Financial Accounting and Accounting Standards

Chapter 211Statement of Cash Flows

2Learning Objectives SOCFExplain the usefulness of the statement of cash flows.Define cash equivalents.Determine cash flows from operating activities by the direct and indirect methods.Identify transactions that are classified as investing activities.Identify transactions that are classified as financing activities.Identify transactions that represent noncash investing and financing activities.Prepare a statement of cash flows with the aid of a spreadsheet or T-accounts.

1. On the topic, Challenges Facing Financial Accounting, what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements?Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases).Forward-looking Information Soft Assets (a companys know-how, market dominance, marketing setup, well-trained employees, and brand image).Timeliness (no real time financial information)

Role of the Statement of Cash FlowsLists all cash inflows and all cash outflows by category: operating, investing, and financingExplains the change in cash during the periodRequired by GAAPCash is King!Especially during an economic downturn.

BusinessInvesting ActivitiesOperating ActivitiesFinancing ActivitiesSale of operational assetsSale of investmentsCollections of loansCash received from revenuesIssuance of stockIssuance of bonds and notesPurchase of operational assetsPurchase of investmentsLoans to othersCash paid for expensesPayment of dividendsRepurchase of stockRepayment of debtCash InflowsCash Outflows4Cash Flows

Explains what caused the cash balance to change from one accounting period to the next by providing information about a companys cash receipts and cash payments during a period.Provides information to help assess:Entitys ability to generate future cash flows.Entitys ability to repay loans, replace equipment, expand facilities, and pay dividends.Reasons for difference between net income and net cash flow from operating activities.Cash and noncash investing and financing transactions.A firms liquidity, solvency and financial flexibilityliquidity: the ability to get cash when needed.solvency: the ability to pay liabilities when they mature.financial flexibility: the ability to react to opportunities and challenges.Primary Purpose: Usefulness: Relevance of Cash FlowsCash is the beginning and the end of a companys operating cycle.Net cash flow is the end measure of value creation.SOCF - Purpose5

Cash is defined as Cash and cash equivalents.Resources immediately available to pay obligations.Cash equivalents are short-term, highly liquid investments that are both: (a) readily convertible to known amounts of cash, and (b) so near their maturity that they present insignificant risk of changes in interest rates.Generally, only investments with original maturities of three months or less qualify under this definition. Examples of cash equivalents are Treasury bills, commercial paper, CDs, and money market funds purchased with cash that is in excess of immediate needs.Cash and Cash Equivalents 6Cash Defined

Operating ActivitiesInvesting ActivitiesFinancing ActivitiesReconciliation of the Net Increase or Decrease in Cash with the Change in the Balance of the Cash AccountNoncash Investing and Financing Activities7SOCF - ElementsReports the cash effects of the elements of net income.Reports the cash effects of the acquisition and disposition of assets (other than inventory and cash equivalents).Reports the cash effects of the sale or repurchase of shares, the issuance or repayment of debt securities, and the payment of cash dividends.

Income Statement ItemsOperating SectionRelated to the acquisition and disposition of assets, other than inventory and assets classified as cash equivalents.Investing SectionIssuance & Repayment of Bonds and Other Debt Securities PrincipalPayment of Cash DividendsIssue of Common & Preferred StockStock Buybacks/Treasury Stock SalesFinancing SectionThe SOCF is formatted to include 3 disbursement sections:Memory Tool:You always invest in PIPE:P - PropertyI - InvestmentsP - PlantE - EquipmentYou always finance with PRINC DIV ITS:Princ - PrincipalDiv - DividendsI - Issue StockTS - Treasury Stock

Buy/Sell Investments Except Cash Equivalents & Trading SecuritiesBuy/Sell Property, Plant & Equipment Make/Receive Payment on Loans (Non-trade Receivables)Inflows and outflows of cash resulting from the external financing of a business.Means of contributing, withdrawing, and servicing funds to support business activitiesCash flows from operating activities (CFOA) are both inflows and outflows of cash that result from activities reported on the Income Statement and the working capital portion of the balance sheet.SOCF - Elements8

Cash Flows from Operating ActivitiesInflows from:Sales to customers.Interest and dividends received.Outflows to:Purchase of inventory.Salaries, wages, and other operating expenses.Interest on debt.Income taxes.+-Cash Flows From Operating Activities9

Operating Activities section can be prepared using either of two methods.Indirect Method Direct Method Most used method Recommended by FASB

Net income is converted to net cash flow from operating activities through either a direct method or an indirect method.The direct method is theoretically preferred but the indirect method is most commonly used.While the Operating Activities section will be presented differently for each method, both methods will have identical sections for Investing and Financing Activities and both will provide the same results for each section .CFOA Presentation MethodsReports cash effect of each operating activity.

Starts with accrual net income and converts to cash basis.

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The net cash increase or decrease from operating activities is derived indirectly by starting with reported net income on an accrual basis and working backwards to convert that amount to a cash basis.The cash effect of each operating activity is reported directly on the statement of cash flows.Net cash provided by operating activities is the equivalent of cash basis net income and is the same under each method!CFOA Presentation Methods11

CFOA Presentation Methods12Cash FlowsFrom Investing Activities

Cash Flows from Investing ActivitiesInflows from:Sale of long-term assets used in the business.Sale of investment securities (stocks and bonds).Collection of nontrade receivables.

