1 the statement of cash flows c hapter 22 an electronic presentation by norman sunderman angelo...

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The Statement of Cash Flows

Chapter22

An electronic presentation by Norman Sunderman Angelo State University

An electronic presentation by Norman Sunderman Angelo State University

COPYRIGHT © 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Intermediate AccountingIntermediate Accounting 10th edition 10th edition

Nikolai Bazley JonesNikolai Bazley Jones

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1. A firm’s ability to generate positive cash flows from operating activities.

2. A firm’s ability to meet its obligations and pay dividends.

3. The reasons for the difference between net income and net cash flows.

4. The effect of investing and financing on a firm’s financial position.

5. Both the cash and noncash investing and financing transactions during the period.

Purpose of a Cash Flow Statement

Helps users assessHelps users assessHelps users assessHelps users assess

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Operating Activities

Operating activities include all transactions and other

events that are not investing and financing activities.

Operating activities include all transactions and other

events that are not investing and financing activities.

Operating activities include transactions involving acquiring,

selling, and delivering goods for sale, as well as

providing services.

Operating activities include transactions involving acquiring,

selling, and delivering goods for sale, as well as

providing services.Cash receipts from the sale of goods or services

and collections of accounts receivable are

typical cash inflows from operating

activities.

Cash receipts from the sale of goods or services

and collections of accounts receivable are

typical cash inflows from operating

activities.

Cash payments to suppliers for inventory

and on account, for wages, and for taxes are examples

of cash outflows from operating activities.

Cash payments to suppliers for inventory

and on account, for wages, and for taxes are examples

of cash outflows from operating activities.

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Investing ActivitiesInvesting activities include transactions involving noncurrent assets and short-

term investments.Outflows (3) Inflows (3)

1. Lending money and collecting principal on the loans.

2. Acquiring and selling investments (both current and noncurrent).

3. Acquiring and selling property, plant, and equipment.

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Financing Activities

Financing activities include transactions involving liabilities & equity:

Inflows (2)1. Issuing stock for cash

(new issue or treasury stock)2. Borrowing money (bonds and notes)Outflows (3)1. Paying cash dividends2. Repayments of amounts borrowed3. Purchase of treasury stock

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Cash and Cash Equivalents

The cash flow statement is prepared using cash and cash equivalents. Cash equivalents

─ Within 3 months of maturity when purchased─ No risk--treasury bonds, treasury notes,

treasury bills, money market, commercial paper

─ Known amount of cash Purchases of cash equivalents are not reported

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Indirect and Direct Methods

FASB No. 95 allows two ways for a company to calculate and report its

net cash flow from operating activities on its statement of cash flows.

FASB No. 95 allows two ways for a company to calculate and report its

net cash flow from operating activities on its statement of cash flows.

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Indirect and Direct Methods

Even though the FASB recommends the direct

method, more than 98% of companies use the

indirect method.

Even though the FASB recommends the direct

method, more than 98% of companies use the

indirect method.

The first is called the direct method and the second is the indirect

method.

The first is called the direct method and the second is the indirect

method.

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Steps in Visual Inspection Method-Indirect Method

1. Prepare the statement’s heading and list the three major sections.

2. Determine the net income and list it as the first item in the net cash flow from operating activities section.

3. Add back any non-cash expenses.4. Adjust net income for gains and losses

not related to operations.

ContinuedContinuedContinuedContinued

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5. Adjust net income for the change in deferred taxes

6. Adjust net income for income and losses on investments carried under the equity method.



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7. Examine all working capital accounts, except cash, short-term non-trade notes payable and dividends payable.

A DDebit to a noncash account is a DDecrease in cash. (If the account had net debits during the year).

A Credit to a noncash account is an increase in cash. (if the account had net credits during the year).



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8. Calculate the cash provided or cash used by operating activities.

9. Examine comparative balance sheets for changes in non-current assets.

10. Calculate the cash provided or cash used by investing activities.

11. Examine long-term liabilities and equity accounts.



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12. Calculate the cash provided or cash used by financing activities.

