chapter 14 statement of cash flows. what does it do for us? the statement of cash flows reports a...
TRANSCRIPT
Chapter 14
Statement of Cash Flows
What does it do for us?
The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet its financial obligations, and pay dividends.
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Statement of Cash Flows
• Cash flows from operating activities• Cash flows from investing activities• Cash flows from financing activities
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(payments for treasury stock, dividends, and redemption of debt securities)
Financing Financing
(payments for expenses)
Operating Operating
Sources (increases) of Cash Uses (decreases) of Cash
(receipts from sales of noncurrent assets)
Investing Investing
(receipts from issuing equity and debt securities)
Financing Financing
(payments for acquiring noncurrent assets)
Investing Investing
(receipts from revenues)
Operating Operating
Cash Flows
Direct vs. Indirect
• Cash receipts• Cash disbursements• Data is difficult to
obtain/report on• Same result as indirect
• Starts with Net Income• Adjusts for rev/exp that
don’t have anything to do with cash
• Most common b/c data is more available for reporting
• Same result as direct
Indirect Method
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Comparative Balance Sheet
(Continued)
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Comparative Balance Sheet
(Concluded)24
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Retained Earnings
The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year.
ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 202,300.00Dec. 31 Net income 108,000.00 310,300.00
31 Cash dividends 28,000.00 282,300.00
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ACCOUNT Retained Earnings ACCOUNT NO. 32
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 202,300.00Dec. 31 Net income 108,000.00 310,300.00
31 Cash dividends 28,000.00 282,300.00
The net income of $108,000 is entered on the statement (or working papers).
To statementTo statementTo statementTo statement
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Next, we need to determine depreciation expense for the year. If it isn’t given in the income statement, sometimes it can be found by analyzing the various accumulated depreciation accounts.
Depreciation 14-2
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ACCOUNT Accumulated Depreciation—Building ACCT. NO.
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 58,300.00Dec. 31 Depr. for year 7,000.00 65,300.00
to statementto statementto statementto statement
The comparative balance sheet (Exhibit 4: Slides 23 and 24) indicates that Accumulated Depreciation—Building increased by $7,000. By analyzing the account we can see that the increase is the result of the year-end adjusting entry.
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Gain on Sale of Land
The ledger or income statement of Rundell Inc. indicates that the sale of land resulted in a gain of $12,000. This gain increased net income by $12,000, yet cash flows was provided by an investing activity (selling land) rather than an operating activity, so the gain is deducted from net income on the statement of cash flows.
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Next, select current assets and current liabilities that impact cash flows and determine their increases and decreases.
Changes in Current Operating Assets and Liabilities
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Adjustments to Net Income (Loss) Using the Indirect Method
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Changes in Current AccountsChanges in Current Accounts
Accounts
Accounts receivable (net) $ 74,000 $ 65,000Inventories 172,000 180,000Accounts payable (mdse.) 43,500 46,700Accrued expenses payable 26,500 24,300Income taxes payable 7,900 8,400
9,0008,000*
3,200*2,200500*
2008 2007 December 31 Increase
Decrease*
Note that Cash and Dividends Payable are not included in this analysis.
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Statement of Cash Flows—Indirect Method for Rundell Inc. (Operating Activities Section)
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Same information as Slide 39, only in final form.
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Building
ACCOUNT Building ACCOUNT NO.
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 200,000Dec. 27 Purchased for cash 60,000 260,000
By examining the Building account, we can determine that Rundell Inc. bought a building for $60,000 cash.
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Land
ACCOUNT Land ACCOUNT NO.
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 125,000June 8 Sold for $72,000 cash 60,000 65,000Oct. 12 Purchased for $15,000
cash 15,000 80,000
The $45,000 decline in the Land account resulted from two separate transactions: a sale and a purchase.
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Cash Flows Used for Payment of Dividends
ACCOUNT Dividends Payable ACCOUNT NO.
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 10,000
10 Cash paid 10,000 —June 20 Dividends declared 14,000 14,000July 10 Cash paid 14,000 —Dec. 20 Dividends declared 14,000 14,000
Note that while $28,000 in dividends were declared, only $24,000 were paid during the year.
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Common Stock
Common Stock increased by $8,000.
ACCOUNT Common Stock ACCOUNT NO.
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 16,000Nov. 1 4,000 shares issued/cash 8,000 24,000
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ACCOUNT Paid-in Capital in Excess of Par—Common Stock
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 80,000Nov. 1 4,000 shares issued/cash 40,000 120,000
Analyzing the two accounts together, we can determine that the 4,000 shares were sold for $48,000.
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Bonds Payable
Bonds Payable decreased by $50,000.
ACCOUNT Bonds Payable ACCOUNT NO.
Balance Date Item Debit Credit Debit Credit
2008Jan. 1 Balance 150,000June 30 Retired by payment of
cash at face amount 50,000 100,000
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Financial Analysis and Interpretation
Free cash flow is a measure of operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.
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Cash flow from operations
Less: Investments in fixed assets to maintain current production
Free cash flow
Free Cash Flow
Positive free cash flow is considered favorable. A company that has free cash flow is able to fund internal growth, retire debt, pay dividends, and enjoy financial flexibility.
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