© the mcgraw-hill companies, inc., 2002 mcgraw-hill/irwin slide 13-1 statement of cash flows...

© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin

Slide 13-1

STATEMENT OF CASH FLOWS

Chapter

13


Slide 13-2

Provides information about the cash receipts and cash payments of a business entity

during the accounting period.

Provides information about the cash receipts and cash payments of a business entity

during the accounting period.

Helps investors with questions about the company’s:

Ability to generate positive cash flows. Ability to meet its obligations and to pay

dividends. Need for external financing. Investing and financing transactions for the

period.

Helps investors with questions about the company’s:

Ability to generate positive cash flows. Ability to meet its obligations and to pay

dividends. Need for external financing. Investing and financing transactions for the

period.

Purpose of the Statement of Cash Flows

Purpose of the Statement of Cash Flows


Slide 13-3


Slide 13-4

The Statement of Cash Flows must include the following three sections:

Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities

The Statement of Cash Flows must include the following three sections:

Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities

Classification of Cash FlowsClassification of Cash Flows


Slide 13-5

Outflows to: Suppliers of merchandise

and services. Employees. Lenders for interest. Governments for taxes.

Outflows to: Suppliers of merchandise

and services. Employees. Lenders for interest. Governments for taxes.

Inflows from: Sales to customers. Interest and dividends

received.

Inflows from: Sales to customers. Interest and dividends

received. Cash Flows from

Operating Activities

Cash Flows from

Operating Activities

+

_

Operating Activities Operating Activities


Slide 13-6

Cash Flows from

Investing Activities

Cash Flows from

Investing Activities

+

_

Inflows from: Selling investments and plant

assets. Collecting of principal on loans.

Inflows from: Selling investments and plant

assets. Collecting of principal on loans.

Outflows to: Payments to acquire

investments and plant assets. Purchase debt or equity

investments. Make loans.

Outflows to: Payments to acquire

investments and plant assets. Purchase debt or equity

investments. Make loans.

Investing Activities Investing Activities


Slide 13-7

+

_

Inflows from: Short-term and long-term

borrowing. Owners (for example, from

issuing stock).

Inflows from: Short-term and long-term

borrowing. Owners (for example, from

issuing stock).

Outflows to: Repayments of borrowed

funds. Owners for dividends. Purchase treasury stock.

Outflows to: Repayments of borrowed

funds. Owners for dividends. Purchase treasury stock.

Financing Activities Financing Activities

Cash Flows from

Financing Activities

Cash Flows from

Financing Activities


Slide 13-8

Cash Equivalents

CashCashCurrency

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by

interest rate changes.

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by

interest rate changes.

Cash and Cash EquivalentsCash and Cash Equivalents


Slide 13-9

The operating cash flows section

can be prepared using either the direct method or

the indirect method.

The operating cash flows section

can be prepared using either the direct method or

the indirect method.

Let’s look at the Direct

Method for preparing the Statement of Cash Flows.


Slide 13-10

Accrual basis revenue includes sales that did not result in cash inflows.

Can be computed as:

Cash Received from Customers


Decrease in receivables


Increase in receivablesIncrease in receivables

+

–

=

=

Net SalesNet Sales

Direct MethodCash Received from Customers



Slide 13-11

+

–

=

=

The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue

for 2003 was $900,000, what was cash basis revenue?





Increase in receivablesIncrease in receivables

Net Sales

$900,000

Net Sales

$900,000






Slide 13-12

Cash Received from Customers = $870,000Cash Received from

Customers = $870,000



$30,000 Increase in receivables

$30,000 Increase in receivables–

=

Net Sales

$900,000

Net Sales

$900,000








Slide 13-13

Now that we understand the

process, let’s look at some simplified

formulas for computing direct

method cash flows.


Slide 13-14

Direct MethodInterest and Dividends Received

Direct MethodInterest and Dividends Received


Slide 13-15

Step 1

Step 2

Direct MethodCash Paid for Merchandise



Slide 13-16

How much did Lug Lite pay for inventory in 2003?

a. $900,000b. $923,000c. $947,000d. $877,000

Inventory, 1/1/03 130,000$ A/P, 1/1/03 23,000$ Inventory, 12/31/03 165,000$ A/P, 12/31/03 35,000$ COGS, 12/31/03 900,000$



Purchases for 2003 were $935,000.

Purchases = $900,000 + $35,000

Cash Paid for Merchandise in 2003 was $923,000.

Cash Paid = $935,000 - $12,000

Purchases for 2003 were $935,000.

Purchases = $900,000 + $35,000

Cash Paid for Merchandise in 2003 was $923,000.

