c h a p t e r 13 statement of cash flows. learning objective 1 understand the purpose of a statement...
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C H A P T E R 13Statement of Cash Flows
Learning Objective 1
Understand the purpose of a statement of cash flows.
What Does The Statement ofCash Flows Do?
Summarizes a company’s cash flows for a period of time.
Explains how a company’s cash was generated and how that cash was used.
Complementary to the income statement.
Indicates ability of a company to generate income in the future.
Learning Objective 2
Recognize the different types of information reported in the statement of cash flows.
What Are Cash Equivalents?
Short-term, highly liquid investments that can be converted easily into cash.
Examples:Treasury BillsMoney Market FundsCommercial Paper
The Flow of Cash
Cash paidfor operating
activities
Cash paidfor investing
activities
Cash paidfor financing
activities
outflows
Cash receivedfrom operating
activities
Cash receivedfrom investing
activities
Cash receivedfrom financing
activities
Cash andcash
equivalents
inflows
Match Classifications of Cash Flows
1.Transactions and events that enter into the determination of net income.2.Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans.3.Transactions and events whereby resources are obtained from, or repaid to, owners and creditors.
Operating Activities
Financing Activities
Investing Activities
Operating
Activities
Financing Activities
Investing Activities
Statement of Cash Flows
Cash
Cash Inflows
Operating Activities
Investing Activities
Financing Activities
CashCash Outflows
Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
Cash Inflow
• Sale of goods orservices
• Sale of investmentsin trading securities
• Interest revenue
• Dividend revenue
Cash Outflow
• Inventory payments
• Interest payments
• Wages
• Utilities, rent
• Taxes
What Items Are Classified as Operating Activities?
Investing Activities
Cash Inflow• Sale of plant
assets
• Sale of securities, other than trading securities
• Collection of principal on loans
Cash Outflow• Purchase of plant
assets
• Purchase of securities, other than trading securities
• Making of loans to other entities
Cash Inflow• Issuance of own
stock
• Borrowing
Cash Outflow• Dividend
payments
• Repaying principal on borrowing
• Treasury stock purchase
Financing Activities
Define Noncash ItemsNoncash items are items included in the determination of net income on an accrual basis that do not affect cash; examples are depreciation and amortization.
Learning Objective 3
Prepare a simple statement of cash flows.
What is the Format ofthe Statement of Cash Flows?
Cash provided by (used in): Operating activities $XXX Investing activities XXX Financing activities XXXNet increase (decrease) in cash $XXXCash—beginning of year XXXCash—end of year $XXX
A Simple ExampleRed Bull CorporationTrial Balance, 1/1/03
Debit CreditCash $ 500Accounts Receivable 1,300Property, Plant &Equipment
500
Accumulated Depreciation $ 350Accounts Payable 1,100Long-Term Debt 250Common Stock 300Retained Earnings 300Totals $2,300 $2,300
A Simple Example
1. Sales on account, $1,3002. Collections on account, $1,8003. Paid accounts payable, $1,0004. Paid long-term debt, $1005. Issued stock at par value, $2006. Paid interest on debt, $507. Sold equipment, $100 (original cost, $250, accumulated depreciation, $225)
The following transactions were conducted by Red Bull Corp during 2003:
Record the appropriate journal entries.
Accounts Receivable . . . . . . . . . . . . . . 1,300Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800Accounts Receivable . . . . . . . . . . . . . . 1,800
Accounts Payable . . . . . . . . . . . . . . . . . 1,000Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Long-Term Debt . . . . . . . . . . . . . . . . . . 100Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Common Stock . . . . . . . . . . . . . . . . . . . 200
Interest Expense . . . . . . . . . . . . . . . . . . 50Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100Accumulated Depreciation . . . . . . . . . . 225
Property, Plant, & Equipment . . . . . . . . 250Gain on Sale of Equipment . . . . . . . . . . 75
A Simple Example
A Simple ExampleRed Bull Corporation
Trial Balance, 12/31/03
Debit CreditCash $1,450Accounts Receivable 800Property, Plant &Equipment 250Accumulated Depreciation $ 125Accounts Payable 100Long-Term Debt 150Common Stock 500Retained Earnings 1,625Totals $2,500 $2,500
STATEMENT OF CASH FLOWS
Operating activities:Collections on account. . . . . . . . . . . . . $ 1,800 Payment of accounts payable . . . . . . . $1,000
Payment for interest . . . . . . . . . . . . . . . 50 (1,050)Cash flows from operating activities. . . $ 750
Investing activities:Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100
Financing activities:Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)
Cash flows from financing activities . . . 100
A Simple Example
A Simple Example
Statement of Cash Flows (continued)
Net increase in cash. . . . . . . . . . . . . . . . $ 950
Beginning cash balance. . . . . . . . . . . . . 500
Ending cash balance . . . . . . . . . . . . . . . $1,450
Learning Objective 4
Analyze financialstatements to prepare astatement of cash flows.