Outflows to:Purchase of long-term assets used in the business.Purchase of investment securities (stocks and bonds).Create nontrade receivables.Inflows from:Sale of shares to owners.Borrowing from creditors through notes, loans, mortgages, and bonds.Cash Flows from Financing Activities

Outflows to:Owners in the form of dividends or other distributions.Owners for the reacquisition of shares previously sold.Creditors as repayment of the principal amounts of debt.+-Cash Flows from Financing Activities+-

Reconciliation with Change in Cash BalanceThe net amount of cash inflows and outflows reconciles the change in the companys beginning and ending cash balances.For example, assume that the firms net increase in cash is $9 million and the cash beginning balance is $20 million. The cash reconciliation would be as follows:

Cash receipts from customersSales - Increase in Accounts ReceivableSales + Decrease in Accounts Receivable

Cash paid to suppliersCOGS + Increase in Inventory - Increase in Accounts Payable or + Decrease in APCOGS - Decrease in Inventory - Increase in Accounts Payable or + Decrease in AP

Cash paid for Selling & Administrative ExpensesS&A Expenses - Increase in Wages Payable or - Decrease in Prepaid ExpensesS&A Expenses + Decrease in Wages Payable or + Increase in Prepaid ExpensesCash paid for InterestInterest Expense - Increase in Interest Payable or Decrease in Bond DiscountInterest Expense + Decrease in Interest Payable or + Decrease in Bond PremiumCash paid for Income TaxesIncome Tax Expense - Increase in Taxes PayableIncome Tax Expense + Decrease in Income Taxes Payable

Depreciation, Amortization, Depletion, and Bad Debt Expenses are non-cash expenses and are not disclosed in the SCF using the direct method.

CFOA Direct Method14

A company must determine revenues and expenses on a cash basis. Eliminate the effects of income statement transactions that do not result in an increase or decrease in cash.Earned RevenuesIncurred ExpensesNet IncomeNet Cash FlowsFromOperating Activities

Eliminating Noncash RevenuesEliminating Noncash Expenses

Accrual Basis

Cash Basis

Convert from Accrual to Cash BasisCFOA = Cash Flows from Operating ActivitiesCFOA Indirect Method15

Changes in Cash Balances16Components of Net Income that Do Not Increase or Decrease Cash

Depreciation ExpenseLoss on Sale of EquipmentAdding these items back to net income restores net income to what it would have been had depreciation and the loss not been subtracted at all.

Subtracting the gain reverses the effect of the gain having been added to net income. Gain on Sale of LandComponents of Net Income that Do Not Increase or Decrease CashNote: Cash and cash equivalents, short-term investments in securities available for sale, dividends payable, and short-term payables to financial institutions are excluded from this category.

For components of net income that increase or decrease cash, but by an amount different from that reported on the income statement, net income is adjusted for changes in the balances of related balance sheet accounts to convert the effects of those items to a cash basis.

RulesIncreaseDecreaseAssets(Outflow)InflowLiabilitiesInflow(Outflow)

Net Income Adjustments for Changes in Assets and LiabilitiesAmounts that were increases in net incomeGainsSubtract from net incomeAmounts that were reductions in net incomeDepreciation, depletion, & amortizationLossesAdd Back to net income

Net Income Adjustments for Non-Cash ComponentsCFOA Indirect Method17

Net Income

CFOA Indirect Method18

The net amount of cash inflows and outflows reconciles the change in the companys beginning and ending cash balances.For example, assume the net increase in cash is $10 million and the Cash beginning balance is $60 million. The cash reconciliation would be as follows:Reconciliation with Change in Cash Balance19

Significant investing and financing transactions not involving cash also are reported:Acquiring an asset by incurring a debt payable to the seller.Acquiring an asset by entering into a capital lease.Converting debt into common stock or other equity securities.Exchanging noncash assets or liabilities for other noncash assets or liabilities.Noncash Investing and Financing Activities20Not in the body of the SCFFootnoted at the bottom of the Statement as a supplementary disclosure.Stock dividends, stock splits, retained earnings appropriations not in the body of the SCF and not in supplementary schedules.No need for a Cash Flow Per Share calculation.

Sources of Information:Comparative balance sheetsCurrent income statementSelected transaction dataWrite-downs, amortization charges, and similar book entries, such as depreciation, because they have no effect on cash.SOCF Sources of Information21

SOCF Preparation22Three Major Steps:Determine change in cash.Determine net cash flow from operating activities.Determine net cash flows from investing and financing activities.Special Rules Applying to Indirect MethodsProduce a reconciliation of net income to net cash flows from operating activities within the statement of cash flows or in a separate schedule.Disclose interest paid.Disclose income taxes paid.

Net cash flows from operating activitiesNet cash provided by operating activities = operating activities increase cashNet cash used by operating activities = operating activities decrease cashSpecial Rules Applying to Direct MethodProduce a reconciliation of net income to net cash flows from operating activities in a separate schedule.