Cash Paid = $935,000 - $12,000


Slide 13-17

After deducting depreciation and other noncash expenses, the cash paid for expenses

is affected by

(1) whether the expense was prepaid, and

(2) whether the expense was accrued.

After deducting depreciation and other noncash expenses, the cash paid for expenses

is affected by

(1) whether the expense was prepaid, and

(2) whether the expense was accrued.

Cash Paid for Expenses

= Expenses

+ Increase in prepaid expenses - Decrease in prepaid expenses

+ Decrease in accrued liabilities - Increase in accrued liabilities

{ {

Direct MethodCash Payments for Expenses

Direct MethodCash Payments for Expenses


Slide 13-18

Now, let’s prepare a direct

method Statement of

Cash Flows for Grate Big Company.


Slide 13-19

Grate Big CompanyComparative Balance Sheets - Assets

December 31, 2002 2003

Cash 60,000$ 70,370$ Accounts Receivable, net 27,000 35,000 Inventory 230,000 200,000 Trading Securities - 25,000 Equipment, net 500,000 425,000 Investment in Tiny Co. 100,000 130,000

Total Assets 917,000$ 885,370$

Direct Method - ExampleDirect Method - Example


Slide 13-20

Grate Big CompanyComparative Balance Sheets - Liabilities and Equity

December 31, 2002 2003

Accounts Payable 15,000$ 12,000$ Salaries Payable 7,000 5,000 Interest Payable 11,950 7,350 Income Tax Payable 20,000 17,000 Notes Payable, Bob's Bank 70,000 60,000 Bonds Payable 250,000 150,000 Premium on Bonds Payable 5,000 4,000

Common Stock 450,000 500,000 Retained Earnings 88,050 130,020

Total Liabilities and Equity 917,000$ 885,370$



Slide 13-21

Grate Big CompanyIncome Statement Amounts

For the Year Ending December 31, 2003

Sales Revenues 800,000$ Cost of Goods Sold 560,000 Depreciation Expense 5,000 Interest Expense 28,050 Income Tax Expense 27,980 Salary Expense 80,000 Other Expenses 71,000 Amortization of Bond Premium 1,000 Gain on Sale of Equipment 3,000 Extraordinary Loss 30,000 Equity in Investee Income 40,000

Net Income 41,970$



Slide 13-22


Additional Information Trading Securities were purchased during 2003

at a cost of $25,000. Equipment with a book value of $40,000 was

sold during the year for $43,000. Equipment with a book value of $30,000 was

destroyed during a freak flood in 2003. There was no insurance.

Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method.

Additional Information Trading Securities were purchased during 2003

at a cost of $25,000. Equipment with a book value of $40,000 was

sold during the year for $43,000. Equipment with a book value of $30,000 was

destroyed during a freak flood in 2003. There was no insurance.

Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method.


Slide 13-23


Additional Information Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12%

rate. The payments are due on the first day of each month.

The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1.

Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny

Co.

Additional Information Grate Big’s tax rate is 40%. The Notes Payable to Bob’s Bank carry a 12%

rate. The payments are due on the first day of each month.

The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1.

Grate Big sold stock during 2001 for $50,000. Grate Big received $10,000 dividends from Tiny

Co.


Slide 13-24

Salary Expense 80,000$ 2000Add: Decrease in Salary Payable 2,000

Cash Paid to Employees 82,000$

Salary Expense 80,000$ 2000Add: Decrease in Salary Payable 2,000

Cash Paid to Employees 82,000$

Sales Revenues 800,000$

Less: Increase in A/R (8,000)

Cash Received from Customers 792,000$

Sales Revenues 800,000$

Less: Increase in A/R (8,000)

Cash Received from Customers 792,000$



Cash Paid to Employees


Slide 13-25

Interest Expense 28,050$ 2000Add: Decrease in Interest Payable 4,600

Cash Paid for Interest 32,650$

Interest Expense 28,050$ 2000Add: Decrease in Interest Payable 4,600

Cash Paid for Interest 32,650$

Cost of Goods Sold 560,000$

Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000)

Cash Paid for Inventory 533,000$

Cost of Goods Sold 560,000$

Add : Decrease in A/P 3,000 Less: Decrease in Inventory (30,000)

Cash Paid for Inventory 533,000$


Cash Paid for Inventory

Cash Paid for Interest


Slide 13-26

Income Tax Expense 27,980$ 2000Add: Decrease in Taxes Payable 3,000

Cash Paid for Taxes 30,980$

Income Tax Expense 27,980$ 2000Add: Decrease in Taxes Payable 3,000

Cash Paid for Taxes 30,980$


Cash Paid for Taxes

Other Operating Cash Flows


Slide 13-27


Cash Flows From Operating Activities


Slide 13-28

Grate Big CompanyStatement of Cash Flows

For the Period Ending December 31, 2003

I. Operating Cash Flows 27,370$

II. Investing Cash Flows

Proceeds from sale of Equipment 43,000

III. Financing Cash Flows

Proceeds from sale of Stock 50,000$ Principal paid on Bonds (100,000) Principal paid on Notes (10,000) (60,000)

Net Cash Flows for the Period 10,370$

Add: Beginning Cash Balance 60,000

Ending Cash Balance 70,370$

Equipment with a book value of $40,000 was sold for $43,000.