13. Calculate the net change in cash that occurred during the accounting period.

14. Add the beginning cash15. The total should equal the ending cash

on the balance sheet16. List interest and taxes paid.17. List significant noncash investing and

financing activities.


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Simple Statement of Cash Flows

RYAN COMPANYStatement of Cash Flows

For Year Ended December 31, 2007

The statement’s

heading

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Adjustments to Net Income

Remember the adjustments to net income are:

• Noncash expenses• Gains/losses on

investments• Deferred taxes• Equity income• Working capital changes

Remember the adjustments to net income are:

• Noncash expenses• Gains/losses on

investments• Deferred taxes• Equity income• Working capital changes

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Indirect Method-Ryan Corporation

Net Cash flows From Operating Activities:Net income $14,000 Adjustments for differences between income flows and cash flows for operating activities:Add: Depreciation expense 8,000

Decrease in accounts receivable 2,600 Increase in salaries payable 800

Less: Increase in inventory (2,000)Decrease in accounts payable (7,000)

Net cash provided by operating activities $16,400

Added back Added back since since

depreciation depreciation is not an is not an

outflow of outflow of cash.cash.

Same number as Same number as direct methoddirect method

Credits to Credits to noncash noncash accountsaccounts

Debits to Debits to noncash noncash accountsaccounts

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Leyton Company InformationPage 1140Page 1140Page 1140Page 1140

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Simple Statement of Cash Flows-Leyton Company

Net Cash Flow From Operating ActivitiesNet income $ 7,000 Adjustments for differences between income

and cash flows from operating activities:Add: Depreciation expense 2,300

Increase in accounts payable 1,500 Less: Increase in accounts receivable (2,700) 1,100Net cash provided by operating activities $8,100

Cash Flows From Investing ActivitiesPayment for purchase of building $(12,000)Proceeds from sale of land, at cost 3,000 Net cash used for investing activities (9,000)


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Simple Statement of Cash Flows


Net cash used for investing activities (9,000)

Cash Flows From Financing ActivitiesProceeds from issuance of bonds $ 7,000 Payment of dividends (3,500)Net cash provided by financing activities 3,500

Net increase in Cash $2,600 Cash, January 1, 2007 4,000 Cash, December 31, 2007 $6,600

This amount should match the balance This amount should match the balance of the of the CashCash account in the ledger. account in the ledger.

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Sale of Equipment

Dack Company sold equipment with a cost of $2,200 and

accumulated depreciation of $700 for $2,100.

Dack Company sold equipment with a cost of $2,200 and

accumulated depreciation of $700 for $2,100.

Gains and losses from investing activities should be eliminated

from operating activities by adding losses and deducting gains

from net income.

Gains and losses from investing activities should be eliminated

from operating activities by adding losses and deducting gains

from net income.

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Historical cost 2,200Less: Accumulated depreciation 700Book value $1,500Gain (not operating) ?Cash proceeds $2,100

Deduct $600 from net income to reconcile net

income to operating cash.

Deduct $600 from net income to reconcile net

income to operating cash.

Sale of Equipment

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Interest Paid and Income Taxes Paid

FASB Statement Number 95 requires that a company using

the indirect method also disclose its interest paid and income taxes

paid.

FASB Statement Number 95 requires that a company using

the indirect method also disclose its interest paid and income taxes

paid.

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Interest Expense Interest Payable

Bal. 0 1,100

Jones Company had $1,100 of interest expense, including $100 amortization of bond discount. The beginning balance in Interest Payable was $0 and the ending balance was $500. How much cash was

paid for interest?

Jones Company had $1,100 of interest expense, including $100 amortization of bond discount. The beginning balance in Interest Payable was $0 and the ending balance was $500. How much cash was

paid for interest?

1,000Cash Paid 500

Bal. 500

= $1,000

= $1,000$100 discount $100 discount amortizationamortization

will not requirewill not requirecashcash

Interest Paid

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Taxes Payable/Deferred Taxes

Cash Paid 2,820 1,500 Bal.--Taxes Payable

1,920 Bal.--Deferred Taxes

2,130 Bal.--Taxes Payable

2,100 Bal.--Deferred Taxes

The beginning and ending balances in Taxes Payable were $1,500 and $2,130 and the beginning and ending balances in Deferred Taxes were $1,920 and $2,100. Tax Expense

was $3,630. How much cash was paid?

