plain background power point slides chapter 12 the statement of cash flows2948

8/9/2019 Plain Background Power Point Slides Chapter 12 the Statement of Cash Flows2948

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

1

The Statement of CashFlows

Chapter 12


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2

Objective 1

Identify the purposes of thestatement of cash flows.


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3

Reports the entitys cash flows(cash receipts and cash

payments) during the period

Basic Concepts


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4

Purposes of the Statement

of Cash Flows1. Predict future cash flows2. Evaluate management decisions

3. Determine the ability to paydividends to stockholders andpayments to creditors

4. Show the relationship of netincome to the businesss cashflows


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5

What is Cash?

Cash on hand

Cash in the bank

Cash equivalents - highly liquid,short-term investments that can beconverted into cash with little delay

Money-market investments

U.S. Government Treasury bills


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6

Objective 2

Distinguish among operating,investing, and financing cash

flows.


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7

Operating, Investing, and

Financing ActivitiesOperating activities create

revenues, expenses, gains, and

losses.Investing activities increase and

decrease long-term assets.

Financing activities obtain cashfrom investors and creditors.


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8

Two Formats for

Operating ActivitiesIndirect method reconciles from net

income to net cash provided by

operating activitiesDirect method reports all cash

receipts and cash payments fromoperating activities

The two methods have no effect oninvesting or financing activities.


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Two Formats for

Operating ActivitiesIndirect Method

Net income $XXXAdjustments:

Depreciation, etc. XXXNet income provided by operating activities $XXX

Direct Method

Collection from customers $XXXDeductions:Payment to suppliers, etc. XXXNet income provided by operating activities $XXX



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10

Objective 3

Prepare a statement of cashflows by the indirect method.


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11

The Indirect Method:

Operating ActivitiesPositive Items

Net incomeDepreciation/amortization

Loss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilities

Negative Items

Net lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities


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Investing ActivitiesPositive ItemsSale of plant assetsSale of investments that are not cash equivalents

Collections of loans receivable

Negative Items

Acquisition of plant assetsPurchase of investments that are not cash

equivalentsMaking loans to others


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13


Financing ActivitiesPositive Items

Issuing stockSelling treasury stock

Borrowing money

Negative Items

Payment of dividendsPurchase of treasury stockPayment of principal amounts of debts


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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren14

Comparative Balance Sheets

Assets

Current:Cash

Accounts receivableInterest receivableInventoryPrepaid expenses

Long-term receivablePlant assets, net

Total

$ 22933

1358

11453

$725

$ 42801

1387

219

$487

$ (20)132

(3)1

11234

$238

(In thousands) 20x2 20x1 Inc/dec)

Anchor Corporation December 31


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Comparative Balance Sheets

Liabilities

Current:Accounts payableSalary payable

Accrued liabilitiesLong-term debtStockholders equityCommon stockRetained earnings

Total

$ 91341

160

359110

$725

$ 5763

77

25886

$487

$ 34(2)(2)83

10124

$238

(In thousands) 20x2 20x1 Inc/dec)

Anchor Corporation December 31


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Income Statement

Revenues and gains:Sales revenue $284Interest revenue 12

Dividend revenue 9Gain on sale of plant assets 8Total revenues and gains $313

Anchor CorporationYear Ended December 31, 20x2

(In thousands)


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Expenses:Cost of goods sold $150Salary and wage expense 56Depreciation expense 18Other operating expense 17Interest expense 16Income tax expense 15Total expenses $272

Income Statement


(In thousands)


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Total revenues and gains $313Total expenses 272

Net income $ 41

Income Statement


(In thousands)


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Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)

Cash flows from operating activities:Net Income $41

Adjustments to reconcile net income tonet cash provided by operating activities:

A Depreciation 18B Gain on sale of plant (8)

Statement of Cash Flows:

Operating ActivitiesDepreciation does not affectcash, but it decreases netincome add it back in.

Sales of long-term assets areinvesting

Activities remove gains fromnet income.


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C Increase in accounts receivable (13)C Increase in interest receivable (2)C Decrease in inventory 3C Increase in prepaid expenses (1)C

Increase in accounts payable 34C Decrease is salary payable (2)C Decrease in accrued liabilities (2) 27Net cash provided by operating activities $68


Operating ActivitiesStatement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)


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Changes in Current Asset and

Current Liability Accounts C1. An increase in a current asset other

than cash indicates a decrease in cash.

2. A decrease in a current asset otherthan cash indicates an increase in cash.

3. A decrease in a current liability

indicates a decrease in cash.4. An increase in a current liability

indicates an increase in cash.


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Investing Activities

Cash flows from investing activities:Acquisition of plant assets $(306)Loan to another company (11)Proceeds from sale of plant assets 62

Net cash used for investing activities $(255)



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Financing Activities

Cash flows from financing activities:Proceeds from issuance of common stock $101Proceeds from issuance of long-term debt 94Payment of long-term debt (11)

Payment of dividends (17)Net cash provided by financing activities $167



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Statement of Cash Flows

Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $ (20)

Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22



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Computing Acquisition and

Sales of Plant AssetsAnchor had plant assets, net of

depreciation, of $219,000 at the

beginning of the year and$453,000 at year end. Theacquisition of plant assets

amounted to $306,000 duringthe year.