Equipment with a book value of $40,000 was sold for $43,000.

Notes Payable decreased from $70,000 to $60,000 during 2003.

Notes Payable decreased from $70,000 to $60,000 during 2003.

Bonds Payable decreased from $250,000 to $150,000 during 2003.

Bonds Payable decreased from $250,000 to $150,000 during 2003.


Slide 13-29

Grate Big CompanyStatement of Cash Flows

For the Period Ending December 31, 2003

I. Operating Cash Flows 27,370$

II. Investing Cash Flows

Proceeds from sale of Equipment 43,000

III. Financing Cash Flows

Proceeds from sale of Stock 50,000$ Principal paid on Bonds (100,000) Principal paid on Notes (10,000) (60,000)

Net Cash Flows for the Period 10,370$

Add: Beginning Cash Balance 60,000

Ending Cash Balance 70,370$

Notice that the Ending Cash Balance per the

Statement of Cash Flows agrees with the 12/31/03

Cash balance on the Balance Sheet.

Notice that the Ending Cash Balance per the

Statement of Cash Flows agrees with the 12/31/03

Cash balance on the Balance Sheet.


Slide 13-30

Let’s look at the Indirect Method that is used by over 97% of all

companies.


Slide 13-31

Net Income

Net Income

Cash Flows from Operating

Activities

Cash Flows from Operating

Activities

Indirect MethodIndirect Method

Changes in current assets and current liabilities as shown on the following table.

Changes in current assets and current liabilities as shown on the following table.

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization.

+ Noncash expenses such as depreciation and

amortization.


Slide 13-32

Use this table when adjusting Net Income to Operating Cash Flows.

Indirect MethodIndirect Method


Slide 13-33

Let’s prepare a complete

Statement of Cash Flows

using the Indirect Method.


Slide 13-34

Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended

3/31/03 has also been prepared. Joe needs help preparing the Statement of

Cash Flows.

Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended

3/31/03 has also been prepared. Joe needs help preparing the Statement of

Cash Flows.

Joe’s Place

Indirect Method - ExampleIndirect Method - Example


Slide 13-35

Joe's PlaceIncome Statement

For the Year Ending 3/31/03

Revenues 727,000$ Operating Expenses (748,000) Depreciation Expense (6,000) Gain on Sale of Land 8,000 Net Loss (19,000)$

Joe's PlaceIncome Statement

For the Year Ending 3/31/03

Revenues 727,000$ Operating Expenses (748,000) Depreciation Expense (6,000) Gain on Sale of Land 8,000 Net Loss (19,000)$

The $8,000 gain was the result of selling land

costing $32,000 for $40,000 during the period.

The $8,000 gain was the result of selling land

costing $32,000 for $40,000 during the period.



Slide 13-36



Slide 13-37

Joe’s Place issued $50,000 of no par common stock to

settle the $50,000 note payable.

Joe’s Place issued $50,000 of no par common stock to

settle the $50,000 note payable.



Slide 13-38



Slide 13-39

With the indirect method, always start with the net income or net

loss for the period.

With the indirect method, always start with the net income or net

loss for the period.



Slide 13-40



Slide 13-41

Accounts receivable decreased.

3/31/03 3/31/02

$23,000 - $40,000 = $(17,000)

Accounts receivable decreased.

3/31/03 3/31/02

$23,000 - $40,000 = $(17,000)



Slide 13-42

Accounts payable increased.

3/31/03 3/31/02

$38,000 - $27,000 = $11,000

Accounts payable increased.

3/31/03 3/31/02

$38,000 - $27,000 = $11,000



Slide 13-43

Inventory increased.

3/31/03 3/31/02

$350,000 - $300,000 = $50,000

Inventory increased.

3/31/03 3/31/02

$350,000 - $300,000 = $50,000



Slide 13-44

Salaries payable decreased.

3/31/03 3/31/02

$ 9,000 - $14,000 = $(5,000)

Salaries payable decreased.

3/31/03 3/31/02

$ 9,000 - $14,000 = $(5,000)



Slide 13-45

Add back non-cash expenses. Add back non-cash expenses.



