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  • STATEMENT OF CASH FLOWS

    January 18, 2015 1DMH

    Mahfuzul Hoque PhD

    Professor

    Department of Accounting & Information Systems

    Faculty of Business Studies

    University of Dhaka

    mhoque71@gmail.com

  • 1. Indicate the usefulness of the statement of cash flows.

    2. Distinguish among operating, investing, & financing

    activities.

    3. Explain the impact of the product life cycle on a

    companys cash flows.

    4. Prepare a statement of cash flows using the indirect

    method.

    5. Use the statement of cash flows to evaluate a company.

    Study Objectives

    January 18, 2015 2DMH

  • Usefulness

    Classifications

    Significant noncash

    activities

    Format

    Corporate life cycle

    Preparation

    Indirect & direct

    methods

    Step 1: Operating

    activities

    Step 2: Investing &

    financing activities

    Step 3: Net change in

    cash

    Free cash flow

    Assessing liquidity &

    solvency

    The Statement of

    Cash Flows:

    Usefulness &

    Format

    Preparing the

    Statement of Cash

    FlowsIndirect

    Method

    Using Cash Flows to

    Evaluate a

    Company

    Statement of Cash Flows

    January 18, 2015 3DMH

  • Provides information to help assess:

    1. Entitys ability to generate future cash flows.

    2. Entitys ability to pay dividends & obligations.

    3. Reasons for difference between net income & net cash

    provided (used) by operating activities.

    4. Cash investing & financing transactions during the

    period.

    Usefulness & Format

    Usefulness of the Statement of Cash Flows

    January 18, 2015 4DMH

  • Classification of Cash Flows

    Usefulness & Format

    Income Statement

    Items

    Operating

    Activities

    Changes in

    Investments &

    Long-Term Asset

    Items

    Investing

    Activities

    Changes in

    Long-Term

    Liabilities &

    Stockholders

    Equity

    Financing

    Activities

    January 18, 2015 5DMH

  • Usefulness & Format

    Typical receipt & payment

    classificationsClassification of Cash Flows

    January 18, 2015 6DMH

  • Usefulness & Format

    Typical receipt &

    payment classificationsClassification of Cash Flows

    January 18, 2015 7DMH

  • 1. Issuance of common stock to purchase assets.

    2. Conversion of bonds into common stock.

    3. Issuance of debt to purchase assets.

    4. Exchanges of plant assets.

    Companies report noncash activities in either a

    separate schedule (bottom of the statement) or

    separate note to the financial statements.

    Usefulness & Format

    Significant Noncash Activities

    January 18, 2015 8DMH

  • January 18, 2015 9DMH

  • Order of Presentation:

    1. Operating activities.

    2. Investing activities.

    3. Financing activities.

    Direct Method

    Indirect Method

    Usefulness & Format

    Format of the Statement of Cash Flows

    January 18, 2015 10DMH

  • Illustration

    Format of the Statement of Cash Flows

    January 18, 2015 11DMH

  • Illustration: Classify each of these transactions

    by type of cash flow activity.

    Format of the Statement of Cash Flows

    1. Issued 100,000 shares of $5 par value common

    stock for $800,000 cash.

    2. Borrowed $200,000, signing a 5-year note

    bearing 8% interest.

    3. Purchased two semi-trailer trucks for $170,000

    cash.

    4. Paid employees $12,000 for salaries & wages.

    5. Collected $20,000 cash for services provided.

    Financing

    Financing

    Investing

    Operating

    Operating

    January 18, 2015 12DMH

  • Usefulness & Format

    Impact of product

    life cycle on cash

    flows.

    Illustration

    The Corporate Life Cycle

    January 18, 2015 13DMH

  • January 18, 2015 14DMH

  • Three Sources of Information:

    1. Comparative balance sheets

    2. Current income statement

    3. Additional information

    Usefulness & Format

    Preparing the Statement of Cash Flows

    January 18, 2015 15DMH

  • Usefulness & Format

    Three Major Steps:Illustration

    Preparing the Statement of Cash Flows

    January 18, 2015 16DMH

  • Usefulness & Format

    Three Major Steps:Illustration

    Preparing the Statement of Cash Flows

    January 18, 2015 17DMH

  • Usefulness & Format

    Three Major Steps:Illustration

    Preparing the Statement of Cash Flows

    January 18, 2015 18DMH

  • Companies favor the indirect

    method for two reasons:

    1. Easier & less costly to prepare.

    2. Focuses on differences between

    net income & net cash flow from

    operating activities.