SOCF Direct vs Indirect23

Enter the balance sheet accounts and their beginning and ending balances in the balance sheet accounts section.Enter the data that explain the changes in the balance sheet accounts and their effects on the statement of cash flows in the reconciling columns of the worksheet.Enter the increase or decrease in cash on the cash line and at the bottom of the worksheet. This entry should enable the totals of the reconciling columns to be in agreement.WorksheetSOCF Tools for PreparationT-Accounts & Journal EntriesDetermine the change in Cash the statement must show why cash changed.Setup T-Accounts for all Balance Sheet line items except Cash.Setup 3 T-Accounts for:Operating Activities (I/S & WC items)Investing Activities (PIPE)Financing Activities (PRINC DIVITS)Account for all the changes that have occurred using the T-Accounts.24

U.S. GAAP vs. IFRS25

Operating ActivitiesDividends ReceivedInterest ReceivedInterest PaidInvesting Activities

Financing ActivitiesDividends PaidOperating Activities

Investing ActivitiesDividends ReceivedInterest ReceivedFinancing ActivitiesDividends PaidInterest PaidConsistent with U.S. GAAP, cash flows are classified as operating, investing, or financing.

U.S. GAAP vs. IFRS26

The FASB and IASB are working together on a project, Financial Statement Presentation, to establish a common standard for presenting information in the financial statements.

U.S. GAAP vs. IFRS27

Based on the joint FASB and IASB Financial Statement Presentation project, the statement of cash flows is slated to change in several ways.Operating and Investing cash flows will be categorized as Business activities and some cash flows may switch categories.The statement will have three additional groupings: income taxes, discontinued operations, and equity (if needed).Direct method will be required.Eliminate the concept of cash equivalents in favor of cash only.

Sheet1UNITED BRANDS CORPORATIONSpreadsheet for the Statement of Cash FlowsChangesDec. 31, 2005DebitsCreditsDec. 31, 2006Balance SheetAssets:Cash20(19)929Accounts receivable30(1)232Short-term investments- 0(12)1212Inventory50(4)446Prepaid insurance6(8)33Land60(13)30(3)1080Buildings and equipment75(14)20(9)1481Less: Accumulated depreciation(20)(9)7(6)3(16)221267Liabilities:Accounts payable20(4)626Salaries payable1(5)23Income tax payable8(10)26Notes payable- 0(14)2020Bonds payable50(15)1535Less: Discount on bonds payable(3)(7)2(1)Shareholders' Equity:Common stock100(16)10(17)20130Paid-in capital20(16)3(17)629Retained earnings25(16)13(18)5(11)1219221267ChangesDec. 31, 2005DebitsCreditsDec. 31, 2006Income StatementRevenues:Sales revenue(1)100100Investment revenue(2)33Gain on sale of land(3)88Expenses:Cost of good sold(4)60(60)Salaries expense(5)13(13)Depreciation expense(6)3(3)Bond interest expense(7)5(5)Insurance expense(8)7(7)Loss on sale of equipment(9)2(2)Income tax expense(10)9(9)Net income(11)1212ChangesDec. 31, 2005DebitsCreditsDec. 31, 2006Statement of Cash FlowsOperating Activities:Cash Inflows:From customers(1)98From investment revenue(2)3Cash Outflows:To suppliers of goods(4)50To employees(5)11To bondholders(7)3For insurance expense(8)4For income taxes(10)11Net cash flows22Investing Activities:Sale of land(3)18Sale of equipment(9)5Purchase of S-T investment(12)12Purchase of land(13)30Net cash flows(19)Financing Activities:Retirement of bonds payable(15)15Sale of common stock(17)26Payment of cash dividends(18)5Net cash flows6Net increase in cash(19)99Totals376376

Sheet2Cash Flows from Operating Activities--Indirect MethodNet Income$ 12Adjustments for noncash effects:Increase in accounts receivable(2)Gain on sale of land(8)Decrease in inventory4Accounts ReceivableIncrease in accounts payable6Beg. bal.30Increase in salaries payable2Credit sales100?Cash receivedDepreciation expense3End. bal.32Discount on bonds payable2Decrease in prepaid insurance3Loss on sale of equipment2Decrease in income tax payable(2)Net cash flows from operating activities$ 22Cash Flows from Operating Activities--Direct MethodCash Inflows:From customers$ 98From investment revenue3Cash Outflows:To suppliers of goods(50)To employees(11)To bondholders(3)For insurance expense(4)For income taxes(11)Net cash flows from operating activities$ 22

