Lecture Principles of financial accouting - Chapter 16: Reporting the statement of cash flows

After completing this chapter you should be able to: Distinguish between operating, investing, and financing activities, and describe how noncash investing and financing activities are disclosed; analyze the statement of cash flows and apply the cash flow on total assets ratio; prepare a statement of cash flows; compute cash flows from operating activities using the indirect method.

PowerPoint Authors:

Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA

McGraw­Hill/Irwin         Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved.

Statement of Cash Flows

Where does a company spend its

How did the

business fund its

operations?

How did the

business fund its

operations?

Did the business borrow any funds or repay any loans?

Did the business borrow any funds or repay any loans?

Does the business have sufficient cash

to pay its debts as they mature?

Does the business have sufficient cash

to pay its debts as they mature?

Did the business

make any dividend

payments?

Did the business

make any dividend

payments?

Importance of Cash Flows

Currency

Cash

Equivalents

 Short-term, highly liquid investments.

 Readily convertible into cash.

 Sufficiently close to maturity so that market value is

unaffected by interest rate changes.

 Short-term, highly liquid investments.

 Readily convertible into cash.

 Sufficiently close to maturity so that market value is

unaffected by interest rate changes.

Measurement of Cash Flows

Classification of Cash Flows

The Statement of Cash Flows

includes the following three

 Selling equity investments

 Collecting principal on loans

Inflows

 Selling long-term productive

assets

 Selling equity investments

 Collecting principal on loans

Investing Activities

C1

 Purchasing treasury shares

 Repaying cash loans

Outflows

 Purchasing treasury shares

 Repaying cash loans

Inflows

 Issuing its own equity

securities

 Issuing bonds and notes

 Issuing short- and long-term

 Issuing bonds and notes

 Issuing short- and long-term

liabilities

 Contributions by owners

Financing Activities

C1

Operating Investing Financing

Reporting entities have choices in classifying interest and dividends

C1

Noncash Investing and Financing

Items requiring separate disclosure include:

 Retirement of debt by issuing equity securities.

 Conversion of preference shares to ordinary shares.

Items requiring separate disclosure

Format of the Statement

of Cash Flows

Preparing the Statement

of Cash Flows

P1

Analyzing the Cash Account

Analyzing the Cash Account

P1

Cash from Operating

Cash from Investing

Cash from Financing

Cash Proved

Analyzing Noncash Account

P1

A second approach to preparing the statement

of cash flows is analyzing noncash accounts

Information to Prepare the Statement

P1

Comparative

Balance Sheets

Current Income Statement

Additional InformationInformation to prepare the statement of cash

flows usually comes from three sources:

Cash Flows from Operating Indirect and Direct Methods of Reporting

The net cash amount

provided by operating

activities is identical under

both the direct and indirect

methods.

Direct Method

Indirect

Method

Application of the Indirect Method of Reporting

P2

Application of the Indirect Method of Reporting

P2

Additional information on Genesis Inc.’s 2011 transactions:

a) The accounts payable balances result from merchandise

inventory purchases

b) Purchased $70,000 in property, plant and equipment by

paying $10,000 cash and issuing $60,000 of notes payable

c) Sold property, plant and equipment with an original cost of

$30,000 and accumulated depreciation of $12,000 for $12,000 cash, yielding a $6,000 loss

d) Received $15,000 cash from issuing 3,000 shares of no-par ordinary shares

e) Paid $18,000 cash to retire notes with a $34,000 carrying

amount, yielding a $16,000 gain

f) Declared and paid cash dividends of $14,000

Cash Flows from Operating Activities

Changes in noncash current assets and current

liabilities

Changes in noncash current assets and current

+ Noncash expenses such as depreciation and amortization

Application of the Indirect Method of Reporting

P2

1

Why start with income before taxes?

(IFRS)

 Cash flows arising from taxes on income

should be separately disclosed and should be classified as cash flows from operating

Cash Flows from Operating Activities

Use this table when adjusting income before

taxes to operating cash flows

Change in Account Balance During Year

Liabilities Add to income Subtract from income

Noncash Current Assets and Current Liabilities

P2 Adjustments for Changes in

NonCASH Current Assets and

Current Liabilities

Adjustments for Operating Items

Not Providing or Using Cash

Adjustments for Nonoperating Items

Interest Revenues, Dividend Revenues, Interest Expenses and Income Taxes

Under IFRS, interest and dividends received, interest paid and

income taxes must be separately shown.

Since interest and dividend revenues are added to

derive income amount, adjustments involve deducting these amounts from income.

Interest expenses are added to income to

cancel the earlier deduction.

P2

COMPLETING THE OPERATING SECTION

P2 Summary of Adjustments

for Indirect Method

Common adjustments to income when computing net cash provided or

used by operating activities under the indirect method:

Report their cash flow effects

A three-stage process to determine cash

provided or used by investing activities:

P3 Cash Flows from Investing

This analysis reveals a $40,000 increase in property, plant and equipment from $210,000 to

$250,000 and a $12,000 increase in accumulated depreciation from $48,000 to

$60,000

Cash Flows from Investing

Item b: Genesis purchased property, plant and equipment of $70,000

by issuing $60,000 in notes payable to the seller and paying $10,000

in cash

Item c: Genesis sold property, plant and equipment costing $30,000

(with $12,000 of accumulated depreciation) for $12,000 cash,

resulting in a $6,000 loss

We also reconstruct the entry for Depreciation Expense using

information from the income statement

P3 Cash Flows from Investing

Report their cash flow effects

A three-stage process to determine cash

provided or used by financing activities:

P3 Cash Flows from Financing

This analysis reveals:

1.an increase in notes payable from $64,000 to $90,000,

2.an increase in share capital from $80,000 to $95,000, and 3.an increase in retained

earnings from $88,000 to

$112,000

Cash Flows from Financing

Item e: Notes with a carrying amount of $34,000 are retired for

$18,000 cash, resulting in a $16,000 gain

Item b: Genesis purchased property, plant and equipment of $70,000

by issuing $60,000 in notes payable to the seller and paying $10,000

in cash

Cash Flows from Financing

Item d: Issued 3,000 no-par ordinary shares for $5 per share

Item f: Cash dividends of $14,000 are paid

P3

P3

Analyzing Cash Sources and Uses

A1

Most managers stress the importance of understanding and predicting cash flows for business

decisions

Used, along with income-based ratios, to

assess company performance.

Used, along with income-based ratios, to

assess company performance.

Cash flow on total assets = Operating cash flows Average total assets

Cash Flow on Total Assets

A1

Appendix 16A: Direct Method of Reporting Operating Cash Flows

P4

Adjust income statement accounts related to operating activities

for changes in their related balance sheet accounts:

Framework for reporting cash receipts and cash payments

Appendix 16A: Direct Method of Reporting Operating Cash Flows

P4

End of Chapter 16