The beginning and ending balances in Taxes Payable were $1,500 and $2,130 and the beginning and ending balances in Deferred Taxes were $1,920 and $2,100. Tax Expense

was $3,630. How much cash was paid?

3,630 Taxes Expense

= $7,050

= $7,050

Taxes PaidTaxes Payable and Deferred Taxes can be combined to find taxes paid.

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Direct MethodUnder the direct method, a

company deducts its operating cash outflows from its operating cash inflows to determine its net cash flow from operating activities.

Under the direct method, a company deducts its

operating cash outflows from its operating cash inflows to determine its net cash flow from operating activities.

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Direct Method

Inflows (3)1. Cash from customers (A/R)2. Cash from interest revenue (Interest Receivable)3. Cash from dividend revenue (Dividends Rec.)Outflows (5)1. Cash paid to suppliers (A/P)2. Cash paid for wages (Wages Payable)3. Other cash expenses (Prepaid/Accrued)4. Cash paid for interest expense (Interest Payable)5. Cash paid for taxes (T/P and Deferred Tax)

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Direct Method

Use T accounts to examine the 3 inflows and 5 outflows

in the direct method.

Use T accounts to examine the 3 inflows and 5 outflows

in the direct method.

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Sales Revenue Accounts Receivable

Bal. 0 30,00042,000

Smith Company made cash sales of $30,000 and credit sales of $42,000. How much cash

was collected from customers?

Smith Company made cash sales of $30,000 and credit sales of $42,000. How much cash

was collected from customers?

42,000

Bal. 5,000

37,000

$67,000

Cash From Customers

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Interest Receivable Dividends Receivable

Bal. 0Revenue 4,000Bal. 1,000

Bal. 30,000Revenue 42,000Bal. 12,000

Ives Company earned interest revenue of $42,000 & dividend revenue of $4,000. Interest Receivable had a beginning balance of $30,000 and an ending balance of $12,000. Dividends receivable had a beginning balance of $0 and an ending balance of $1,000. How much cash

from interest and dividends was collected?

Ives Company earned interest revenue of $42,000 & dividend revenue of $4,000. Interest Receivable had a beginning balance of $30,000 and an ending balance of $12,000. Dividends receivable had a beginning balance of $0 and an ending balance of $1,000. How much cash

from interest and dividends was collected?

Dividends and Interest Collected

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Interest Receivable Dividends Receivable

Bal. 0Revenue 4,000Bal. 1,000

Bal. 30,000Revenue 42,000

Bal. 12,000

Ives Company earned interest revenue of $42,000 and dividend revenue of $4,000. During the year $60,000 of interest and

$3,000 of dividends was collected.

Ives Company earned interest revenue of $42,000 and dividend revenue of $4,000. During the year $60,000 of interest and

$3,000 of dividends was collected.

60,000 3,000

Dividends and Interest Collected

=72,000

=72,000

=4,000

=4,000

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Cash Paid to Suppliers

Copeland Company had beginning and ending balances in Accounts Payable of $10,300 and $12,100, respectively. The beginning and ending balances in inventory were $12,500

and $11,000 respectively. The cost of goods sold was $51,000. How much cash was paid to suppliers?

Copeland Company had beginning and ending balances in Accounts Payable of $10,300 and $12,100, respectively. The beginning and ending balances in inventory were $12,500


Accounts Payable Inventory

Bal. 12,500

Bal. 11,000

10,300

12,100

51,000 Cost of goods sold

49,500 Purchases 49,500

Cash paid $47,700

62,000

59,800

59,800

62,000

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Prepaid/Accrued Expenses

Prepaid Bal. 20,000

Prepaid Bal. 12,000

60,000 Accrued Bal.

300,000 Cash operating expenses

32,000 Accrued Bal.

Wolverine Company had beginning and ending balances in accrued expenses of $60,000 and $32,000, respectively. It had beginning and ending balances in prepaid expenses of $20,000

and $12,000, respectively. It had cash operating expenses of $300,000. How much cash was paid for expenses?

