Managerial accounting by garrison noreen13th chap015

Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts... Constructing the Statement of Cash Flows Using Changes in Noncash Balance Sheet Accounts It is

“How Well Am I Doing?”

Statement of Cash Flows

Chapter 15

Purpose of the Statement of Cash Flows

Are cash flows

to creditors?

Can we pay dividends?

Can we pay dividends?

Why is there a difference between net income and net cash flow?

Why is there a difference between net income and net cash flow?

Will the company

have to borrow

money to make

needed investments?

Will the company

have to borrow

money to make

needed

investments?

The term cash on the statement of cash flows refers

broadly to both currency and cash equivalents.

Cash

Treasury Bills

Money Market Commercial Currency and

Bank Accounts

Constructing the Statement of Cash Flows Using Changes

in Noncash Balance Sheet Accounts

Constructing the Statement of Cash Flows Using Changes

in Noncash Balance Sheet Accounts

It is implied that cash

was used to acquire the

inventory.

Increases in noncash asset noncash asset

accounts imply uses uses of cash

Constructing the Statement of Cash Flows Using Changes

in Noncash Balance Sheet Accounts

It is implied that an increase

in a payable has the effect

of increasing cash available

for other uses.

Increases in liability liability accounts imply

sources of cash.

Example: Inventory is purchased on credit from

a supplier.

Example: Inventory is purchased on credit from

a supplier.

Constructing the Statement of Cash Flows Using Changes

in Noncash Balance Sheet Accounts

Decreases in noncash assets noncash assets

accounts imply sources sources of cash

Example: Accounts receivable

decreases when a customer

pays their bill.

Example: Accounts receivable

decreases when a customer

pays their bill.

When the customer pays the

bill, the company’s cash

increases.

Constructing the Statement of Cash Flows Using Changes

in Noncash Balance Sheet Accounts

Decreases in liability liability accounts

imply uses uses of cash.

When the payment is made,

cash decreases.

Example: A company pays a note payable held

by a creditor.

Example: A company pays a note payable held

by a creditor.

The Full-Fledged Statement of Cash Flows:

Operating Activities

Operating activities are those activities that enter into the determination of

income

2 Transactions affecting current liabilities

The Full-Fledged Statement of Cash Flows:

Investing Activities

Investing activities relate to transactions involving the acquiring or disposing of

loan

2 Acquiring or selling securities

Financing activities relate to transactions involving borrowing

from creditors or repaying creditors and engaging in transactions with the company’s owners.

1 Issuing stock

and purchasing

treasury stock

3 Payment of dividends (note that interest on debt is classified

as an operating activity)

2 Issuing term debt and repayment of debt.

long-The Full-Fledged Statement of Cash Flows:

Financing Activities

The Full-Fledged Statement of Cash Flows:

An Overview

Operating Activities:

Net income

Changes in current assets

Changes in noncurrent assets that affect net income (e.g., depreciation)

Changes in current liabilities (except for debts to lenders and dividends

Changes in the current liabilities that are debts to lenders rather than

obligations to suppliers, employees, or the government

Changes in noncurrent liabilities that are not included in net income

Changes in capital stock accounts

Dividends

The Full-Fledged Statement of Cash Flows: An

balance Noncash Investing

and Financing

Operating Activities

Sources of cash are added to net

income and uses of cash are deducted from net income.

Other Issues: Direct Method or Indirect Method?

Two Formats for Reporting Operating Activities

No matter which format is used, the same amount of net

A Full-Fledged Statement of Cash Flows:

An Example

Let’s revisit the comparative balance sheet account balances for Ed’s Pizza Hut.

A Full-Fledged Statement of Cash Flows:

An Example

 There was a net loss for the year of $27,000.

 Depreciation charges for the year were $6,000.

 During the year, Ed sold land originally costing

 Ed issued $50,000 of common stock to settle the

 There was a net loss for the year of $27,000.

 Depreciation charges for the year were $6,000.

 During the year, Ed sold land originally costing

In addition, on the

face of the statement or in a supplemental schedule, disclose the issuance of

$50,000 of stock

to a creditor, a noncash financing

activity.

In addition, on the

face of the statement or in a supplemental schedule, disclose the issuance of

$50,000 of stock

to a creditor, a noncash financing

activity.

Example – Indirect Method

Free Cash Flows

Free cash flow measures a company’s ability to

fund its capital expenditures and dividends from

its net cash provided by operating activities

Computing Net Cash Provided by Operating

Activities

The direct method computes net cash provided by operating activities by reconstructing the income statement on a cash basis from top to bottom.

Net cash provided by operating activities under the direct method will

always agree with the amount computed using the indirect method.

Similarities and Differences in Handling Data

Add (+) or Deduct (-) to Adjust to a Cash Basis Sales revenue (as reported)

Increases in accounts receivable

-Decreases in accounts receivable +

Cost of goods sold (as reported)

Increase in merchandise inventory +

Decrease in merchandise inventory

-Increase in accounts payable

-Decrease in accounts payable +

Operating expenses (as reported)

Increase in prepaid expenses +

Decrease in prepaid expenses

-Increase in accrued liabilities

-Decrease in accrued liabilities +

Period's depreciation, depletion and

amortization charges

-Income tax expense (as reported)

Increase in accrued taxes payable

-Decrease in accrued taxes payable +

Increase in deferred income taxes

-Adjustments to a cash basis:

Revenue or Expense Item

Adjustments to a cash basis:

Adjustments to a cash basis:

Adjustments to a cash basis:

Adjustments for accounts that affect revenue are the same in the direct and indirect methods.

Adjustments for accounts that affect expenses are handled in opposite ways for the direct and indirect

methods.

The Direct Method: An Example

Notice that the

net cash provided by operating activities agrees

with that computed using the indirect method.

End of Chapter 15