©2009 the mcgraw-hill companies, inc. chapter 11 statement of cash flows

©2009 The McGraw-Hill Companies, Inc.

Chapter 11

Statement of Cash Flows


Part A

Formatting the Statement of Cash Flows

11-3

Statement of Cash Flows

Provides a summary of cash inflows and cash outflows during the reporting period

E-Games, Inc.Statement of Cash Flows

For the Year Ended December 31, 2010

Cash Flows from Operating Activities

Net income $42,000

Adjustments for noncash effects:

Depreciation expense 9,000

Loss on sale of land 4,000

Increase in accounts receivable (7,000)

Decrease in inventory 10,000

Increase in prepaid rent (2,000)

Decrease in accounts payable (5,000)

Increase in interest payable 1,000

Decrease in income tax payable (2,000)

Net cash flows from operating activities $50,000

11-4

Statement of Cash Flows (continued)

Cash Flows from Investing Activities

Purchase of investment (35,000)

Sale of land 6,000

Net cash flows from investing activities (29,000)

Cash Flows from Financing Activities

Issuance of common stock 5,000

Payment of cash dividends (12,000)

Net cash flows from financing activities (7,000)

Net increase (decrease) in cash 14,000

Cash at the beginning of the period 48,000

Cash at the end of the period $62,000

Note: Noncash Activities

Purchased equipment by issuing a note payable $20,000

11-5

LO1 Classification of Cash Flows

Categories of Cash Flows

Operating activities

Investing activities

Financing activities

Include cash receipts and cash payments for transactions relating to revenue and expense

activities

Include cash transactions involving the purchase and sale

of long-term assets and current investments

Inflows and outflows of cash resulting from the external financing of a

business

11-6

Classification of Cash Flows


Cash Inflows:Sale of goods or services.Receipt of interest and dividends.

Cash Outflows:Purchase of inventory.For operating expenses.For interest.For income taxes.


Cash Inflows: Sale of investments.Sale of PPE or intangibles.Collection of notes receivable.

Cash Outflows: Purchase of investments.Purchase of PPE or intangibles.Acceptance of notes receivable.


Cash Inflows: Issuance of bonds or notes payable.Issuance of stock.

Cash Outflows:Repayment of bonds or notes payable.Reacquisition of stock (treasury stock).Payment of dividends.

11-7

Sources of Information

Sources Explanation

1. Income statement The income statement provides important information in the determination of cash flows from operating activities.

2. Balance sheets We look at the change in asset, liability, and stockholders’ equity accounts from the end of last period to the end of this period to find cash flows from operating, investing, and financing activities.

3. Additional information

Sometimes we need additional information from the accounting records to determine specific cash inflows or cash outflows for the period.

11-8

Relationship between Financial Statements

11-9

Reporting Noncash Activities

Transactions that don’t increase or decrease cash Excluded from the statement of cash flows Reported in a separate note to the financial statements as

noncash activities

Purchase of long-term assets by issuing debt

Purchase of long-term assets by issuing stock

Conversion of bonds payable into common stock.

Exchange of long-term assets

Examples:

11-10

Operating Activities – Indirect and Direct Methods

Begin with net income and then list adjustments to net income in order to arrive at operating cash flows.

More popular method. Easier and less costly.

Adjust the items on the income statement to directly show the cash inflows and outflows from operations.

Conceptually better method. More difficult and more costly.

Differ only in the presentation format for operating activities. We report investing, financing, and noncash activities identically

under both methods.

Indirect Method Direct Method


Part B

Preparing the Statement of Cash Flows

11-12

Steps in Preparing the Statement of Cash Flows

1. Calculate net cash flows from operating activities using information from the income statement and changes in current assets (other than cash) and current liabilities from the comparative balance sheets.

2. Determine the net cash flows from investing activities by analyzing changes in long-term asset accounts from the comparative balance sheets.

3. Determine the net cash flows from financing activities by analyzing changes in long-term liabilities and stockholders’ equity accounts from the comparative balance sheets.

4. Combine the operating, investing, and financing activities and make sure the total agrees with the net increase (decrease) in cash.

11-13

Illustration The income statement, balance sheets, and additional information for E-Games, Inc., are provided in the following Illustration. We will use this information in preparing the statement of cash flows following the four basic steps.

