PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

REPORTING THE STATEMENT OF CASH FLOWS

Chapter 16

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How does a company obtain its

cash?

How does a company obtain its

cash?

Where does a company spend its

cash?

Where does a company spend its

cash?

What explains the change in the cash

balance?

What explains the change in the cash

balance?

PURPOSE OF THE STATEMENTOF CASH FLOWS

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How did the business fund its

operations?

How did the business fund its

operations?

Did the business borrow any funds or

repay any loans?

Did the business borrow any funds or

repay any loans?

Does the business have sufficient cash to pay its debts as

they mature?

Does the business have sufficient cash to pay its debts as

they mature?

Did the business make any dividend

payments?

Did the business make any dividend

payments?

IMPORTANCE OF CASH FLOWS

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CashCashCurrency

Cash Equivalents

Short-term, highly liquid investments. Readily convertible into cash. Sufficiently close to maturity so that market value is

unaffected by interest rate changes.

Short-term, highly liquid investments. Readily convertible into cash. Sufficiently close to maturity so that market value is

unaffected by interest rate changes.

MEASUREMENT OF CASH FLOWS

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CLASSIFICATION OF CASH FLOWS

The Statement of Cash Flows includes the following three sections: Operating Activities Investing Activities Financing Activities

C1

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Outflows Salaries and wages Payments to suppliers Taxes and fines Interest paid to lenders Other

Outflows Salaries and wages Payments to suppliers Taxes and fines Interest paid to lenders Other

Inflows Receipts from customers Cash dividends received Interest from borrowers Other

Inflows Receipts from customers Cash dividends received Interest from borrowers Other

OPERATING ACTIVITIESC1

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Outflows Purchasing long-term

productive assets Purchasing equity

investments Purchasing debt investments Other

Outflows Purchasing long-term

productive assets Purchasing equity

investments Purchasing debt investments Other

Inflows Selling long-term productive

assets Selling equity investments Collecting principal on loans Other

Inflows Selling long-term productive

assets Selling equity investments Collecting principal on loans Other

INVESTING ACTIVITIESC1

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Outflows Pay dividends Purchasing treasury stock Repaying cash loans Paying owners’ withdrawals

Outflows Pay dividends Purchasing treasury stock Repaying cash loans Paying owners’ withdrawals

Inflows Issuing its own equity

securities Issuing bonds and notes Issuing short- and long-term

liabilities Contributions by owners

Inflows Issuing its own equity

securities Issuing bonds and notes Issuing short- and long-term

liabilities Contributions by owners

FINANCING ACTIVITIESC1

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NONCASH INVESTING AND FINANCING

Items requiring separate disclosure include: Retirement of debt by issuing equity

securities. Conversion of preferred stock to

common stock. Leasing of assets in a capital lease

transaction.

Items requiring separate disclosure include: Retirement of debt by issuing equity

securities. Conversion of preferred stock to

common stock. Leasing of assets in a capital lease

transaction.

C1

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FORMAT OF THE STATEMENTOF CASH FLOWS

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PREPARING THE STATEMENTOF CASH FLOWS

P1

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ANALYZING THE CASH ACCOUNTP1

The Cash account is a natural place to look for information about cash flows from operating,

investing, and financing activities.

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ANALYZING THE CASH ACCOUNTP1

Cash from Operating

Cash from Investing

Cash from Financing

Cash Provided

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ANALYZING NONCASH ACCOUNTP1

A second approach to preparing the statement of cash flows is analyzing noncash accounts.

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INFORMATION TO PREPARE THE STATEMENT

P1

Comparative Balance Sheets

Current Income Statement

Additional Information

Information to prepare the statement of cash flows usually comes from three sources:

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CASH FLOWS FROM OPERATINGINDIRECT AND DIRECT METHODS OF

REPORTING

The net cash amount provided by operating activities is identical under both the direct and indirect methods.

Direct Method

Indirect Method

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APPLICATION OF THE INDIRECT METHOD OF REPORTING

P2

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APPLICATION OF THE INDIRECT METHOD OF REPORTING

P2

Additional information on Genesis Inc.’s 2011 transactions:a) The accounts payable balances result from merchandise inventory purchases.b) Purchased $70,000 in plant assets by paying $10,000 cash and issuing $60,000 of notes payable.c) Sold plant assets with an original cost of $30,000 and accumulated depreciation of $12,000 for $12,000 cash, yielding a $6,000 loss.d) Received $15,000 cash from issuing 3,000 shares of common stock.e) Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain.f) Declared and paid cash dividends of $14,000.