Sheet3

Sheet1UNITED BRANDS CORPORATIONSpreadsheet for the Statement of Cash FlowsChangesDec. 31, 2005DebitsCreditsDec. 31, 2006Balance SheetAssets:Cash20(19)929Accounts receivable30(1)232Short-term investments- 0(12)1212Inventory50(4)446Prepaid insurance6(8)33Land60(13)30(3)1080Buildings and equipment75(14)20(9)1481Less: Accumulated depreciation(20)(9)7(6)3(16)221267Liabilities:Accounts payable20(4)626Salaries payable1(5)23Income tax payable8(10)26Notes payable- 0(14)2020Bonds payable50(15)1535Less: Discount on bonds payable(3)(7)2(1)Shareholders' Equity:Common stock100(16)10(17)20130Paid-in capital20(16)3(17)629Retained earnings25(16)13(18)5(11)1219221267ChangesDec. 31, 2005DebitsCreditsDec. 31, 2006Income StatementRevenues:Sales revenue(1)100100Investment revenue(2)33Gain on sale of land(3)88Expenses:Cost of good sold(4)60(60)Salaries expense(5)13(13)Depreciation expense(6)3(3)Bond interest expense(7)5(5)Insurance expense(8)7(7)Loss on sale of equipment(9)2(2)Income tax expense(10)9(9)Net income(11)1212ChangesDec. 31, 2005DebitsCreditsDec. 31, 2006Statement of Cash FlowsOperating Activities:Cash Inflows:From customers(1)98From investment revenue(2)3Cash Outflows:To suppliers of goods(4)50To employees(5)11To bondholders(7)3For insurance expense(8)4For income taxes(10)11Net cash flows22Investing Activities:Sale of land(3)18Sale of equipment(9)5Purchase of S-T investment(12)12Purchase of land(13)30Net cash flows(19)Financing Activities:Retirement of bonds payable(15)15Sale of common stock(17)26Payment of cash dividends(18)5Net cash flows6Net increase in cash(19)99Totals376376

Sheet2Cash Flows from Operating Activities--Indirect MethodNet Income$ 12Adjustments for noncash effects:Gain on sale of land(8)Credit sales100?Cash receivedDepreciation expense3Loss on sale of equipment2Changes in operating assets and liabilities:Increase in accounts receivable(2)Decrease in inventory4Accounts ReceivableIncrease in accounts payable6Beg. bal.30Increase in salaries payable2End. bal.32Discount on bonds payable2Decrease in prepaid insurance3Decrease in income tax payable(2)Net cash flows from operating activities$ 22Cash Flows from Operating Activities--Direct MethodCash Inflows:From customers$ 98From investment revenue3Cash Outflows:To suppliers of goods(50)To employees(11)To bondholders(3)For insurance expense(4)For income taxes(11)Net cash flows from operating activities$ 22

Sheet3

Sheet1AccountChange in Account Balance During YearTypeIncreaseDecreaseCurrentSubtract from netAdd to net income.Assetsincome.CurrentAdd to net income.Subtract from netLiabilitiesincome.

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Sheet1PUC CorpStatement of Cash FlowsFor the Period Ending December 31, 2012Amounts in thousandsCash Fows from Operating Activities130,000Cash flows from Investing Activities$ (60,000)Cash flows from Financing Activities$ (60,000)Net Cash Flows for the Period10,000Add: Beginning Cash Balance$ 60,000Ending Cash Balance70,000

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SI VS CISimple Interest VS. Compound InterestSimple Interest CalculationCompound Interest CalculationYearAmountNominal RateSimple InterestAccumulated Year-End BalanceYearAmountNominal RateCompound InterestAccumulated Year-End Balance1$ 1,000.009.0%$ 90.00$ 1,090.001$ 1,000.009.0%$ 90.00$ 1,090.002$ 1,000.009.0%$ 90.00$ 1,180.002$ 1,090.009.0%$ 98.10$ 1,188.103$ 1,000.009.0%$ 90.00$ 1,270.003$ 1,188.109.0%$ 106.93$ 1,295.034$ 1,000.009.0%$ 90.00$ 1,360.004$ 1,295.039.0%$ 116.55$ 1,411.585$ 1,000.009.0%$ 90.00$ 1,450.005$ 1,411.589.0%$ 127.04$ 1,538.62$ 450.00$ 538.62Difference$ 88.62

FV Single AmtTime Value of MoneySingle Amounts: A lump-sum amount either currently held or expected at some future date.Future Value of a Single AmountThe value at a given future date of a present amount invested today and earning interest at a specified rate.Based on the: (1) dollar amount invested or deposited (present value), (2) the length of time a given amount is invested, and(3) the interest rate.The process of converting today's values, which are termed present values (PV), to future values (FV) is calledcompounding.ProblemWhat will a deposit of $4,500 at 7% annual interest be worth if left in the bank for nine years?Present Amount$ 4,500.00Rate7.00%Term9yearsComputational Tools:Numerical SolutionFVn =PV(1+k)n= 4,500(1+.07)9= 4,500*(1.8385)= $8,273.07Table SolutionInterest Rate (k)Period1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.01001.02001.03001.04001.05001.06001.07001.08001.09001.100021.02011.04041.06091.08161.10251.12361.14491.16641.18811.210031.03031.06121.09271.12491.15761.19101.22501.25971.29501.331041.04061.08241.12551.16991.21551.26251.31081.36051.41161.464151.05101.10411.15931.21671.27631.33821.40261.46931.53861.610561.06151.12621.19411.26531.34011.41851.50071.58691.67711.771671.07211.14871.22991.31591.40711.50361.60581.71381.82801.948781.08291.17171.26681.36861.47751.59381.71821.85091.99262.143691.09371.19511.30481.42331.55131.68951.83851.99902.17192.3579101.10461.21901.34391.48021.62891.79081.96722.15892.36742.5937FVn =PV(FVIFk,n)FVn =4,500*(1.8385) = $8,273.25Calculator SolutionExcel Solution=fv(rate,nper,pmt,pv,type)CE/C=fv(7%,9,0,-4,500,0) = $8,273.072ndCLR TVM2ndP/Y1Rate7.00%Periods9NI/YRPVPMTFVPresent Value$ 4,500.009.007.00-4,500.00CPT FV$8,273.07Future Value$8,273.07

