ppt chap12

8/3/2019 Ppt Chap12

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© The McGraw-Hill Companies, Inc., 2010 McGraw-Hill/Irwin

Chapter 12

Reporting and Analyzing Cash Flows

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How does acompany obtain its

cash?

Where does acompany spend its

cash?

What explains thechange in the cashbalance?

Purpose of the Statement of CashFlows

C1

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How did thebusiness fund its

operations?

Did the businessborrow any funds or

repay any loans?

Does the businesshave sufficient cash

to pay its debts asthey mature?

Did the businessmake any dividend

payments?

Importance of Cash FlowsC1

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CashCurrency

CashEquivalents

Short-term, highly liquid investments. Readily convertible into cash.

Sufficiently close to maturity so that market value isunaffected by interest rate changes.

Measurement of Cash FlowsC1

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The Statement of Cash Flows

includes the following threesections:

Operating Activities

Investing Activities Financing Activities

Classifying Cash FlowsC 2

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Examples of Outflows Salaries and wages

Payments to suppliers

Taxes and fines

Interest paid to lenders

Examples of Inflows Receipts from customers

Cash dividends received

Interest from borrowers

Operating Activities

C 2

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Examples of Outflows Pu

rchasing long-termproductive assets

Purchasing equityinvestments

Purchasing debt investments

Examples of Inflows Selling long-term productive

assets

Selling equity investments

Collecting principal on loans

Investing ActivitiesC 2

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Examples of O

utflows Pay cash dividends

Purchasing treasury stock

Repaying cash loans

Paying owners¶ withdrawals

Examples of Inflows Issuing its own equity

securities

Issuing bonds and notes Issuing short- and long-term

liabilities

Financing ActivitiesC 2

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Classification of

Cash Flow Items

Operating Investing Financing

Interest received Yes Yes

Dividends received Yes Yes

Interest paid Yes Yes

Dividends paid Yes Yes

C 2

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Items requiring separatedisclosure include:

Retirement of debt by issuingequity securities.

Conversion of preferred stock to

common stock. Leasing of assets in a capital

lease transaction.

Noncash Investing and

Financing

C 3

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Cash flows from operating activities:

[List of individual inflows and outflows] Net cash provided (used) by operating activites $ #####

Cash flows from investing activities:

[List of individual inflows and outflows]

Net cash provided (used) by investing activites #####

Cash flows from financing activities:

[List of individual inflows and outflows]

Net cash provided (used) by financing activites #####

Net increase (decrease) in cash $ #####

Cash (and equivalents) balance at beginning of period #####

Cash (and equivalents) balance at end of period $ #####

Company Name

Statement of Cash Flows

For Period Ended Date

Format of the Statement of CashFlows

C 4

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There are two acceptable methods to determineCash Flows from Operating Activities:

Direct Method

Indirect Method

There are two acceptable methods to determineCash Flows from Operating Activities:

Direct Method

Indirect Method

Format of the Statement of CashFlows

C 4

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Let¶s look at the IndirectMethod for preparing theCash Flows from OperatingActivities section.

Preparing the Statement of CashFlows

P1

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Relationship to theAccounting Equation

Assets = Liabilities Equity

Cash Liabilities Equity+ = +Noncash Assets

= +_

Changesin Cash

Account

Changesin

Noncash Accounts

Cash Noncash AssetsLiabilities Equity

P1

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ACCRUAL AND CASH: BASIC IDEAS

Company A all cash sales andcash payments of expenses

Dr Cash 100

Cr Rev 100

Dr Exp 20

Cr Cash 20

Income = 80

Cash = 80

Company B all credit sales andcash payments of expenses

Dr AR 100

Cr Rev 100

Dr Exp 20

Cr Cash 20

Income = 80

Cash = (20)

For company B, to go from its Income to Cash:

Income ± Increase in AR = 80 ± 100 = (20)

1st

year of operations:S

cenario 1

P1

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ACCRUAL AND CASH: BASIC IDEAS

Company A all cash sales andcash payments of expenses

Dr Cash 100

Cr Rev 100

Dr Exp 20

Cr Cash 20

Income = 80

Cash = 80

Company B all cash sales andaccrued expenses

Dr Cash 100

Cr Rev 100

Dr Exp 20

Cr Payable 20

Income = 80

Cash = 100

For company B, to go from its Income to Cash:

Income + Increase in Payable = 80 + 20 = 100

1st

year of operations:S

cenario 2

P1

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Use this table when adjusting Income or Profit to Operating Cash Flows.

Change in Account Balance During Year

Increase Decrease

Current

Subtract from Add to incomeAssets income

Current Add to income Subtract from

Liabilities income

Indirect MethodP2

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Incomebeforetaxes

Cash Flowsfrom Operating

Activities

Most companies use the indirect method.

Changes in current assetsand current liabilities.

+ Losses and

- Gains

+ Noncash

expenses such asdepreciation and

amortization.

Indirect MethodP2

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East, Inc. reports $125,000 income before taxesfor the year ended December 31, 2010.

Accounts Receivable increased by $7,500during the year and Accounts Payableincreased by $10,000.

During 2010, East reported $12,500 of Depreciation Expense.

What is East, Inc.¶s OperatingCash Flow for 2010?

Indirect Method ExampleP2

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Net income 125,000$

Deduct: Increase in accountsreceivable

Cash provided by operating

activities

Income before taxes 125,000$



activities

For the indirectmethod, start withincome before

taxes.


