease in accrued liabilities (4) Net cash provided by operating activities $68

The Indirect Method

Statement of Cash Flows (Indirect Method)

Year Ended December 31, 2005 (Thousands)

Cash flows from investing activities:

Proceeds from sale of plant assets 62Net cash used for investing activities $(255)

The Indirect Method

Statement of Cash Flows (Indirect Method)

Year Ended December 31, 2005

(Thousands)

Acquisition and Sales

of Plant Assets

• The business had plant assets net of

depreciation of $219,000 at the beginning

of the year and $464,000 at year end

• Further, the acquisition of plant assets

amounted to $317,000 during the year

Acquisition and Sales

of Plant Assets

• The income statement shows depreciation expense of $18,000 and a $8,000 gain on sale of plant assets

• What is the book value of the assets sold?

• Beginning net balance + Acquisitions –

Depreciation – Book value of assets sold = Ending balance

Acquisition and Sales

Acquisition and Sales

of Plant Assets

• Book value + Gain or – Loss = Proceeds

• $54,000 + $8,000 = $62,000

• How do we determine acquisitions?

• Beginning net balance + Acquisitions

– Depreciation – Book value of assets sold

= Ending balance

Computing the Cash Amounts

Cash flows from financing activities:

Proceeds from issuance of common stock $101Proceeds from issuance of long-term

Payment of long-term notes payable (11)

The Indirect Method

Statement of Cash Flows (Indirect Method) Year Ended December 31, 2005 (Thousands)

Issuance of Common Stock

• Take beginning balance of common stock

• Subtract ending balance of common stock

• Equals issuance of new common stock

Issuance and Payments of Long-Term Notes Payable

• Beginning balance was $77,000

• New debt amounting to $94,000 was incurred during the year

• The ending balance for the Long-Term Notes Payable account was $160,000

• How much was the payment?

• $11,000

Computing Dividend Payments

• Dividend payments are computed by

analyzing Retained Earnings

• Beginning balance + Dividends declared

Net cash inflows from operating activities $ 68Net Cash outflow from investing activities (255)Net Cash inflow from financing activities 167

The Indirect Method

Statement of Cash Flows (Indirect Method) Year Ended December 31, 2005 (Thousands)

Noncash Investing and Financing Activities

…are not reported in the statement of cash flows

• The FASB requires that significant

non-cash investing and financing activities be shown in a separate schedule at the bottom

of the statement

Prepare a Statement of Cash Flows by the Direct Method.

Objective 4

Cash flows from operating activities:

Receipts:

Interest received on notes receivable 12Dividends received on investments in stock 9

The Direct Method

Statement of Cash Flows (Direct Method)

Year Ended December 31, 2005 (Thousands)

Revenues or expenses from the income statement

+–Adjusted for the change in therelated balance sheet account(s)Amount for the statement of cash flows

=

Computing Individual Amounts for the Statement of Cash Flows

Computing Cash Collections

Computing Cash Collections

from Customers

• $81,000 + $284,000 – 96,000 = $269,000

• Because Accounts Receivable increased by

$15,000, the business received $15,000

less cash than its sales revenue for the

Payments for Operating

Expenses

• Increases in prepaid expenses require cash payments, and decreases indicate that

payments were less than expenses

• Decreases in accrued liabilities can occur only from cash payments, and increases mean that cash was not paid

Reconciling Net Income

to Net Cash Flow

• The FASB requires companies that format operating activities by the direct method to report a reconciliation from net income to net cash inflow (or outflow)

End of Chapter

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