PV Single AmtCalculator SolutionExcel SolutionDateChange in SharesShares OutstandingFraction of Year10%3/1Weighted Average Shares=pv(rate,nper,pmt,fV,type)$ 14,200.00NumberAmountTotalPercent$ 1,010,000.00NumberAmountPriceTotalPercentDividendSplitCE/C=pv(6%,3,8,000,100,000,0) = $105,346.02Common stock300X$ 20.00=$ 6,000.0040%Bonds1,000X$ 1,000.00X$ 0.98=$ 980,000.0096%Jan-07480,000X1/12X110%X3132,0002ndCLR TVMPreferred stock100X90.00=9,000.0060%Warrants1,000XX40.00=40,000.004%Feb-07120,000600,000X1/12X110%X3165,0002ndP/YFair Market Value=$ 15,000.00100%Fair Market Value=$ 1,020,000.00100%Mar-0760,000660,000X2/12X3330,000May-07(100,000)560,000X1/12X3140,000NI/YRPVPMTFVAllocation:CommonPreferredProportional MethodAllocation:BondsPreferredJun-071,120,0001,680,000X4/12X560,0004.0012.00CPT PV2,500.0050,000.00Issue price$ 14,200.00$ 14,200.00Issue price$ 1,010,000.00$ 1,010,000.00Bond face value$ 1,000,000Oct-0760,0001,740,000X3/12X435,000-39,369.28Allocation %40%60%Allocation %96%4%Allocated FMV969,6001,762,000Total$ 5,680.00$ 8,520.00Total$ 969,600.00$ 40,400.00Discount$ 30,400Divide12Amortization TablesWeighted Avg. Shares146,833Par$ 14,200.00NumberAmountTotal$ 1,010,000.00NumberAmountPriceTotalPercent8%8%$ 100,000.00Common stock300X$ 20.00=$ 6,000.00Bonds1,000X$ 1,000.00X$ 0.98=$ 980,000.0096%DateCash PaidInterest ExpenseCarrying AmountPreferred stock100X=- 0Warrants1,000XX=- 00%Fair Market Value=$ 6,000.00Fair Market Value=$ 980,000.0096%1/1/07$100,000.00Income from continuing operations$ 1.7212/31/07$ 8,000.00$ 8,000.00100,000.00Allocation:CommonPreferredIncremental MethodAllocation:BondsLoss from discontinued operations(0.25)12/31/088,000.008,000.00100,000.00Issue price$ 14,200.00Issue price$ 1,010,000.00Bond face value$ 1,000,000Income before extraordinary item1.4712/31/098,000.008,000.00100,000.00Common(6,000.00)Bonds980,000.00Allocated FMV980,000Extraordinary gain0.49Total$ 6,000.00$ 8,200.00Warrants$ 30,000.00Discount$ 20,000Net income$ 1.96Discount5%12%$ 50,000.00Net income$ 3,456,000DateCash PaidInterest ExpenseDiscount AmortizedCarrying AmountDeduct extraordinary gain(864,000)Add loss from discontinued operations432,0001/1/0839,369Income from continuing operations$ 3,024,00012/31/08$ 2,500$ 4,724$ 2,22441,59412/31/092,5004,9912,49144,08512/31/102,5005,2902,79046,87512/31/112,5005,6253,12550,000Premium8%6%$ 100,000.00DateCash PaidInterest ExpensePremium AmortizedCarrying Amount1/1/07$105,346.0212/31/07$ 8,000.00$ 6,320.761,679.24103,666.7912/31/088,000.006,220.011,779.99101,886.7912/31/098,000.006,113.211,886.79100,000.00Lease Amortization - Lessee10%DateLease PaymentInterest ExpenseReduction of LiabilityLease Liability1/1/07$60,0001/1/07$ 16,228$ 16,22843,77212/31/0716,228$ 4,37711,85131,92112/31/0816,2283,19213,03618,88512/31/0916,2281,88914,3394,54612/31/105,0004554,5450Lease Amortization - Lessor10%DateLease PaymentInterest RevenueRecovery of ReceivableLease receivable1/1/07$60,0001/1/07$ 16,228$ 16,22843,77212/31/0716,228$ 4,37711,85131,92112/31/0816,2283,19213,03618,88512/31/0916,2281,88914,3394,54612/31/105,0004554,5450

