24-1. the statement of cash flows section 1: sources and uses of cash chapter 24 section objectives...

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Page 1: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Page 2: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

The Statementof Cash FlowsThe Statementof Cash Flows

Section 1: Sources and

Uses of Cash

Chapter

24

Section Objectives

1. Distinguish between operating, investing, and financing activities.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

Page 3: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Statement of Cash Flows

Reviewed by creditors to determine how the firm will pay principal and interest on debts.

Reviewed by investors to determine if the corporation will have the cash to pay dividends.

Reviewed by management for information about cash to pay employees, suppliers, and other obligations.

Page 4: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Sources and Uses of Cash

The statement of cash flows reports:

cash inflowsSources of cash

cash outflowsUses of cash

Page 5: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Sources and Uses of Cash

Cash inflows and outflows are classified under three headings:

Operating Activities

Investing Activities

Financing Activities

Distinguish between operating, investing, and financing activitiesObjective 1

Page 6: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Sources of Cash Uses of Cash

Operating Activities

Sale of merchandise

Sale of services

Interest income

Dividend income

Miscellaneous income

Pay for merchandise

Pay taxes

Pay salaries and wages

Pay interest expense

Pay for other expenses

Page 7: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Sources of Cash Uses of Cash

Investing Activities

Sale of land, buildings, or equipment.

Principal payments collected on receivable for long-term assets.

Sale of investment in bonds or other securities.

Pay for purchase of land, buildings, or equipment.

Pay for the purchase of investments in bonds or other securities.

Page 8: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Sources of Cash Uses of Cash

Financing Activities

Issuance of common stock.

Issuance of preferred stock.

Issuance of bonds payable.

Borrowing through signing a note payable.

Resale of treasury stock.

Pay cash dividends on common stock.

Pay cash dividends on preferred stock.

Repay bond indebtedness.

Repay notes payable or other borrowing.

Purchase treasury stock.

Page 9: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

The Statementof Cash FlowsThe Statementof Cash Flows

Section 2: Cash Flows

from Operating Activities

Chapter

24

Section Objectives

2. Compute cash flows from operating activities.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

Page 10: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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To prepare the statement of cash flows, you need four items.

Income statement

Schedule of operating expenses

Statement of retained earnings

Comparative balance sheet

Statement of Cash Flows

Page 11: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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The schedule of operating expenses is a schedule that supplements the income statement.

ANSWER:

It shows the selling and general and administrative expenses in greater detail.

QUESTION:

What is the schedule of operatingexpenses?

Compute cash flows from operating activitiesObjective 2

Page 12: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Reconciles the beginning and ending cash balances.

Ties together: income statement, changes in the noncash items on the balance sheet, changes in the noncash items on the statement of retained earnings.

Can be prepared in two different ways: direct method indirect method

Statement of Cash Flows

This chapter illustrates the indirect method.

Page 13: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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The indirect method of preparing the statement of cash flows treats net income as the primary source of cash from operating activities and adjusts net income for changes in noncash items.

ANSWER:

QUESTION:

What is the indirect method of preparing the statement of cash flows?

Page 14: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Cash Flows from Operating Activities

Net income + or – Adjustments for noncash items on

income statement + Decreases in current assets – Increases in current assets + Increases in current liabilities – Decreases in current liabilities

Indirect Method

= Net cash provided by operating activities

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Depreciation expense.

Amortization of premium on bonds payable.

Gain or loss on sale of equipment.

Adjustments for Noncash Items on the Income Statement

Page 16: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Operating assets and liabilities are current assets and current liabilities.

ANSWER:

QUESTION:

What are operating assets and liabilities?

Changes are usually related to routine business operations and are reflected in net income.

Page 17: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Increase in Accounts Receivable

More sales on account were recorded than were collected.

Sales were included in net income but cash has not been received.

To obtain cash flows from operating activities, the increase in accounts receivable is subtracted from net income.

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Decreases in Prepaid Expenses

Less was paid for prepaid expenses than was charged to expense in arriving at net income.

Net income does not reflect cash paid for prepaid expenses.

To obtain cash flows from operating activities, the decrease in prepaid expenses is added to net income.

Page 19: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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More supplies were paid for than were used.

Net income does not reflect all cash paid for supplies.

To obtain cash flows from operating activities, the increase in supplies is deducted from net income.

Increase in Supplies

Page 20: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Decreases in noncash current assets are added to net income to arrive at cash flows from operating activities.

Inventory is an example of a noncash current asset.

Decrease in Noncash Current Assets

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More inventory was sold than was purchased.

Sale of inventory was reflected in net income as cost of goods sold, but cash was not paid to replace the inventory.

Net income reflects higher costs than actual cash outflows.