Wolverine Company had beginning and ending balances in accrued expenses of $60,000 and $32,000, respectively. It had beginning and ending balances in prepaid expenses of $20,000

and $12,000, respectively. It had cash operating expenses of $300,000. How much cash was paid for expenses?

Prepaid and accrued expenses can be combined to calculate the cash paid. Cash operating expenses exclude depreciation, amortization and depletion.

=$372,000

=$372,000

Cash Expenses

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Wolverine Company paid $320,000 for expenses.

Wolverine Company paid $320,000 for expenses.

Prepaid/Accrued Expenses

Prepaid Bal. 20,000Cash paid 320,000

Prepaid Bal. 12,000

60,000 Accrued Bal.

300,000 Cash operating expenses

32,000 Accrued Bal.

Cash Expenses

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Cash Paid to Employees

Smith Company had beginning and balances in Salaries Payable of $0 and $1,000. respectively. Salary expense for the year was $14,000. How

much cash was paid to employees?

Smith Company had beginning and balances in Salaries Payable of $0 and $1,000. respectively. Salary expense for the year was $14,000. How

much cash was paid to employees?

Salaries Payable

Cash paid 13,000

0 Bal.

14,000 Salaries expense

1,000 Bal.

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Sales revenue (cash and A/R) $70,000 Less:

Cost of goods sold (cash and A/P)$(29,000)Salaries expense (cash and S/P) (13,000)Depreciation expense (8,000) (50,000)

Income before income taxes $20,000Income tax expense (cash) (6,000)Net income $14,000

Ryan Corporation’s Income Statement

Ryan Corporation’s Income Statement

Direct Method

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Sales Revenue Accounts Receivable

Bal. 22,600 70,000

Accounts receivable decreased by $2,600 for Ryan Company. How much cash was

collected from customers?

Accounts receivable decreased by $2,600 for Ryan Company. How much cash was

collected from customers?

70,000

Bal. 20,000

72,600

$72,600

Cash From Customers-Ryan Company

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Direct Method

Inflows (3)1. Cash from customers (A/R)2. Cash from interest revenue (Interest Receivable)3. Cash from dividend revenue (Dividends Rec.)Outflows (5)1. Cash paid to suppliers (A/P)2. Cash paid for wages (Wages Payable)3. Other cash expenses (Prepaid/Accrued)4. Cash paid for interest expense (Interest Payable)5. Cash paid for taxes (T/P and Deferred Tax)

Remember to check for these cash flows.

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Cash Paid to Suppliers-Ryan Company

Ryan Company had beginning and ending balances in Accounts Payable of $10,300 and $3,300, respectively. The beginning and ending balances in inventory were $9,000


Ryan Company had beginning and ending balances in Accounts Payable of $10,300 and $3,300, respectively. The beginning and ending balances in inventory were $9,000


Accounts Payable Inventory

Bal. 9,000

Bal. 11,000

10,300

3,300

29,000 Cost of goods sold

31,000 Purchases 31,000

Cash paid $38,000

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Cash Paid to Employees-Ryan Company

Ryan Company had beginning and balances in Salaries Payable of $200 and $1,000. respectively. Salary expense

for the year was $13,000. How much cash was paid to employees?

Ryan Company had beginning and balances in Salaries Payable of $200 and $1,000. respectively. Salary expense

for the year was $13,000. How much cash was paid to employees?

Salaries Payable

Cash paid 12,200

200 Bal.

13,000 Salaries expense

1,000 Bal.

Ryan Company had no change in the Taxes Payable and Deferred Taxes accounts.

Ryan Company had no change in the Taxes Payable and Deferred Taxes accounts.

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Cash flows From Operating Activities:Cash Inflows:

Cash received from customers$72,600 Cash inflows from operating activities $72,600

Cash Outflows:Cash paid to suppliers $(38,000)Cash paid to employees (12,200)Cash paid for income taxes (6,000)Cash outflows for operating activities (56,200)


Direct Method-Ryan Company

41Reconciliation of Net Income to Cash Provided by Operations-

Direct Method

When the direct method is used, a schedule to

reconcile net income to cash provided by

operations is required.

