Financial accounting, 5e

CHAPTER 14STATEMENT OF CASH FLOWS STUDY OBJECTIVES After studying this chapter, you should understand: Usefulness of the statement of cash flows Operating, investing, and financing activ

Financial A ccounting, 5e

Prepared by Kurt M Hull, MBA CPA California State University, Los Angeles

Weygandt, Kieso, & Kimmel

CHAPTER 14

STATEMENT OF CASH FLOWS

STUDY OBJECTIVES After studying this chapter, you should understand:

Usefulness of the statement of cash flows Operating, investing, and financing activities

Indirect method Direct method Analysis

STUDY OBJECTIVE 1

USEFULNESS OF CASH FLOW STATEMENTSTUDY OBJECTIVE 1

USEFULNESS OF CASH FLOW STATEMENT

The cash flow statement reports CASH RECEIPTS and CASH PAYMENTS

from OPERATING, FINANCING, and INVESTING activities.

The cash flow statement helps users assess:

1 Ability to generate future cash flows

2 Ability to pay dividends and meet obligations

3 Why net income is different from operating cash flows

• Cash inflows:

– From sale of goods or services

– From return on loans (interest received) and on equity securities (dividends received)

• Cash outflows:

– To suppliers for inventory

– To employees for services

– To government for taxes

– To lenders for interest

– To others for expenses

STUDY OBJECTIVE 2

OPERATING CASH FLOWSSTUDY OBJECTIVE 2

OPERATING CASH FLOWS

• Cash inflows:

– From sale of property, plant, and equipment – From sale of debt or equity securities of other entities

– From collection of principal on loans to other entities

• Cash outflows:

– To purchase property, plant, and equipment – To purchase debt or equity securities of other entities

STUDY OBJECTIVE 2

INVESTING CASH FLOWSSTUDY OBJECTIVE 2

INVESTING CASH FLOWS

FINANCING CASH FLOWSSTUDY OBJECTIVE 2

FINANCING CASH FLOWS

1 Issuance of common stock to purchase assets.

2 Conversion of bonds into common stock.

3 Issuance of debt to purchase assets.

4 Exchanges of plant assets.

SIGNIFICANT NON-CASH ACTIVITIES

The following activities are reported in a separate schedule

(bottom of cash flow statement) or a note to the F/S.

COMPANY NAME Statement of Cash Flows

Period Covered

Cash flows from operating activities

(List of individual items) XX

Net cash provided (used) by operating activities XXX

Cash flows from investing activities

(List of individual inflows and outflows) XX

Net cash provided (used) by investing activities XXX

Cash flows from financing activities

(List of individual inflows and outflows) XX

Net cash provided (used) by financing activities XXX

Net increase (decrease) in cash XXX

Cash at beginning of period XXX

Cash at end of period XXX

Noncash investing and financing activities

(List of individual noncash transactions) XXX

CASH FLOW STATEMENT FORMAT CASH FLOW

STATEMENT FORMAT

Needed to prepare cash flow statement:

Comparative balance sheet Current income statement Additional information.

INFORMATION REQUIRED

TO PREPARE CASH FLOW STATEMENT INFORMATION REQUIRED

TO PREPARE CASH FLOW STATEMENT

The SCF deals with cash receipts and payments, so the accrual concept is not used in the preparation of the SCF

STEPS IN PREPARING CASH FLOW STATEMENT STEPS IN PREPARING

CASH FLOW STATEMENT

STUDY OBJECTIVE 3

INDIRECT METHOD STUDY OBJECTIVE 3 INDIRECT METHOD

Cash flow from operating activities X

Cash flow from investing activities (X)

Cash flow from financing activities X

Beginning cash & equivalents X

Ending cash & equivalents xx

The operating section

reconciles

NET INCOME

with CASH FLOW FROM OPERATIONS

The investing and financing sections are the same

regardless of which method is used.

INDIRECT METHOD

Illustration 14-4

2006 2005

INDIRECT METHOD

Illustration 14-4

For the year ended Dec 31, 2006

INDIRECT METHOD

Using the information provided, the

cash flow statement will account for

every change on the comparative balance sheet.