TaxBook vs. Tax DifferenceReporting Requirement20042005200620072007Deferred tax liability account increased to$4,000Financial income: GAAP$ 300,000$ 325,000$ 400,000GAAP Reporting2008No change in deferred tax liability accountDifference200720082009Total2009Deferred tax liability account reduced by$4,000Taxable income (loss): IRS$ 300,000$ 325,000$ 400,000$ (450,000)Revenues$130,000$130,000$130,000$390,000Tax rate35%30%30%29%Expenses(S/L Depreciation)30,00030,00030,00090,000Income tax$ 105,000$ 97,500$ 120,000Pretax financial income100,000100,000100,000300,000Balance SheetIncome Statement20072007NOL ScheduleIncome tax expense40%$40,000$40,000$40,000$120,000AssetsRevenuesTaxable income$ 300,000$ 325,000$ 400,000Carryback from 2007(325,000)(125,000)Tax ReportingLiabilitiesExpensesTaxable income$ 300,000$ - 0$ 275,000200720082009TotalDeferred taxes4,000Income tax expense40,000Tax rate35%30%30%29%Revenues$130,000$130,000$130,000$390,000Income tax payable36,000Net income (loss)Income tax (revised)$ 105,000$ - 0$ 82,500$ - 0Expenses(MACRS depreciation)40,00030,00020,00090,000Pretax financial income90,000100,000110,000300,000EquityRefund$ 97,500$ 37,500=$ 135,000Income tax payable40%$36,000$40,000$44,000$120,000Balance Sheet200520062007Book/Tax Difference$4,000$0($4,000)$02007Financial income: GAAP$ 200,000$ 200,000AssetsTemporary difference(500,000)Deferred tax asset$ 180,000Taxable income (loss): IRS200,000200,000(500,000)Allowance for deferred tax(30,000)Tax rate40%40%40%Deferred tax asset, net150,000Income tax$ 80,000$ 80,000NOL ScheduleTaxable income$ 200,000$ 200,000$ (500,000)Carryback from 2007(200,000)(200,000)400,000Taxable income$ - 0$ - 0$ (100,000)Tax rate40%40%40%Income tax (revised)$ - 0$ - 0$ (40,000)Refund$ 80,000$ 80,000$ 160,000Permanent DifferencesCurrent YearDeferredDeferred2007AssetLiabilityFinancial income: GAAP$ 70,000Excess tax depreciation(16,000)$ 16,000Excess rent collected22,000$ (22,000)Fines (permanent)11,000Taxable income (loss): IRS87,000(22,000)16,000Tax rate30%30%30%Income tax$ 26,100$ (6,600)$ 4,800

FV AnnuityTime Value of MoneyAnnuities: A stream of equal periodic cash flows, over a specified time period. The cash flows can be inflows ofreturns earned on investments or outflows of funds invested to earn future returns.There are two basic types of annuities. For an ordinary annuity, the cash flow occurs at the end of each period.For an annuity due, the cash flow occurs at the beginning of each period.Future Value of an Ordinary AnnuityThe future value of an annuity is the sum of all payments (receipts) plus the accumulated compound interest on them.Based on the: (1) interest rate, (2) number of compounding periods, and (3) amount of periodic payments or receipts.ProblemHow much will an ordinary annuity of $650 per year be worth in eight years at an annual interest rateof 6 percent?Payment$ 650.00Rate6.00%Term8yearsComputational Tools:Numerical SolutionFVAn =PMT(1+k)n-1=650(1+.06)8-1=650(1.5938)-1= 650(9.8975)k0.060.06= $6,433.35Table SolutionInterest Rate (k)Period1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.00001.00001.00001.00001.00001.00001.00001.00001.00001.000022.01002.02002.03002.04002.05002.06002.07002.08002.09002.100033.03013.06043.09093.12163.15253.18363.21493.24643.27813.310044.06044.12164.18364.24654.31014.37464.43994.50614.57314.641055.10105.20405.30915.41635.52565.63715.75075.86665.98476.105166.15206.30816.46846.63306.80196.97537.15337.33597.52337.715677.21357.43437.66257.89838.14208.39388.65408.92289.20049.487288.28578.58308.89239.21429.54919.897510.259810.636611.028511.435999.36859.754610.159110.582811.026611.491311.978012.487613.021013.57951010.462210.949711.463912.006112.577913.180813.816414.486615.192915.9374FVAn =PMT(FVIFAk,n)FVAn =650*(9.8975)= $6,433.35Calculator SolutionExcel Solution=fv(rate,nper,pmt,pv,type)CE/C=fv(6%,8,-650,0,0) = $6,433.352ndCLR TVM2ndP/Y1Rate6.00%Periods8NI/YRPVPMTFVPayments$ 650.008.006.00-650.00CPT FV$6,433.35Future Value$6,433.35

Trial BalanceJulie Hartsack CorporationTrial BalanceDecember 31, 2008Account TitleDebitCreditCash$ 2,500Supplies900Prepaid insurance2,200Land15,000Lodge70,000Accumulated depreciation - Lodge$ 200Furniture16,800Accumulated depreciation - Furniture250Accounts payable5,300Unearned rent2,100Salaries payable800Interest payable350Mortgage payable35,000Common stock60,000Retained earnings- 0Dividends1,000Rent revenue11,700Advertising expense500Depreciation expense - Lodge200Depreciation expense - Furniture250Supplies expense1,000Interest expense350Insurance expense200Salaries expense3,800Utilities expense1,000Totals$ 115,700$ 115,700