E-Games, Inc.Income Statement

For the Year Ended December 31, 2010

Revenues $ 1,012,000

Expenses:

Cost of goods sold $ 650,000

Operating expenses (salaries, rent, utilities) 286,000



Interest expense 5,000

Income tax expense 16,000

Total expenses 970,000

Net Income $ 42,000

11-14

Illustration (continued)

E-Games, Inc.Balance Sheets

December 31, 2009 and 2010

2010 2009 Increase (I) or Decrease (D)

Assets

Current Assets:

Cash $ 62,000 $ 48,000 $14,000 (I)

Accounts receivable 27,000 20,000 7,000 (I)

Inventory 35,000 45,000 10,000 (D)

Prepaid rent 4,000 2,000 2,000 (I)

Long-Term Assets:

Investment in stock 35,000 0 35,000 (I)

Land 70,000 80,000 10,000 (D)

Equipment 90,000 70,000 20,000 (I)

Accumulated depreciation (23,000) (14,000) 9,000 (I)

Total Assets $ 300,000 $ 251,000

11-15

Illustration (continued)Liabilities and Stockholders’ Equity

Current Liabilities:

Accounts payable $ 22,000 $ 27,000 $ 5,000 (D)

Interest payable 2,000 1,000 1,000 (I)

Income tax payable 5,000 7,000 2,000 (D)

Long-Term Liabilities:

Notes payable 95,000 75,000 20,000 (I)

Stockholders’ Equity:

Common stock 105,000 100,000 5,000 (I)

Retained earnings 71,000 41,000 30,000 (I)

Total Liabilities and Equity $ 300,000 $ 251,000

Additional Information for 2010:1. Purchased stock in Intendo Corporation for $35,000. 2. Sold land originally costing $10,000 for $6,000, resulting in a $4,000 loss on sale of

land.3. Purchased $20,000 in equipment by issuing a $20,000 note payable due in three

years. No cash was exchanged in the transaction.4. Issued common stock for $5,000 cash. 5. Declared and paid a cash dividend of $12,000.

11-16

Basic FormatE-Games, Inc.

Statement of Cash FlowsFor the Year Ended December 31, 2010

Cash Flows from Operating Activities:

Cash Flows from Investing Activities:

Cash Flows from Financing Activities:





List of noncash transactions

11-17

LO2 Operating Activities – Indirect Method Both net income and cash flows from operating activities

represent the same operating activities. The income statement reports net income on an accrual basis. On

the other hand, the statement of cash flows reports the very same activities on a cash basis.

We remove the noncash components from net income so that what’s left is cash flows from operating activities.

We can classify the noncash components as:

(a) revenues and expenses that don’t affect cash at all (adjustments

for noncash components of net income).

(b) revenues and expenses that do affect cash, but not by the amount

reported as the revenue or expense (adjustments for changes

in current assets and current liabilities).

11-18

Adjustments for noncash components of net income

Depreciation Expense and Loss on Sale of Land

Cash 6,000

Loss on Sale of Land 4,000

Land 10,000

(To record loss on sale of land)


Net income $42,000




Add back Depreciation Expense and Loss on Sale of Land which was earlier subtracted from the net income.

11-19

Adjustments for Changes in Current Assets and Current Liabilities

Increase in Accounts Receivable

(Increase in a current asset)

Cash (to balance) 1,005,000

Accounts Receivable ($27,000 – $20,000) 7,000

Revenues (from income statement) 1,012,000

(To record increase in accounts receivable)


Net income $42,000





Subtract

11-20


Decrease in Inventory

(Decrease in a Current Asset)


Net income $42,000






Add Back

11-21


Decrease in Accounts Payable

(Decrease in a Current Liability)

Subtract


Net income $42,000








11-22


Increase in Interest Payable

(Increase in a Current Liability)

Add Back


Net income $42,000









11-23



Net income $42,000









Decrease in income tax payable (2,000)


11-24

Summary of All Adjustments


Net income


For noncash components of income

+ Depreciation expense

+ Loss on sale of assets

– Gain on sale of assets

For changes in current assets and current liabilities

– Increase in a current asset

+ Decrease in a current asset

+ Increase in a current liability

– Decrease in a current liability

= Net cash flows from operating activities

11-25

LO3 Investing Activities



Sale of land 6,000



Net cash flows from financing activities






Cash Outflow

Cash Inflow

Noncash activity disclosed in the footnote

11-26

LO3 Financing ActivitiesCash Flows from Investing Activities


Sale of land 6,000



Issuance of common stock 5,000

Payment of cash dividends (12,000)

Net cash flows from financing activities (7,000)




Note X: Noncash Activities


Cash Inflow

Cash Outflow

Retained earnings, beg. Balance $41,000+ Net income 42,000– Dividends (12,000)Retained earnings, ending balance $71,000

11-27

LO4 Cash Flow Analysis

Analysis based on net cash flows from operating activities (CFFO)