When the direct method is used, a schedule to

reconcile net income to cash provided by

operations is required.

In other words, the indirect method is

required even when using the direct method.

In other words, the indirect method is

required even when using the direct method.

Yes.Yes.

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Step 1: Prepare the column headings on a worksheet. Then enter the account title Cash on the first line of the account titles column and list the beginning balance, ending balance, and the change in cash in the respective columns.

Step 2: Enter the titles of all the remaining accounts from the balance sheets on the worksheet and list each beginning and ending account balance, and the change in the account balance directly below the cash information.

Worksheet Method

Steps 1-3: Setting up the worksheetSteps 1-3: Setting up the worksheet

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Step 3: Directly below these accounts, add the following headings:A. Net Cash Flow From Operating ActivitiesB. Cash Flows From Investing ActivitiesC. Cash Flows From Financing ActivitiesD. Investing and Financing Activities NotAffecting Cash


Leave sufficient room below each heading.Leave sufficient room below each heading.

Worksheet Method

Steps 1-3: Setting up the worksheetSteps 1-3: Setting up the worksheet

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Account for all the changes in the noncash accounts. Reconstruct the journal entries that caused the changes in the noncash accounts directly on the worksheet. Use these general rules: (A) Start with net income. (B) Account for the changes in the current assets (except cash) and current liability accounts. (C) Account for the changes in the noncurrent accounts.


Worksheet Method

Step 4: Completion of the worksheetStep 4: Completion of the worksheet

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Make a final worksheet entry to record the net change in cash. The difference between the total cash inflows and outflows must be equal to the change in the Cash account.

Prepare the statement of cash flows and the accompanying schedule from the information developed on the worksheet.

Worksheet Method

Step 5: Record the net change in cashStep 5: Record the net change in cash

Step 6: Prepare the final worksheet entryStep 6: Prepare the final worksheet entry

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Analyzing Complex TransactionsAnalyzing Complex Transactions

First, let’s reconstruct the original entry.

First, let’s reconstruct the original entry.During the year the company sold land

that cost $2,200 for $3,900.

During the year the company sold land that cost $2,200 for $3,900.

Worksheet Method

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Cash 3,900Land

2,200Gain on Sale of Land

1,700Cash Flows From Investing Activities:Proceeds From Sale of Land 3,900

Land 2,200Net Cash Flow From Operating Activities: Gain 1,700

Now, we can analyze the entry to help us with recording it on

the worksheet.

Now, we can analyze the entry to help us with recording it on

the worksheet.

Worksheet Method

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This is a tougher one.This is a tougher one.

Analyzing Complex TransactionsAnalyzing Complex TransactionsDuring the year, an earthquake

(extraordinary event) occurred that destroyed a building owned by the

company with a cost of $10,000 and a book value of $5,200. The company received after-tax proceeds of $3,100

from its insurance company.

During the year, an earthquake (extraordinary event) occurred that destroyed a building owned by the

company with a cost of $10,000 and a book value of $5,200. The company received after-tax proceeds of $3,100

from its insurance company.

Worksheet Method

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Cash 3,100Accumulated Depreciation: Buildings 4,800Extraordinary loss 2,100

Buildings 10,000

Cash Flows From Investing Activities:Proceeds From Building Destroyed byEarthquake 3,100

Accumulated Depreciation: Buildings 4,800Net Cash Flow From Operating Activ.2,100

Buildings 10,000

Now, we can reconstruct the entry.

Now, we can reconstruct the entry.

Worksheet Method

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On January 1, the company issued bonds payable with a face value of

$10,000, receiving proceeds of $9,000. The company amortized $100 of the

discount during the year.

On January 1, the company issued bonds payable with a face value of

$10,000, receiving proceeds of $9,000. The company amortized $100 of the

discount during the year.

Let’s reconstruct both entries related to the bond issue and prepare them for

the worksheet.

Let’s reconstruct both entries related to the bond issue and prepare them for

the worksheet.