Slide 13-46

Subtract gains. Subtract gains.



Slide 13-47

The operating cash flows amount comes

from the schedule just prepared.

The operating cash flows amount comes

from the schedule just prepared.



Slide 13-48

Land originally costing $32,000 was sold for $40,000.

Land originally costing $32,000 was sold for $40,000.



Slide 13-49

Dividends of $20,000 were paid to owners during the year.

Dividends of $20,000 were paid to owners during the year.



Slide 13-50

Compute the net change in cash for the period.

Compute the net change in cash for the period.



Slide 13-51

Complete the Statement of Cash Flows by reconciling beginning

cash to ending cash.

Complete the Statement of Cash Flows by reconciling beginning

cash to ending cash.



Slide 13-52

Note that the ending cash amount ties back to the Joe’s

Place Balance Sheet at 3/31/03.

Note that the ending cash amount ties back to the Joe’s

Place Balance Sheet at 3/31/03.



Slide 13-53

In addition, on the face of the statement or in a

supplemental schedule, disclose the

$50,000 noncash financing activity.

In addition, on the face of the statement or in a

supplemental schedule, disclose the

$50,000 noncash financing activity.



Slide 13-54

In addition, cash interest payments and

cash tax payments must also be disclosed

separately.

In addition, cash interest payments and

cash tax payments must also be disclosed

separately.



Slide 13-55

Cash Budgets are used by management to plan and forecast future cash flows.

Cash Budgets are used by management to plan and forecast future cash flows.

Force m anagem ent to coordinate activities.

Provide m anagers w ith advance notice of available resources.

Provide targets useful in evaluating perform ance.

Provide advance w arnings of potential cash shortages.

A C ash Budget can be used to:

Managing Cash FlowsManaging Cash Flows


Slide 13-56

Increase collection of accounts receivables.

Keep inventory low.Delay payment of liabilities.Plan timing of major expenditures. Invest idle cash.

Increase collection of accounts receivables.

Keep inventory low.Delay payment of liabilities.Plan timing of major expenditures. Invest idle cash.

Managing Cash FlowsManaging Cash Flows


Slide 13-57 Cash Budgeting

Cash BudgetMay June July August

Beginning cash balance 27,500$ 15,000$ -$ -$ Add: Cash receipts 3,500 Total available cash 31,000$

Less: Cash disbursements 16,000 Excess (deficiency) of available cash over cash disbursements 15,000$ Financing neededFinancing repayments - Ending cash balance 15,000$


Beginning cash balance 27,500$ 15,000$ -$ -$ Add: Cash receipts 3,500 Total available cash 31,000$

Less: Cash disbursements 16,000 Excess (deficiency) of available cash over cash disbursements 15,000$ Financing neededFinancing repayments - Ending cash balance 15,000$

The ending cash balance of one month becomes the beginning cash balance of the next month.

The ending cash balance of one month becomes the beginning cash balance of the next month.


Slide 13-58

Cash BudgetingCash Budgeting


Beginning cash balance 27,500$ 15,000$ 10,000$ 10,000$ Add: Cash receipts 3,500 2,000 9,000 14,000 Total available cash 31,000$ 17,000$ 19,000$ 24,000$

Less: Cash disbursements 16,000 18,000 6,000 8,000 Excess (deficiency) of available cash over cash disbursements 15,000$ (1,000)$ 13,000$ 16,000$ Financing needed 11,000 - - Financing repayments - - 3,000 6,000 Ending cash balance 15,000$ 10,000$ 10,000$ 10,000$


Beginning cash balance 27,500$ 15,000$ 10,000$ 10,000$ Add: Cash receipts 3,500 2,000 9,000 14,000 Total available cash 31,000$ 17,000$ 19,000$ 24,000$

Less: Cash disbursements 16,000 18,000 6,000 8,000 Excess (deficiency) of available cash over cash disbursements 15,000$ (1,000)$ 13,000$ 16,000$ Financing needed 11,000 - - Financing repayments - - 3,000 6,000 Ending cash balance 15,000$ 10,000$ 10,000$ 10,000$

Financing is needed in June because the company must maintain a minimum cash balance of $10,000.

Financing is needed in June because the company must maintain a minimum cash balance of $10,000.


Slide 13-59

End of Chapter 13End of Chapter 13

Chester, ol’ Chester, ol’ buddy, I wonder if buddy, I wonder if

you could help you could help me with a little me with a little

cash flow cash flow problem I’m problem I’m

having?having?

© the mcgraw-hill companies, inc., 2002 mcgraw-hill/irwin slide 13-1 statement of cash flows...

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