To obtain cash flows from operating activities, a decrease in inventory is added to net income.

Decrease in Merchandise Inventory

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Increases in Current Liabilities

Increases in current liabilities are added to net income to obtain the cash flows from operating activities.

Increase in sales tax payable

Increase in payroll taxes payable

Increase in interest payable

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Decreases in current liabilities are subtracted from net income.

If current liabilities decrease as a result of operations, some of the net income reported was not a cash flow.

Decrease in Current Liabilities

Page 24: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Summary of Effects of Changes in Current Assets and Current Liabilities.

Add to Deduct from Net Income Net IncomeIncrease in current asset x

Decrease in current asset x

Increase in current liability x

Decrease in current liability x

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If the income statement reflects a net loss, the first line of the statement of cash flows is the net loss.

All adjustments for noncash income and expense, current assets, and current liabilities are made to the net loss figure.

Effect of Net Loss on Cash Flows from Operations

Page 26: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

The Statementof Cash FlowsThe Statementof Cash Flows

Section 3: Cash

Flows from Investing

and Financing Activities

Chapter

24

Section Objectives

3. Compute cash flows from investing activities.4. Compute cash flows from financing activities.5. Prepare a statement of cash flows.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

Page 27: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Investing activities involve the acquisition or disposal of assets that are not consumed in routine operations within one year.

Cash Flows from Investing Activities

Compute cash flows from investing activities

Objective 3

Page 28: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Cash payments for purchases of property, plant, and equipment.

Cash payments for purchases of stocks and bonds of other corporations.

Cash Outflows from Investing Activities

Page 29: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Cash Inflows from Investing Activities

Sale of property, plant, and equipment.

Sale of investments in securities of other corporations.

Principal received on mortgages or notes held in connection with the sale of plant and equipment.

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Sales price (cash inflow) $8,000Asset cost $6,000

Cash Inflows from Investing Activities

In 2010 Household Productions, Inc. sold equipment for $8,000 cash.

Gain on sale $4,000Accumulated depreciation (2,000) (4,000)

Statement of cash flows shows the $8,000 received as a cash inflow from investing activities.

The $4,000 gain was subtracted from net income in the Cash Flows from Operating Activities section.

Page 31: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Equity transactions

Debt transactions

Cash Flows from Financing Activities

Compute cash flows from financing activities

Objective 4

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Original issue of capital stock.

Resale of treasury stock.

Issue of bonds and notes payable.

Cash Inflows from Financing Activities

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Purchase of treasury stock.

Retirement of preferred stock.

Payment of cash dividends.

Repayment of debt obligations: Bonds payable Notes payable Mortgages

Cash Outflows from Financing Activities

Interest expense is an outflow from operating activities (not financing activities).

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Cash flows from three types of business activities are combined to arrive at the net change in cash and cash equivalents: Operating Investing Financing

The net change is combined with the beginning balance of cash and cash equivalents to reconcile to the ending balance of cash and cash equivalents.

Prepare a statement of cash flowsObjective 5

Page 35: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Household Productions, Inc.

Statement of Cash Flows (Partial)

Year Ended December 31, 2010

Net cash provided by operating activities 37,958.00

Net cash provided by investing activities 3,500.00

Net cash used in financing activities (7,000.00)

Net Increase in Cash and Cash Equivalents 34,458.00

Cash and cash equivalents, January 1, 2010 80,773.00

Cash and cash equivalents, December 31, 2010 115,231.00

Agrees with amount reported on balance sheet

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Recall that there are two methods of preparing the statement of cash flows.

The two methods relate to the Cash Flows from Operating Activities section only.

This chapter illustrates the indirect method.

Direct and Indirect Methods

Most corporations use the indirect method.

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Under the direct method all revenue and expenses reported on the income statement appear in the operating section of the statement of cash flows and show the cash received or paid out for each type of transaction.

ANSWER:

QUESTION:

What is the direct method of preparing the statement of cash flows?

Net income is not the starting point in thedirect method.

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The FASB suggests the following classifications: Cash collected from customers

Interest and dividends received

Cash paid to employees and suppliers

Interest paid

Income taxes paid

Direct Method

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If the indirect method is used, the notes accompanying the statement must include:

Interest paid Income tax paid

Disclosures Required in the Statement of Cash Flows

Operating Activities

Investing and Financing Activities

Noncash activities are disclosed on the statement. Examples include:

Issuing bonds payable for land Converting bonds payable into common stock

Page 40: 24-1. The Statement of Cash Flows Section 1: Sources and Uses of Cash Chapter 24 Section Objectives 1.Distinguish between operating, investing, and financing

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Thank Youfor using

College Accounting, 12th Edition

Price • Haddock • Farina