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Statement of Cash Flows

Sid Glandon, DBA, CPASid Glandon, DBA, CPA

Associate Professor of AccountingAssociate Professor of Accounting

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Purpose

Reports on cash inflows and outflows for an Reports on cash inflows and outflows for an accounting periodaccounting period

Provides information regardingProvides information regarding ability of firm to generate cash from operationsability of firm to generate cash from operations ability to maintain and expand operating ability to maintain and expand operating

capacitycapacity ability to meet financial obligations and pay ability to meet financial obligations and pay

dividendsdividends

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Types of Cash Flow Activities

Cash Flows from Operating ActivitiesCash Flows from Operating Activities Cash Flows from Investing ActivitiesCash Flows from Investing Activities Cash Flows from Financing ActivitiesCash Flows from Financing Activities

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Operating Activities

Receipts from revenuesReceipts from revenues Payments for expensesPayments for expenses

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Investing Activities

Receipts from sale of noncurrent assetsReceipts from sale of noncurrent assets Payments for acquisition of noncurrent Payments for acquisition of noncurrent

assetsassets

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Financing Activities

Receipts from issuance of equity and debt Receipts from issuance of equity and debt securitiessecurities

Payments for Payments for dividendsdividends redemption of equity securities (treasury stock) redemption of equity securities (treasury stock) redemption of debt securities redemption of debt securities

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Noncash Investing/Financing

Supplementary schedule to the statementSupplementary schedule to the statement Noncash Investing ActivitiesNoncash Investing Activities

Acquisition of plant assets by issuing bonds or Acquisition of plant assets by issuing bonds or capital stockcapital stock

Purchase a building through a mortgage loanPurchase a building through a mortgage loan

Noncash Financing ActivitiesNoncash Financing Activities Issuance of capital stock in exchange for convertible Issuance of capital stock in exchange for convertible

preferred stock or debtpreferred stock or debt

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Method of Reporting Cash Flows from Operating Activities

Direct MethodDirect Method Indirect Method (reconciliation method)Indirect Method (reconciliation method)

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Cash Flows from Operating Activities: Direct Method

Cash received from customersCash received from customers Cash paid for inventory, labor, and servicesCash paid for inventory, labor, and services

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Cash Flows from Operating Activities: Indirect Method

Net incomeNet income plus noncash charges to net incomeplus noncash charges to net income plus/minus changes in current assetsplus/minus changes in current assets plus/minus changes in current liabilitiesplus/minus changes in current liabilities plus/minus gains/losses on investing activitiesplus/minus gains/losses on investing activities plus/minus gains/losses on financing activitiesplus/minus gains/losses on financing activities

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Cash Flows From Operating Activities-Indirect Method

Net income (from the income statement) $Add: Amortization + Depreciation +Changes in current assets: Increases - Decreases +Changes in current liabilities: Increases + Decreases -Gains from investing or financing - Losses from investing or financing + Net cash flows from operating activities $

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The Three FoolersReported as Operating Activities

Interest paid on debtInterest paid on debt Interest received on investmentsInterest received on investments Dividends received on investmentsDividends received on investments

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Using the Worksheet Approach

Prepare comparative balance sheetsPrepare comparative balance sheets Identify changes in cash for each accountIdentify changes in cash for each account Using income statement and T-account Using income statement and T-account

analysisanalysis Spread changes in cash to appropriate columnsSpread changes in cash to appropriate columns Reconcile balances of each type of activityReconcile balances of each type of activity

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Assets 2001 2000Cash 57,870$ 66,200$ Trade receivables (net) 137,180 117,800 Inventories 211,500 190,150 Prepaid expenses 5,160 6,120 Investments 44,500 93,500 Land 77,250 75,000 Buildings 412,500 225,000 Accumulated depreciation (91,260) (81,220) Equipment 493,700 437,500 Accumulated depreciation (179,700) (149,750) Total assets 1,168,700$ 980,300$

Liabilities and Stockholders' EquityAccounts payable (merchandise creditors) 58,715$ 51,875$ Accured expenses (operating expenses) 11,000 10,500 Interest payable 1,875 1,875 Income tax payable 5,000 8,500 Dividends payable 15,660 12,500 Mortgage note payable 175,000 - Bonds payable 100,000 250,000 Common stock, $25 per value 450,000 375,000 Paid-in capital in excess of par 47,250 41,250 Retained earnings 304,200 228,800 Total liabilities and stockholders' equity 1,168,700$ 980,300$

Spencer CompanyComparative Balance SheetsDecember 31, 2001 and 2000

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Sales 1,520,700$ Cost of merchandise sold 1,110,200 Gross profit 410,500 Operating expenses: Depreciation expense 39,990$ Other operating expenses 227,110 267,100 Operating income 143,400 Other income: Gain on sale of land 20,500 Gain on sale of investments 11,000 31,500 Other expense: Interest expense 25,000 Income before income tax 149,900 Income tax 38,500 Net income 111,400$

Spencer CompanyIncome Statement

For The Year Ended December 31, 2001

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Description Debit CreditBeginning balance $93,500Purchase of investment 40,500Sale of investment $89,500Ending balance $44,500

Description Debit CreditBeginning balance $437,500Purchase of equipment 56,200Ending balance $493,700

Description Debit CreditBeginning balance $149,750Current year depreciation 29,950Ending balance $179,700

