Managerial accounting 5th jiambalvo ch13

Learning objective 2: Identify the three types of business activities presented in a statement of cash flows Slide 13-8 Types of Business Activities  Investing activities  Cash flows r

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Prepared by

Debby Bloom-Hill CMA, CFM

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Slide 13-2

CHAPTER 13

Statement of Cash Flows

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Learning objective 1: Explain the need for

the statement of cash flows Slide 13-3

Need for a Statement of Cash

Flows

 Stakeholders want to know how a

company generates and spends

cash

 Can the company

 Generate enough cash to pay its

wages and bills, including debt

payments

 Generate cash in order to earn a

reasonable return and pay dividends

 Generate enough cash to avoid

bankruptcy

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 Under GAAP, income is calculated

using the accrual method

 The income statement does little to inform managers and other

company stakeholders of the

sources and uses of cash

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Flows

 For the purposes of the cash flow

statement, cash includes both cash and cash equivalents

 Cash equivalents are short term

investments that can be readily

converted into cash

 Examples include 90 day US

Treasury Bills and money market

funds

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Learning objective 2: Identify the three types of business activities

presented in a statement of cash flows Slide 13-6

Types of Business Activities

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presented in a statement of cash flows

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presented in a statement of cash flows Slide 13-8

 Investing activities

 Cash flows related to buying and

selling of long-term assets

 Examples include collections from long term loans, collections from the sale of equipment no longer in use, payments to buy securities of other companies, buying a building and buying a business

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Examples of Investing

Activities

Examples of Investing

Activities

Learning objective 2: Identify the three types

of business activities presented in a statement

of cash flows Slide 13-9

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Slide 13-10

 Financing activities

 Cash inflows related to issuing

stock and issuing long-term debt

 Cash outflows related to

repurchasing stock, paying off loans and making dividend

payments

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Learning objective 2: Identify the three types of business

activities presented in a statement of cash flows

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Slide 13-12

Which of the following would be a

cash outflow from operating

activities?

a Acquisition of operating

equipment

b Retirement of bonds

c Collection of accounts receivable

d Payments to suppliers for raw

materials

Answer: d

Payments to suppliers for raw materials

Test Your Knowledge 1

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Slide 13-13

cash outflow from investing

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Slide 13-14

cash outflow from financing

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Learning objective 3: Prepare a statement of cash

flows using the direct method

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using the cash basis

 Indirect method

 Reconciles net income to cash flow from operations

 Most used in financial statements

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 Cash flows from operating activities

 Cash collected on sale of

merchandise

 Cash received (paid) related to

interest income (expense)

 Cash received related to dividend

income

 Cash paid to purchase merchandise

 Cash paid for general and

administrative expenses

 Cash paid for income taxes

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 Cash flows from investing activities

 Cash received on the sale of a

machine no longer in use

 Cash paid to buy a machine

 Cash paid to buy a building

 Cash received from selling a

building

 Cash paid to buy a business

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 Cash flows from financing activities

 Cash received from selling bonds

 Cash received from using a line of

credit

 Cash received from issuing common stock

 Cash paid to retire long term debt

 Cash dividends paid

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 Lists specific cash inflows and

outflows from operating activities

 Similar to cash-basis income

statement within the operating

activities section

 FASB requires separate schedule to reconcile cash flows from operating activities and net income

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Slide 13-21

Cash Flows from Operating

Activities (Direct Method)

 To determine cash flows using the

direct method

 Analyze all balance sheet accounts,

other than cash, to determine how

their changes were affected by cash flows

 This analysis will involve

information from the income

statement

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Slide 13-22

 Current asset and current liability

accounts

 The first account is cash received

from customers

 Solving the following equation

yields cash receipts of $10,004,825

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Slide 13-23

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Slide 13-24

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Slide 13-25

 Analyze other current asset and

liability accounts

 Use prepaid insurance and

insurance expense to solve for cash

payments for insurance

 Use accrued wages and salaries and wages and salaries expense to solve for cash payments for wages and

salaries

 Use income taxes payable and

income tax expense to solve for cash payments for income taxes Learning objective 3: Prepare a statement of cash

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Slide 13-26

 Long term asset accounts

 Use accumulated depreciation,

depreciation expense, book value of equipment sold, and loss on sale to

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Slide 13-27

 Long term liabilities and

stockholders’ equity

 Cash paid to reduce debt (or cash

proceeds from borrowing) is the

difference between the beginning

and ending balance of long term

debt

 Use beginning and ending retained

earnings plus net income to solve

for cash payments for dividends

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Operating Activities –

Direct Method

Operating Activities –

Direct Method

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Slide 13-29

RS Inc has the following

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 The indirect method is much more common

 The two methods differ only in

terms of the presentation of cash flows related to operating activities

 There are no differences for inventing activities and financing activities

Preparing the Statement of Cash Flows (Indirect Method)

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 5 step approach to calculate cash

flows from operating activities –

indirect

1 Start with net income

2 Add non-cash expenses such as

depreciation and amortization

3 Subtract gains and add back losses

4 Subtract (add) increases

(decreases) in current assets other than cash

5 Add (subtract) increases

(decreases) in current liabilities

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 The operating activities section is a reconciliation of net income to

cash flows from operating activities

 Current assets

 Increases in current assets indicate

we must reduce income to convert to cash basis

income to convert to cash basis

Preparing the Statement of

Cash Flows (Indirect Method)

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 Current liabilities

 Increases in current liabilities

indicate we must increase income to convert to cash basis

 Decreases in current liabilities

indicate we must reduce income to convert to cash basis

Preparing the Statement of

Cash Flows (Indirect Method)

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Slide 13-34

Indirect Method part 1

flows using the indirect method

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Slide 13-35

Indirect Method part 2

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Slide 13-36

Using the indirect method, changes in

current assets other than cash and current liabilities are used to adjust net income to determine:

b Net cash from investing activities

activities

Answer: c

Net cash provided by operating activities

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Learning objective 5: Interpret information in the

statement of cash flows

 In general, the most important part is

the cash flows from operating

activities

 Unless a company is able to

generate cash from its core operations, it is unlikely to succeed

 If cash flows in this section are low,

this implies that a company must offset them by changes in investing and financing decisions

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Slide 13-38

Statement of Cash Flows

Learning objective 5: Interpret information in the

statement of cash flows

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Slide 13-39

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