The objective:

to determine net cash flow during the period, which should match the change in cash during the period

Net cash provided by operating activities 172,000

Net cash used by investing activities (141,000)

Net cash used by financing activities (9,000)

REVIEW QUESTION

A company’s net income is $132,000, and

during the year the following occurred:

1 Accounts payable increased $10,000,

2 Inventory decreased $6,000

3 Accounts receivable increased $12,000

Compute cash flows from operations.

STUDY OBJECTIVE 4

DIRECT METHOD STUDY OBJECTIVE 4 DIRECT METHOD

The direct method does not

reconcile net income with

cash flow from operations

Instead, the operating section lists

cash paid and cash received

for all income statement items.

JUAREZ COMPANY Comparative Balance Sheet

Assets 2006 2005 Increase/Decrease Cash $ 191,000 $ 159,000 $ 32,000 Increase Accounts receivable 12,000 15,000 3,000 Decrease Inventory 170,000 160,000 10,000 Increase Prepaid expenses 6,000 8,000 2,000 Decrease Land

Equip

Accumulated Dep equip

140,000 160,000 (16,000)

80,000- -0 -

-– 0 -–

60,000 Increase 160,000 Increase 16,000 Increase Total $ 663 ,000 $ 422,000

Bonds payable

Common stock

12,000 130,000 360,000

– 0 – – 0 – 300,000

12 ,000 Increase 130,000 Increase 60,000 Increase Retained earnings 94 ,000 42,000 5 2,000 Increase Total $ 663 ,000 $ 422,000

DIRECT METHOD

JUAREZ COMPANY Income Statement For the Year Ended December 31, 2006

Operating expenses (excluding depreciation) 176,000

Loss on sale of store equipment 1,000 855,000

Additional information:

(1) In 2006 , the company declared and paid a $32,000 cash dividend.

(2) Bonds were issued at face value for $130,000 in cash.

(3) Equipment costing $180,000 was purchased for cash.

(4) Equipment costing $20,000 was sold for $17,000 cash when the book value of the

DIRECT METHOD

DIRECT METHOD

OPERATING ACTIVITIES DIRECT METHOD

OPERATING ACTIVITIES

Revenues from sales $ 975,000 Add: Decrease in accounts receivable 3,000

CASH RECEIPTS FROM CUSTOMERS

If accounts receivable decreases from one period to another, Cash collections > credit sales.

Note in each case, the interaction between

PAYMENTS TO SUPPLIERS

1 Adjust COGS for the change in inventory to get purchases

2 Adjust purchases for the change in A/P to get payments

Add: increase in inventory 10,000

Cash payments to suppliers 678,000

Operating expenses are adjusted for changes in

Prepaid assets and accrued expenses

PAYMENTS FOR OPERATING EXPENSES

Deduct: decrease in prepaid expenses (2,000)Add: decrease in accrued expenses payable 5,000Cash payments for operating expenses 179,000

Tax expense is adjusted for changes in

Prepaid taxes and taxes payable

PAYMENTS FOR TAXES

Deduct: increase in income tax payable (12,000)

If tax payable increases during the year, Tax expense > cash paid for taxes

CASH FLOW STATEMENT

REVIEW QUESTION

Given the following facts:

1 Beginning A/R is $44,000

2 Ending A/R is $42,000

3 Sales during the period are $129,000

Compute cash receipts from customers

Cash collected from customers 131,000

Cash provided by operating activities adjusted for capital expenditures and dividends paid.

STUDY OBJECTIVE 5

FREE CASH FLOW STUDY OBJECTIVE 5 FREE CASH FLOW

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omissions, or damages, caused by the use of these programs or from the use

Copyright © 2006 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976

United States Copyright Act without the express written consent of the

copyright owner is unlawful Request for further information should be

addressed to the Permissions Department, John Wiley & Sons, Inc The

purchaser may make back-up copies for his/her own use only and not for

distribution or resale The Publisher assumes no responsibility for errors,

omissions, or damages, caused by the use of these programs or from the use