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Net Income

Net Income

Cash Flows from Operating

Activities

Cash Flows from Operating

Activities

Changes in noncash current assets and current

liabilities

Changes in noncash current assets and current

liabilities

+ Losses and - Gains

+ Losses and - Gains

+ Noncash expenses such as depreciation and

amortization

+ Noncash expenses such as depreciation and

amortization

APPLICATION OF THE INDIRECT METHOD OF REPORTING

P2

1

2 3

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Use this table when adjusting Net Income to Operating Cash Flows.

ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT

LIABILITIES

P2

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P2ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT

LIABILITIES

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P2ADJUSTMENTS FOR OPERATING

ITEMS NOT PROVIDING OR USING CASH

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P2 ADJUSTMENTS FOR NONOPERATING ITEMS

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P2 SUMMARY OF ADJUSTMENTS FOR INDIRECT METHOD

Common adjustments to net income when computing net cash provided or used by operating activities under the

indirect method:

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P3

CASH FLOWS FROM INVESTING

Identify changes in investing-related

accounts

Explain these changes using reconstruction

analysis

Report their cash flow effects

A three-stage process to determine cash provided or used by investing activities:

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P3 CASH FLOWS FROM INVESTING

This analysis reveals a $40,000 increase in plant assets from $210,000 to $250,000 and a

$12,000 increase in accumulated depreciation from

$48,000 to $60,000.

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P3

CASH FLOWS FROM INVESTINGItem b: Genesis purchased plant assets of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash.

Item c: Genesis sold plant assets costing $30,000 (with $12,000 of accumulated depreciation) for $12,000 cash, resulting in a $6,000 loss.

We also reconstruct the entry for Depreciation Expense using information from the income statement.

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P3 CASH FLOWS FROM INVESTING

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P3

CASH FLOWS FROM FINANCING

Identify changes in financing-related

accounts

Explain these changes using reconstruction

analysis

Report their cash flow effects

A three-stage process to determine cash provided or used by financing activities:

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P3 CASH FLOWS FROM FINANCING

This analysis reveals: 1.an increase in notes payable from $64,000 to $90,000, 2.an increase in common stock from $80,000 to $95,000, and 3.an increase in retained earnings from $88,000 to $112,000.

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P3

CASH FLOWS FROM FINANCING

Item e: Notes with a carrying value of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain.

Item b: Genesis purchased plant assets of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash.

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P3

CASH FLOWS FROM FINANCING

Item d: Issued 3,000 shares of common stock at par for $5 per share.

Item f: Cash dividends of $14,000 are paid.

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P3

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P3

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GLOBAL VIEW

Reporting Cash Flows from OperatingBoth U.S. GAAP and IFRS permit the reporting of cash flows from operating activities using either the direct or indirect method. However, two notable differences include: 1.U.S. GAAP requires cash inflows from interest revenue and dividend revenue be classified as operating, whereas IFRS permits classification under operating or investing provided that this classification is consistently applied across periods.2.U.S. GAAP requires cash outflows for interest expense be classified as operating, whereas IFRS again permits classification under operating or financing provided that it is consistently applied across periods.

Reporting Cash Flows from Investing and FinancingU.S. GAAP and IFRS are broadly similar in computing and classifying cash flows from investing and financing activities. One notable exception is that U.S. GAAP requires cash outflows for income tax be classified as operating, whereas IFRS permits the splitting of those cash flows among operating, investing, and financing depending on the sources of that tax.

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ANALYZING CASH SOURCES AND USES

A1

Most managers stress the importance of understanding and predicting cash flows for business

decisions.

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Used, along with income-based ratios, to assess company performance.

Used, along with income-based ratios, to assess company performance.

Cash flow on total assets =

Operating cash flows

Average total assets

CASH FLOW ON TOTAL ASSETSA1

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P4

A spreadsheet, also called work sheet or working

paper, can help us organize the information

needed to prepare a statement of

cash flows.

Appendix 16A: Spreadsheet Preparation of the Statement of Cash Flows

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APPENDIX 16B: DIRECT METHOD OF REPORTING OPERATING CASH

FLOWS

P5

Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts:

Framework for reporting cash receipts and cash payments

16 - 40APPENDIX 16B: DIRECT METHOD OF REPORTING OPERATING CASH

FLOWS

P5

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END OF CHAPTER 16