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The Cash Flow StatementOBJECTIVES2. Identify the purposes of the cash flow statement Report cash flows from operating, investing and financing activities Prepare a cash flow statement by the indirect method Calculate the cash effects of a wide variety of business transactions Prepare a cash flow statement by the direct method

3. 4.

5. 6. Prepare a bank reconciliation and the related journal entries

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

The Cash Flow Statement: Basic Concepts

The cash flow statement reports the entitys cash flows (cash receipts and cash payments) during the period.

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Purposes of the Cash Flow Statement30/6/06 For the Year Ended 30/6/07 (a point in time) (a period of time) time)Income Statement

30/6/07 (a point in

Balance Sheet

Balance Sheet

Cash Flow Statement

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Cash Balance Includes... cash on hand cash in the bank cash equivalents.

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Cash Equivalents Are.... short-term, liquid investments convertible into cash with little delay, money market accounts, Government bills (debentures).

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Basic Organization of the Cash Flow StatementA business may be evaluated in terms of three types of business activities: 1. Operating activities. 2. Investing activities. 3. Financing activities.

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Operating ActivitiesOperating activities are related to the transactions that make up net profit. Interest and dividends received are related to financing activities. However, we classify the cash received from these items as operating activities.Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Investing ActivitiesInvesting activities increase and decrease the assets that are available to the business. Investing activities are related to the Long-term (Non-current) Asset accounts.

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Financing ActivitiesThese are transactions involving obtaining resources from the owners or returning resources to them (share buy-backs and paying dividends to your shareholders).It also involves obtaining resources from long-term liabilities creditors and repaying the amount borrowed (but paying interest is considered operating.. because?).Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Format of the Cash Flow StatementThe direct method lists cash receipts from specific operating activities and cash payments for each major operating activity. It is required by AASB 107 Cash Flow Statements. The indirect method uses accruals to adjust profits to calculate cash flow.Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

The Direct Method(Exhibit 18-5 p687)

Cash Flow Statement (Direct Method) Year Ended June 30, 2007 (Thousands $) Cash flows from operating activities: Receipts: Collections from customers Interest received on bills receivable Dividends received on investments in shares Total receipts

$271 10 9 $290

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

The Direct MethodCash Flow Statement (Direct Method) Year Ended June 30, 2007 Payments: To suppliers $133 To employees 58 For interest 16 For income tax 15 Total payments 222 Net cash inflows from operating activities $ 68Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

The Direct MethodCash Flow Statement (Direct Method) Year Ended June 30, 2007 Cash flows from investing activities: Acquisition of non-current assets $(306) Loan to another company (11) Proceeds from sale of non-current assets 62 Net cash outflow from investing activities $(255)Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

The Direct MethodCash Flow Statement (Direct Method) Year Ended June 30, 2007 Cash flows from financing activities: Proceeds from issue of ordinary shares $101 Proceeds from issue of debentures 94 Payment of long-term bills payable (11) Payment of dividends (17) Net cash inflow from financing activities $167Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

The Direct MethodCash Flow Statement (Direct Method) Year Ended June 30, 2007 Net cash inflows from operating activities Net Cash outflow from investing activities Net Cash inflow from financing activities Net (decrease in cash) Cash balance, June 30, 2006 Cash balance, June 30, 2007 $ 68 (255) 167 $(20) 42 $ 22

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculate Individual Amounts for the Cash Flow StatementRevenues or expenses from the Income Statement

+ Adjusted for the change in the related Balance Sheet account(s)

=Amount for the Cash Flow StatementHorngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculate Individual Amounts for the Cash Flow StatementIncome Statement Year Ended June 30, 2007 (Thousands $)(Exhibit 18-6)

Revenues and gains: Sales revenue Interest revenue Dividend revenue Gain on sale of plant assets Total revenues and gains

$284 12 9 8 $313

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculate Individual Amounts for the Cash Flow StatementExpenses: Cost of goods sold Salary expense Depreciation expense Interest expense Other operating expense Total expenses

$150 56 18 16 17 $257

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculate Individual Amounts for the Cash Flow StatementIncome Statement Year Ended June 30, 2007 (Thousands) Total revenues and gains Less total expenses Net profits before tax Less income tax expense Net profit after tax $313 257 56 15 $ 41

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Comparative Balance Sheets(Exhibit 18-7)

Assets Current: Cash Accounts receivable Interest receivable Inventory Prepaid expenses Long-term receivable Plant, etc net Total assets

2007$ 22 93 3 135 8 11 453 $725

2006$ 42 80 1 138 7 219 $487

Inc./(Dec.)$ (20) 13 2 (3) 1 11 234 $238

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Comparative Balance SheetsLiabilities Current: Accounts payable Salary payable Accrued liabilities Long-term bills payable Shareholders equity: Ordinary shares Retained earnings Total liabilities and shareholders equity 2007 $ 91 4 1 160 359 110 $725 2006 $ 57 6 3 77 258 86 $487 Inc./(Dec.) $ 34 (2) (2) 83 101 24 $238

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculating Cash Collections from CustomersCollections can be calculated by converting sales revenue to the cash basis. Beginning Accounts Receivable balance + Sales on account Collections = Ending Accounts Receivable balance.Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculating Cash Collections from Customers$80,000 + $284,000 93,000 = $271,000 Because Accounts Receivable increased by $13,000, the business received $13,000 less cash than its sales revenue for the period. All collections of receivables are calculated following the pattern illustrated for collections from customers.Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Calculating Payments to SuppliersThis calculation includes two parts, payments for inventory and payments for expenses other than interest and income tax. Payments for inventory are calculated by converting cost of goods sold to the cash basis. This is accomplished by analysing the Inventory and Accounts Payable accounts.Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Payments for InventoryInventoryBeg. inventory 138,000 Cost of goods sold 150,000 Purchases

X

End. inventory 135,000

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Payments for InventoryHow much were the purchases? $138,000 + X $150,000 = $135,000 X = $135,000 $138,000 + $150,000 X = $147,000

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Payments for InventoryAccounts PayablePayments for inventoryBeg. balance

Y

Purchases

57,000 147,000

End. balance

91,000

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Payments for InventoryHow much did the business pay for this inventory? $57,000 + $147,000 Y = $91,000 Y = $57,000 + $147,000 $91,000 Y = $113,000

Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia

Payments for Operating ExpensesIncreases in prepaid expenses require cash payments, and decreases