    Usefulness & Format

    Indirect & Direct Methods

    January 18, 2015 19DMH

  • January 18, 2015 20DMH

  • Statement of Cash Flows

    1. Compute net cash provided by operating activities by

    adjusting each item in the income statement from the accrual

    basis to the cash basis.

    2. Companies report only major classes of operating cash

    receipts & cash payments.

    3. For these major classes, the difference between cash receipts

    & cash payments is the net cash provided by operating

    activities.

    January 18, 2015 21DMH

  • IllustrationStep 1: Operating Activities

    Statement of Cash Flows

    January 18, 2015 22DMH

  • Illustration

    Statement of Cash Flows

    January 18, 2015 23DMH

  • Illustration 12A-1

    Statement of Cash Flows

    January 18, 2015 24DMH

  • Illustration 12A-1

    January 18, 2015 25DMH

  • Illustration

    Cash Receipts from Customers

    For Computer Services, accounts receivable decreased $10,000.

    Illustration

    Statement of Cash Flows

    January 18, 2015 26DMH

  • Cash Payments to Suppliers

    In 2012, Computer Services inventory increased $5,000.

    Illustration

    Inventory

    1/1/12 Balance 10,000

    12/31/12 Balance 15,000

    Purchases 155,000 Cost of goods sold 150,000

    Purchases 155,000Payments to suppliers 139,000

    Statement of Cash Flows

    January 18, 2015 27DMH

  • Illustration

    Cash Payments to Suppliers

    In 2012, Computer Services inventory increased $5,000.

    Statement of Cash Flows

    January 18, 2015 28DMH

  • Illustration

    Cash Payments for Operating Expenses

    Cash payments for operating expenses were $111,000.

    Illustration

    Statement of Cash Flows

    January 18, 2015 29DMH

  • Cash Payments for Interest

    In 2012, Computer Services had interest expense of $42,000.

    Interest Payable

    1/1/12 Balance 0

    12/31/12 Balance 0

    Interest expense 42,000

    Cash paid for interest 42,000

    Statement of Cash Flows

    January 18, 2015 30DMH

  • Cash Payments for Income Taxes

    Cash payments for income taxes were $49,000.

    Illustration

    Income Tax Payable

    1/1/12 Balance 8,000

    12/31/10 Balance 6,000

    Income tax expense 47,000

    Cash paid for taxes 49,000

    Statement of Cash Flows

    January 18, 2015 31DMH

  • Illustration

    Operating activities section of the statement of cash flows

    Statement of Cash Flows

    January 18, 2015 32DMH

  • Increase in Equipment. (1) Equipment purchased for $25,000,

    & (2) sale for $4,000 of equipment $8,000.

    Step 2: Investing & Financing Activities

    Accumulated Depreciation

    1/1/12 Balance 1,000

    12/31/12 Balance 3,000

    Depreciation expense 3,000

    Equipment sold 1,000

    Illustration

    Statement of Cash Flows

    January 18, 2015 33DMH

  • Increase in Equipment. (1) Equipment purchased for $25,000,

    & (2) sale for $4,000 of equipment $8,000.

    Step 2: Investing & Financing Activities

    Cash 4,000

    Accumulated depreciation 1,000

    Loss on sale of equipment 3,000

    Equipment 8,000

    Statement of Cash Flows

    January 18, 2015 34DMH

  • Increase in Land. Land increased

    $110,000. The additional information

    section indicates that the company

    exchanged bonds for land.

    Step 2: Investing & Financing Activities

    Significant noncash

    investing & financing

    transaction.

    Increase in Bonds Payable. Bonds Payable

    increased $110,000. The company acquired

    land by exchanging bonds for land.

    Significant noncash

    investing & financing

    transaction.

    Increase in Building. Acquired building for

    $120,000 cash.Investing transaction.

    Statement of Cash Flows

    January 18, 2015 35DMH

  • Increase in Common Stock. Increase

    in Common Stock of $20,000.

    Increase resulted from the issuance of

    new shares of stock.

    Step 2: Investing & Financing Activities

    Increase in Retained Earnings. The

    $116,000 net increase in Retained

    Earnings resulted from net income of

    $145,000 & the declaration &

    payment of a cash dividend

    of $29,000.

    Financing transaction

    (cash dividend).

    Financing transaction.

    Statement of Cash Flows

    January 18, 2015 36DMH

  • Step 2:

    Investing

    &

    Financing

    Activities

    Illustration