Statement of Cash FlowsPUC Corp.Statement of Cash FlowsFor the Year Ended December 31, 2012Cash flows from operating activities:Net income$ XXXAdjustments to reconcile net income to net cash provided by operating activities:Depreciation expense$ XXXIncrease in accounts receivable, netXXXIncrease in accounts payableXXXNet cash provided by operating activitiesXXXCash flows from investing activities:Purchase of investmentsXXXPurchase of property, plant & equipmentXXXSale of investmentsXXXNet cash used by investing activitiesXXXCash flows from financing activities:Reduction in long-term note payableXXXCash dividends paidXXXNet cash used by financing activitiesXXXNet increase in cashXXXCashJanuary 1, 2012XXXCashDecember 31, 2012XXX

PV AnnuityTime Value of MoneyAnnuities: A stream of equal periodic cash flows, over a specified time period. The cash flows can be inflows ofreturns earned on investments or outflows of funds invested to earn future returns.There are two basic types of annuities. For an ordinary annuity, the cash flow occurs at the end of each period.For an annuity due, the cash flow occurs at the beginning of each period.Present Value of an Ordinary AnnuityThe present value of an annuity is the value today of a series of future amounts to be received (or paid), assumingcompound interest.Based on the: (1) discount rate, (2) number of discount periods, and (3) amount of periodic receipts or payments.ProblemHow much must you invest today to have an annuity that provides cash flows of $700 at the end ofeach year for 5 years? Your required rate of return is 8%.Payment$ 700.00Rate8.00%Term5yearsComputational Tools:Numerical SolutionPVAn = PMT1 -1= 7001 -1(1+k)n(1+.08)5k0.08= 7001 - .6806= 700 (3.9925)0.08= $2,794.75Table SolutionInterest Rate (k)Period1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%10.99010.98040.97090.96150.95240.94340.93460.92590.91740.909121.97041.94161.91351.88611.85941.83341.80801.78331.75911.735532.94102.88392.82862.77512.72322.67302.62432.57712.53132.486943.90203.80773.71713.62993.54603.46513.38723.31213.23973.169954.85344.71354.57974.45184.32954.21244.10023.99273.88973.790865.79555.60145.41725.24215.07574.91734.76654.62294.48594.355376.72826.47206.23036.00215.78645.58245.38935.20645.03304.868487.65177.32557.01976.73276.46326.20985.97135.74665.53485.334998.56608.16227.78617.43537.10786.80176.51526.24695.99525.7590109.47138.98268.53028.11097.72177.36017.02366.71016.41776.1446PVAn =PMT(FVIFAk,n)PVAn =700*(3.9927)= $2,794.89Calculator SolutionExcel Solution=pv(rate,nper,pmt,fv,type)CE/C=pv(8%,5,700,0,0) = $2,794.902ndCLR TVM2ndP/Y1Rate8.00%Periods5NI/YRPVPMTFVPayments$ 700.003.008.00CPT PV8,000.00100,000.00$2,794.90Present Value$2,794.90

Sheet1Batson Company.Comparative Balance Sheets

December 31, Change20042005Increase/DecreaseAssetsCash$ 60,000$ 70,000$ 10,000increaseAccounts Receivable, net27,00035,0008,000increaseInventory230,000200,000(30,000)decreaseLand95,000167,00072,000increaseBuildings, net300,000325,00025,000increaseEquipment, net200,000126,000(74,000)decreaseTotal Assets$ 912,000$ 923,000$ 11,000increase

Liabilities and Stockholders' EquityAccounts Payable$ 15,000$ 12,000$ (3,000)decreaseSalaries Payable7,0005,000(2,000)decreaseInterest Payable11,95014,4502,500increaseIncome Tax Payable20,00017,000(3,000)decreaseNotes Payable, Bob's Bank70,00060,000(10,000)decreaseBonds Payable250,000150,000(100,000)decreaseTotal Liabilities373,950258,450(115,500)

Common Stock450,000500,00050,000increaseRetained Earnings88,050164,55076,500increaseTotal Stockholders' Equity538,050664,550126,500increaseTotal Liabilities and Equity$ 912,000$ 923,000$ 11,000.00increase

Sheet2Batson CompanyIncome StatementFor the Year Ending December 31, 2005

Sales Revenues$ 800,000Cost of Goods Sold460,000Gross Margin340,000Depreciation Expense$ 10,000Interest Expense24,500Salary Expense80,000Other Expenses71,000185,500Operating Income154,500Gain on Sale of Equipment3,000Loss Due to Flood(30,000)Income Before Tax127,500Income Tax Expense(51,000)Net Income$ 76,500

Sheet3Batson Company.Statement of Cash FlowFor the Year Ended December 31, 2005

Cash Flow from Operating ActivitiesCash received from customers$ 792,000Cash paid to suppliers(433,000)Cash paid for operating expenses(153,000)Cash paid for interest(22,000)Cash paid for income taxes(54,000)Net Cash Flow from Operating Activities130,000