($ in millions) 2006 2005

Apple

Net Sales $19,315 $13,931

Net Income 1,989 1,335

Net Cash Flows from Operations (CFFO) 2,220 2,535

Total Assets 17,205 11,551

Dell

Net Sales $55,908 $49,205

Net Income 3,572 3,043

Net Cash Flows from Operations (CFFO) 4,839 5,310

Total Assets 23,109 23,215

11-28

Cash Return on Assets

($ in millions) CFFO

÷

AverageTotal Assets

= Cash Return on Assets

Apple 2,220 ÷ (17,205 + 11,551)/2 = 15.4%

Dell 4,839 ÷ (23,109 + 23,215)/2 = 20.9%

($ in millions) Net Income

÷ AverageTotal Assets

= Return on Assets

Apple 1,989 ÷ (17,205 + 11,551)/2 = 13.8%

Dell 3,572 ÷ (23,109 + 23,215)/2 = 15.4%

Return on Assets


Cash Return on Assets is higher than the Return on Assets

11-29

Components of Cash Return on Assets


=Cash Flow

to Salesx

Asset Turnover

CFFO

=

CFFO

x

Net Sales

Average Total Assets

Net SalesAverage Total

Assets

($ in millions) CFFO ÷ Net Sales = Cash Flow to Sales

Apple 2,220 ÷ 19,315 = 11.5%

Dell 4,839 ÷ 55,908 = 8.7%

Net Sales

÷ Average Total Assets

= Asset Turnover

Apple 19,315 ÷ (17,205 + 11,551)/2 = 1.3 times

Dell 55,908 ÷ (23,109 + 23,215)/2 = 2.4 times


Appendix

Operating Activities-Direct Method

11-31

LO5 Operating Activities-Direct Method

We report the cash inflows and cash outflows directly on the statement of cash flows. For instance, we report cash received from customers as the cash effect of sales activities, and cash paid to suppliers as the cash effect of cost of goods sold.

Income statement items that have no cash effect—such as depreciation expense or gains and losses on the sale of assets—are simply not reported under the direct method.

11-32



Cash Inflows:

Cash received from customers

Cash received from interest

Cash received from dividends

Less Cash Outflows:

Cash paid to suppliers

Cash paid for operating expenses

Cash paid for interest

Cash paid for income taxes

Net cash flows from operating activities

$ xxx

11-33

Cash Received from Customers


Cash (to balance) 1,005,000

Accounts Receivable ($27,000 - $20,000) 7,000

Revenues (from income statement) 1,012,000

(To record increase in accounts receivable)

Revenues $1,012,000

– Increase in accounts receivable (7,000)

Cash received from customers $1,005,000

11-34

Cash Paid to Suppliers


Beginning balance 45,000

Cost of goods purchased(increases inventory)

? 650,000 Cost of goods sold(decreases inventory)

Ending balance 35,000

Inventory

27,000 Beginning balance

Cash paid to suppliers(decreases A/P)

? 640,000 Cost of goods purchased(increases A/P)

22,000 Ending balance

Accounts Payable

Cost of Goods Sold (from income statement) 650,000

Accounts Payable ($27,000 – 22,000) 5,000

Inventory ($45,000 – 35,000) 10,000

Cash (to balance) 645,000

(Merchandise purchases and sales)

11-35

Cash Paid to Suppliers


Cost of goods sold $650,000

– Decrease in inventory (10,000)

= Purchases 640,000

+ Decrease in accounts payable 5,000

= Cash paid to suppliers $645,000

11-36


Depreciation Expense and Loss on Sale of Land

Cash (selling price: given) 6,000

Loss on Sale of Land (difference) 4,000

Land (cost: given) 10,000

(Sale of land)

Not reported on the statement of cash flows

11-37


Cash Paid for Interest

Interest expense $5,000

– Increase in interest payable (1,000)

= Cash paid for interest $4,000

Interest Expense (from the income statement)

5,000

Interest Payable ($2,000 – 1,000) 1,000


(Payment for interest expense)

11-38


Cash Paid for Income Taxes

Income tax expense $16,000

+ Decrease in income tax payable 2,000

= Cash paid for income taxes $18,000

Income Tax Expense (from the income statement)

16,000

Income Tax Payable ($7,000 – 5,000) 2,000


(Payment for income taxes)

11-39



Cash received from customers $1,005,000

Cash paid to suppliers (645,000)

Cash paid for operating expenses (288,000)

Cash paid for interest (4,000)

Cash paid for income taxes (18,000)



End of chapter 11

©2009 the mcgraw-hill companies, inc. chapter 11 statement of cash flows

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