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Example: Change in Cash
Red Bull Corporation
Beginning cash balance. . . . . . . . . . . . . $ 500Ending cash balance . . . . . . . . . . . . . . . 1,450Net increase in cash. . . . . . . . . . . . . . . . $ 950
Cash Flow Statements—MatchA method of reporting net cash flows from operations that shows the major classes of cash receipts and payments for a period of time.A method of reporting net cash flows from operations that involves converting accrual-basis net income to a cash basis.
Indirect Method
Direct Method
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Income Statement Conversion
Income Statement Adjustments
Cash Flows from
Operations
Sales $1,300 +500 $1,800
Accounts payable -1,000 (1,000)
Interest expense (50) No change (50)
$1,250 -500 net adjustment $ 750
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Investing Activities
Red Bull Corporation sells a piece of equipment for $100 during the year. The T-accounts relating to the equipment and the associated depreciation are given as follows.
PP&E
500
?
250
Acc. Dep.
350 ?
125
PP&E
500
250
250
Acc. Dep.
350225
125
Investing Activities
From the preceding T-Accounts make Red Bull Corporation’s journal entries relating to Property, Plant, & Equipment for the year:
Cash. . . . . . . . . . . . . . . . . . . . . . . . 100Accumulated Depreciation. . . . . . . 225
Property, Plant, & Equipment . . 250Gain on Sale of Equipment . . . . 75
Investing ActivitiesRecord the investing activities section of Red Bull Corporation’s statement of cash flows:
Investing activities:Proceeds from sale of PP&E . . . . . . .$ 100 Cash flows from investing activities . . $ 100
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Investing Activities
Red Bull Corporation’s financing activities section of its statement of cash flows is as follows:
Financing activities:Issued stock. . . . . . . . . . . . . . . . . . . . . .$ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)Cash flows from financing activities . . . $ 100
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
STATEMENT OF CASH FLOWS
Operating activities:Collections on account. . . . . . . . . . . . . $1,800 Payment of accounts payable . . . . . . . $1,000
Payment for interest. . . . . . . . . . . . . . . 50 (1,050)Cash flows from operating activities. . . 750
Investing activities:Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100
Financing activities:Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100)
Cash flows from financing activities . . . 100 Net increase in cash. . . . . . . . . . . . . . . . . $950 Beginning cash balance. . . . . . . . . . . . . . 500 Ending cash balance . . . . . . . . . . . . . . . . $1,450
A Simple Example
6-Step Process for Preparing a Statement of Cash Flows
1. Compute the change in the cash and cash-equivalent accounts for the period of the statement.
2. Convert the income statement from an accrual-basis to a cash-basis summary of operations.
3. Analyze the long-term assets to identify the cash flow effects of investing activities.
4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions.
5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities.
6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.
Define Noncash TransactionsNoncash transactions are investing and financing activities that do not affect cash; if significant, they are disclosed below the statement of cash flows or in the notes to the financial statements.
Learning Objective 5
Use information from thestatement of cash flowsto make decisions.
Cash Flows from
Operating
Cash Flows from
Investing
Cash Flows from
Financing
General Explanation
1. + + + Building up pile of cash. Possibly looking for acquisition.
2. + – –
Operating cash flow being used to buy fixed assets and pay down debt.
3. + + – Operating cash flow and sale of fixed assets being used to pay down debt.
4. + – + Operating cash flow and borrowed money being used to expand.
Analysis of Statement of Cash Flows
continued
Cash Flowsfrom
Operating
Cash Flowsfrom
Investing
Cash Flowsfrom
Financing
GeneralExplanation
5. – + +Operating cash flowproblems covered by saleof fixed assets, borrowing,and contributions.
6. – – +Rapid growth, short falls inoperating cash flow, andpurchase of fixed assets.
7. – + –Sale of fixed assets isfinancing operating cashflow shortages.
8. – – –Company is using cashreserves to finance cashflow short falls and paycreditors.
Analysis of Statement of Cash Flows