Worksheet Method

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Cash 9,000Discount on Bonds Payable 1,000

Bonds Payable, 10% 10,000

Cash Flows From Financing Activities:Proceeds From Issuance of Bonds 9,000

Discount on Bonds Payable 1,000Bonds Payable, 10% 10,000


Worksheet Method

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Bond Discount Amortization 100Discount on Bonds Payable 100

Cash Flows From Operating Activities:Bond Discount Amortization 100

Discount on Bonds Payable 100

Worksheet Method

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A company acquired land for $10,000 by paying $1,000 down and

signing a $9,000 note payable.

A company acquired land for $10,000 by paying $1,000 down and

signing a $9,000 note payable.

Partial Cash Investing and Financing Activities

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Land 10,000Cash 1,000Notes Payable 9,000

Land 10,000Cash Used For Investing Activities: Purchased Land 1,000Note Payable 9,000Reconstruct the entry for the

worksheet.

Reconstruct the entry for the worksheet.

Make the worksheet entry in journal entry format.



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Schedule of Noncash

Transactions

The purchase of the land is shown as a $9,000 investing

activity…

The purchase of the land is shown as a $9,000 investing

activity…

…and the issuing of the note is shown as a $9,000

financing activity.

…and the issuing of the note is shown as a $9,000

financing activity.


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A company acquired land for $18,000 by paying $15,000 down and signing a

$3,000 note payable.

A company acquired land for $18,000 by paying $15,000 down and signing a

$3,000 note payable.

Cash Flows From Investing ActivitiesPurchase of land by issuance of note

and cash$(18,000 )Less: Issuance of note 3,000

Cash payment for purchase of land $15,000

Cash Flows From Investing ActivitiesPurchase of land by issuance of note

and cash$(18,000 )Less: Issuance of note 3,000

Cash payment for purchase of land $15,000


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Land 10,000Cash 1,000Notes Payable 9,000

Land 10,000Cash Used For Investing Activities: Purchased Land 1,000Notes Payable 9,000Reconstruct the entry for the

worksheet.

Reconstruct the entry for the worksheet.




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On November 28, 2007, Dougherty Company purchased 1,000 shares of Bear Company common

stock for $40,000 as a temporary investment in available-for-sale securities. On December 31, 2007,

the fair value of the stock was $42 per share.

On November 28, 2007, Dougherty Company purchased 1,000 shares of Bear Company common

stock for $40,000 as a temporary investment in available-for-sale securities. On December 31, 2007,

the fair value of the stock was $42 per share.

(1) Reconstruct the two entries related to this investment.

(2) Make the worksheet entry in journal format.

(1) Reconstruct the two entries related to this investment.

(2) Make the worksheet entry in journal format.

Temporary and Long-Term Investments

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Temporary Investment in Available-for-Sale Securities 40,000

Cash 40,000

Temporary Investment in Available-for Sale Securities 40,000

Cash Flows From Investing Activities: Payment for Purchase

of Temporary Investment 40,000


(1)

(2)


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Allowance for Change in Value of Investment 2,000

Unrealized Increase in Value of Available-for-Sale Securities 2,000



No change! The debit portion appears only in the upper portion of the

worksheet.

No change! The debit portion appears only in the upper portion of the

worksheet.

(1)

(2)


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On January 16, 2008, Dougherty Company sold its investment in Bear Company stock for $45,000.

On January 16, 2008, Dougherty Company sold its investment in Bear Company stock for $45,000.

Cash 45,000Temporary Investment in

Available-for-Sale Securities 40,000Gain on Sale of Temporary Invest. 5,000




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Cash Flows From Investing Activities:Proceeds From Sale of TemporaryInvestment 45,000

Temporary Investment in Available-for-Sale Securities 40,000

Net Cash Flow From Operating Activities: Gain on Sale of Temporary

Investment 5,000

The second entry is unchanged.The second entry is unchanged.


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Chapter22

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1 the statement of cash flows c hapter 22 an electronic presentation by norman sunderman angelo...

Documents

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cash payments

cash receipts

net cash flows

cash flow statement

positive cash flows

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