Cash Flow from Investing ActivitiesCash paid for building addition(31,000)Cash received from equipment sale43,000Cash paid for land purchase(72,000)Net Cash Flow from Investing Activities(60,000)

Cash Flow from Financing ActivitiesCash received from issue of common stock50,000Cash paid for note retirement(10,000)Cash paid for bond retirement(100,000)Net Cash Flow from Financing Activities(60,000)

Net increase / (decrease) in cash10,000 Cash and cash equivalents 200460,000 Cash and cash equivalents 2005$ 70,000

Sheet4PUC CorpStatement of Cash FlowFor the Year Ended December 31, 2012

Cash Flow from Operating ActivitiesNet Income$ 76,500Adjustments need to reconcile net income to net cash provided by operating activities:

Depreciation expense10,000Loss due to flood30,000Gain on equipment sale(3,000)Accounts Receivable increase(8,000)Inventory decrease30,000Accounts Payable decrease(3,000)Salaries Payable increase(2,000)Interest Payable increase2,500Income Tax Payable decrease(3,000)Cash Flow from Operating Activities$ 130,000

Cash Flow from Investing ActivitiesCash paid for building addition(31,000)Cash received from equipment sale43,000Cash paid for land purchase(72,000)Net Cash Flow from Investing Activities(60,000)

Cash Flow from Financing ActivitiesCash received from issue of common stock50,000Cash paid for note retirement(10,000)Cash paid for bond retirement(100,000)Net Cash Flow from Financing Activities(60,000)

Net increase / (decrease) in cash10,000 Cash and cash equivalents 201160,000 Cash and cash equivalents 2012$ 70,000

Sheet1Batson Company.Comparative Balance Sheets

December 31, Change20042005Increase/DecreaseAssetsCash$ 60,000$ 70,000$ 10,000increaseAccounts Receivable, net27,00035,0008,000increaseInventory230,000200,000(30,000)decreaseLand95,000167,00072,000increaseBuildings, net300,000325,00025,000increaseEquipment, net200,000126,000(74,000)decreaseTotal Assets$ 912,000$ 923,000$ 11,000increase

Liabilities and Stockholders' EquityAccounts Payable$ 15,000$ 12,000$ (3,000)decreaseSalaries Payable7,0005,000(2,000)decreaseInterest Payable11,95014,4502,500increaseIncome Tax Payable20,00017,000(3,000)decreaseNotes Payable, Bob's Bank70,00060,000(10,000)decreaseBonds Payable250,000150,000(100,000)decreaseTotal Liabilities373,950258,450(115,500)

Common Stock450,000500,00050,000increaseRetained Earnings88,050164,55076,500increaseTotal Stockholders' Equity538,050664,550126,500increaseTotal Liabilities and Equity$ 912,000$ 923,000$ 11,000.00increase

Sheet2Batson CompanyIncome StatementFor the Year Ending December 31, 2005

Sales Revenues$ 800,000Cost of Goods Sold460,000Gross Margin340,000Depreciation Expense$ 10,000Interest Expense24,500Salary Expense80,000Other Expenses71,000185,500Operating Income154,500Gain on Sale of Equipment3,000Loss Due to Flood(30,000)Income Before Tax127,500Income Tax Expense(51,000)Net Income$ 76,500

Sheet3PUC CorpStatement of Cash FlowFor the Year Ended December 31, 2012

Cash Flow from Operating ActivitiesCash received from customers$ 792,000Cash paid to suppliers(433,000)Cash paid for operating expenses(153,000)Cash paid for interest(22,000)Cash paid for income taxes(54,000)Net Cash Flow from Operating Activities130,000

Cash Flow from Investing ActivitiesCash paid for building addition(31,000)Cash received from equipment sale43,000Cash paid for land purchase(72,000)Net Cash Flow from Investing Activities(60,000)

Cash Flow from Financing ActivitiesCash received from issue of common stock50,000Cash paid for note retirement(10,000)Cash paid for bond retirement(100,000)Net Cash Flow from Financing Activities(60,000)

Net increase / (decrease) in cash10,000 Cash and cash equivalents 201160,000 Cash and cash equivalents 2012$ 70,000

Sheet4Batson Company.Statement of Cash FlowFor the Year Ended December 31, 2005

Cash Flow from Operating ActivitiesNet Income$ 76,500Adjustments need to reconcile net income to net cash provided by operating activities:

Depreciation expense10,000Loss due to flood30,000Gain on equipment sale(3,000)Accounts Receivable increase(8,000)Inventory decrease30,000Accounts Payable decrease(3,000)Salaries Payable increase(2,000)Interest Payable increase2,500Income Tax Payable decrease(3,000)Cash Flow from Operating Activities$ 130,000

Cash paid for building addition(31,000)Cash received from equipment sale43,000Cash paid for land purchase(72,000)Net Cash Flow from Investing Activities(60,000)

Cash Flow from Financing ActivitiesCash received from issue of common stock50,000Cash paid for note retirement(10,000)Cash paid for bond retirement(100,000)Net Cash Flow from Financing Activities(60,000)