24-1. the statement of cash flows section 1: sources and uses of cash chapter 24 section objectives...
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24-1
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.
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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.
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Sources and Uses of Cash
The statement of cash flows reports:
cash inflowsSources of cash
cash outflowsUses of cash
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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
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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
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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.
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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.
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.
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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
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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
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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.
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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?
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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
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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.
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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.
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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
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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
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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
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.
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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
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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
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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.
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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
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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
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College Accounting, 12th Edition
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