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Add: Depreciation expense 12,500



activities





activities

Add noncash expenses suchas depreciation, depletion,amortization, or bad debtexpense.


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Deduct: Increase in accountsreceivable (7,500)


activities





Increase Decrease

Current Subtract from Add to income

Assets income


Liabilities income


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Add: Increase in accounts payable 10,000


activities







Increase DecreaseCurrent Subtract from Add to income

Assets income


Liabilities income

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activities 140,000$





Cash generated from operations 140,000$


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Interest revenue, interest expenses,Dividend revenue and income taxes paid

Interest and dividends received, and income

taxes and interest paid must be separately disclosed.

Since interest and dividend income are added to

derive income amount, adjustments involvededucting these amounts from income.Interest expenses are added to income to

cancel the earlier deduction.

P2

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Solving for tax and interest paid

Beginning balance + Income tax expense ± Ending balance = Income tax paid

Beginning balance + Interest expense ± Ending balance = Interest paid

IncomeTax Payable

Beg bal

Income tax paid IncomeTax Exp

End Bal

Interest Payable

Beg bal

Interest paid Interest Exp

End Bal

P2

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Let¶s prepare a Statement of Cash Flows for B&G Companyusing the Indirect Method.

Indirect MethodP2

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2010 2009

Increase

or

(Decrease)

Cash 63,000$ 22,000$ 41,000$

Accounts receivable 85,000 76,000 9,000 Inventories 170,000 189,000 (19,000)

Land 75,000 100,000 (25,000)

Equipment 270,000 200,000 70,000

Accumulated depreciation-equipment (66,000) (32,000) (34,000)

Total Assets 597,000$ 555,000$ 42,000$

Liabilities and Stockholders' Equity

Accounts payable 39,000$ 47,000$ (8,000)

Bonds payable 150,000 200,000 (50,000)

Common stock, $1 par 209,000 174,000 35,000

Retained earnings 199,000 134,000 65,000

Total Liabilities and Stockholders' Equity 597,000$ 555,000$ 42,000$

B&G Company

Comparative Balance

Sheets

December 31

Assets

P2

Indirect Method

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Additional Information for 2010:

Net income was $105,000.

Income tax expense (the same as tax paid for

the year) was $20,000.

There was no sale of old equipment.

Cash dividends declared and paid were $40,000.

Bonds payable of $50,000 were redeemed for

$50,000 cash.

Common stock was issued for $35,000 cash.

P2

Indirect Method

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Cash flows from operating activities


Adjustments to accrual-basis income:

B&G Company


For the Year Ended December 31, 2010

Add noncash expenses andlosses.

Subtract noncash revenuesand gains.

Start with

accrual-basisincome.

Then, analyze the changes incurrent assets and currentliabilities.

P1

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Depreciation expense 34,000$

Increase in accounts receivable (9,000)

Decrease in inventory 19,000

Decrease in accounts payable (8,000)

Total adjustments 36,000

Cash generated from operations 161,000 Income taxes paid 20,000

Net cash provided by operating activites 141,000

B&G Company




Increase Decrease

Current Subtract from Add to income

Assets income


Liabilities income

P2

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Net income 105,000$

Adjustments to accrual-basis net income:






Net cash provided by operating activities 141,000 Cash flows from investing activities

B&G Company













B&G Company



Let¶s do the investing

section next.

P3

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Net cash provided by o operating activities 141,000

Cash flows from investing activities

Proceeds from sale of land 25,000

Purchase of equipment (70,000)

Net cash used by investing activities (45,000)

B&G Company



Finally, let¶s complete thefinancing section.

P3

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Adjustments to accrual-basis income:Depreciation expense 34,000$











Cash flows from financing activities

Proceeds from issuance of common stock 35,000

Redemption of bonds (50,000)

Payment of dividends (40,000)

Net cash used by financing activities (55,000)

Net increase in cash 41,000

Cash, January 1, 2010 22,000 Cash, December 31, 2010 63,000$

B&G Company


For the Year Ended December 31, 2010P3

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Used, along with income-based ratios, toassess company performance.

Cash flow on

total assets

=Operating cash flows

Average total assets

Cash Flow on Total AssetsA2

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Analyzing the Cash Account

Balance, Jan. 1, 2010 22,000 Payments for merchandise 150,000

Receipts from customers 466,000 Payments for wages 145,000

Receipts from sale of land 25,000 Payments for interest 10,000

Receipts from stock issuance 35,000 Payments for taxes 20,000

Payments for equipment 70,000

Payments for bond retirement 50,000

Payments for dividends 40,000

Balance, Dec. 31, 2010 63,000

Cash

Let¶s use this Cash account to prepare B&GCompany¶s Statement of Cash Flows under theDirect Method.

P4

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Cash received from customers 466,000$

Cash paid for merchandise (150,000)

Cash paid for wages (145,000) Cash paid for interest (10,000)

Cash paid for taxes (20,000)

Net cash provided by operating activities 141,000





Cash flows from financing activitiesProceeds from issuance of common stock 35,000

Redemption of bonds (50,000)

Payment of dividends (40,000)

Net cash used by financing activities (55,000)

Net increase in cash 41,000

Cash, January 1, 2010 22,000

Cash, December 31, 2010 63,000$

B&G Company



P4 Preparing the Statement of CashFlows

ppt chap12

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