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Sales of Plant AssetsThe income statement shows

depreciation expense of

$18,000 and an $8,000 gain onsale of plant assets. What is thebook value of the assets sold?

Beginning balance + Acquisitions Depreciation Book value of assets sold= Ending balance


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Sales of Plant Assets$219,000 + 306,000 18,000 X = $453,000

How much are the proceeds

from the sale of plant assets?

X = $219,000 + 306,000 18,000 453,000X = $54,000 (book value)


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Sales of Plant Assets

Book value + Gain Loss = Sale proceeds

$54,000 + $8,000 0 = $62,000


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Sales of Plant AssetsPlant Assets (Net)

Beginning bal. 219,000

Acquisitions 306,000

Ending bal. 453,000

Depreciation 18,000

Book val. 54,000



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Sales of InvestmentsBeginning balance + Purchases

Book value ofinvestment sold

= Ending balance


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Computing Issuances and

Payments of Long-Term Debt

Beginning balance was $77,000.

New debt amounting to $94,000was incurred during the year.

The ending balance for the Long-Term

Debt account was $160,000.How much was the payment?


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Computing Issuances and

Payments of Long-Term Debt

Long-Term Debt

Beginning bal. 77,000New debt 94,000Payments 11,000

Ending bal. 160,000



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Computing Issuances of Stock:

Purchases of Treasury Stock

Beginning balance of common stock +Issuance of new stock= Ending balance

Beginning balance of treasury stock +Purchase of treasury stock= Ending balance


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Computing Dividend Payments

Retained earnings beginning balance +Net income Dividends declared

= Ending balance$86,000 + $41,000 X = $110,000

X = $110,000 $86,000 $41,000

X = $17,000


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Noncash Investing andFinancing Activities

Suppose Anchor Corporation issuedCommon stock valued at $300,000

to acquire a warehouse.

Warehouse Building 300,000

Common Stock 300,000


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Noncash Investing andFinancing Activities

Noncash Investing and Financing Activities: (000)Acquisition of building by issuing common

stock $300 Acquisition of land by issuing note payable 70Payment of long-term debt by issuing

common stock 100

Total noncash investing and financingactivities $470



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Learning Objective 4

Prepare a statement of cashflows by the direct method.


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The Direct Method

The FASB has expressed apreference for the direct method

Provides clearer informationabout the sources and uses of acompanys operating cash


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Cash flows from operating activities:Receipts:Collections from customers $271

Interest received on notes receivable 10Dividends received on investments in stock 9Total cash receipts $290

Statement of Cash FlowsYear Ended December 31, 20x2

(In thousands)

The Direct Method


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Payments:To suppliers $133To employees 58For interest 16

For income tax 15Total payments 222Net cash provided by operating

activities $ 68

The Direct Method

Statement of Cash FlowsYear Ended December 31, 20x2

(In thousands)


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Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $(20)

Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22

The Direct Method

Statement of Cash FlowsYear Ended December 31, 20x2 (In thousands)



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Cash Flows fromOperating Activities

Cash collections from customers

Cash receipts of interest

Cash receipts of dividends Payments to suppliers

Payments to employees

Payments for interest and incometax expense


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Purchases of plant assets;investments in, and loans to,

other companiesProceeds from the sale of plant

assets and investments; andthe collections of loans

Cash Flows fromInvesting Activities


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Proceeds from the issuance ofstock and debt

Payment of debt and purchasesof the companys own stock

Payment of cash dividends

Cash Flows fromFinancing Activities


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Computing Cash Collectionsfrom Customers

Beginning accounts receivable balance

+ Sales on account Collections= Ending accounts receivable balance


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Computing Paymentsto Suppliers

Step 1: How much were thepurchases?

Beginning inventory + Purchases Costof goods sold = Ending Inventory

$138,000 + X $150,000 = $135,000

X = $150,000 $138,000 + $135,000

X = $147,000


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Accounts Payable

Payments for inventoryBeg. balance 57,000Purchases 147,000

End. balance 91,000


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Step 2: How much did the businesspay for this inventory?

Beginning Accounts Payable + Purchases Payments = Ending Accounts Payable

$57,000 + $147,000 X = $91,000

X = $57,000 + $147,000 $91,000X = $113,000


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Computing Payments forOperating Expenses

Beginning prepaid expense + Payments Expiration of prepaid expense

= Ending balanceBeginning accrued liabilities + Accrual of

expense at year end Payments= Ending balance

Accrual ofother operating expenses at year end+ Expiration of prepaid expense + Payments

= Ending balance


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Computing Payments toEmployees

Salary Payable was $6,000 at thebeginning of the year and $4,000 at

year end. During the year, SalaryExpense was $56,000. How muchdid the business pay?

$58,000


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Measuring Cash Adequacy:Free Cash Flow

The amount of cash available fromoperations after paying for planned

investments in plant, equipment,and other long-term assets.

Net cash flow from operating activities

Cash outflow earmarked for investments inplant, equipment, and other long-term assets


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End ofChapter 12

plain background power point slides chapter 12 the statement of cash flows2948

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