T-Account: Investments

T-Account: Equipment

T-Account: Accumulated Depreciation

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Description Debit CreditBeginning balance $75,000Purchase of land 62,500Sale of land $60,250Ending balance $77,250

Description Debit CreditBeginning balance $225,000Purchase of building 187,500Ending balance $412,500

Description Debit CreditBeginning balance $81,220Current year depreciation 10,040Ending balance $91,260

T-Account: Buildings

T-Account: Accumulated Depreciation

T-Account: Land

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Description Debit CreditBeginning balance $12,500Dividends declared 36,000Dividends paid $32,900Ending balance $15,600

Description Debit CreditBeginning balance $0Issuance of mortgage 175,000Ending balance $175,000

Description Debit CreditBeginning balance $250,000Bonds retired at face $150,000Ending balance $100,000

T-Account: Bonds Payable

T-Account: Dividends Payable

T-Account: Mortgage Payable

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Description Debit CreditBeginning balance $375,000Sold 3,000 shares, $25 par value 75,000Ending balance $450,000

Description Debit CreditBeginning balance $41,250Sold 3,000 shares, $2 excess of par 6,000Ending balance $47,250

Description Debit CreditBeginning balance $228,800Net income 111,400Dividends declared $36,000Ending balance $304,200

T-Account: Common Stock

T-Account: Additional Paid-In Capital, Common Stock

T-Account: Retained Earnings

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Accounts 2001 2000 Increase DecreaseCash $57,870 $66,200 $8,330

Trade receivables (net) 137,180 117,800 $19,380Inventories 211,500 190,150 21,350Prepaid expenses 5,160 6,120 $960Investments 44,500 93,500 49,000Land 77,250 75,000 2,250Buildings 412,500 225,000 187,500Accumulated depreciation (91,260) (81,220) 10,040Equipment 493,700 437,500 56,200Accumulated depreciation (179,700) (149,750) 29,950Accounts payable (58,715) (51,875) 6,840Accrued expenses (11,000) (10,500) 500Interest payable (1,875) (1,875)Income tax payable (5,000) (8,500) 3,500Dividends payable (15,660) (12,500) 3,160Martgage note payable (175,000) 0 175,000Bonds payable (100,000) (250,000) 150,000Common stock, $25 par value (450,000) (375,000) 75,000Paid-in capital in excess of par (47,250) (41,250) 6,000Retained earnings (304,200) (228,800) 75,400

$0 $0 431,850 440,180

8,330$431,850 $431,850

Changes in CashDecember 31,

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Accounts Increase Decrease Increase DecreaseCash $8,330

Trade receivables (net) $19,380 $19,380Inventories 21,350 21,350Prepaid expenses $960 $960Investments 49,000Land 2,250Buildings 187,500Accumulated depreciation 10,040 10,040Equipment 56,200Accumulated depreciation 29,950 29,950Accounts payable 6,840 6,840Accrued expenses 500 500Interest payableIncome tax payable 3,500 3,500Dividends payable 3,160Martgage note payable 175,000Bonds payable 150,000Common stock, $25 par value 75,000Paid-in capital in excess of par 6,000Retained earnings 75,400

431,850 440,180

8,330$431,850 $431,850

Analysis of retained earnings: Net income 111,400 Gain on sale of investments 11,000 Gain on sale of land 20,500 Dividends

159,690 75,730

Net Cash Flows 83,960$75,730 $75,730

Changes in Cash Operating Activities

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Accounts Increase Decrease Increase DecreaseCash $8,330

Trade receivables (net) $19,380Inventories 21,350Prepaid expenses $960Investments 49,000 $89,500 $40,500Land 2,250 60,250 62,500Buildings 187,500 187,500Accumulated depreciation 10,040Equipment 56,200 56,200Accumulated depreciation 29,950Accounts payable 6,840Accrued expenses 500Interest payableIncome tax payable 3,500Dividends payable 3,160Martgage note payable 175,000Bonds payable 150,000Common stock, $25 par value 75,000Paid-in capital in excess of par 6,000Retained earnings 75,400

431,850 440,180

8,330$431,850 $431,850

Analysis of retained earnings: Net income Gain on sale of investments 11,000 Gain on sale of land 20,500 Dividends

181,250 346,700

Net Cash Flows 165,450$181,250 $181,250

Changes in Cash Investing Activities

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Accounts Increase Decrease Increase DecreaseCash $8,330

Trade receivables (net) $19,380Inventories 21,350Prepaid expenses $960Investments 49,000Land 2,250Buildings 187,500Accumulated depreciation 10,040Equipment 56,200Accumulated depreciation 29,950Accounts payable 6,840Accrued expenses 500Interest payableIncome tax payable 3,500Dividends payable 3,160 $3,160Martgage note payable 175,000 175,000Bonds payable 150,000 $150,000Common stock, $25 par value 75,000 75,000Paid-in capital in excess of par 6,000 6,000Retained earnings 75,400

431,850 440,180

8,330$431,850 $431,850

Analysis of retained earnings: Net income Gain on sale of investments Gain on sale of land Dividends 36,000

259,160 186,000

Net Cash Flows 73,160$186,000 $186,000

Changes in Cash Financing Activities

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Accounts 2001 2000 Increase Decrease Increase Decrease Increase Decrease Increase DecreaseCash $57,870 $66,200 $8,330

Trade receivables (net) 137,180 117,800 $19,380 $19,380Inventories 211,500 190,150 21,350 21,350Prepaid expenses 5,160 6,120 $960 $960Investments 44,500 93,500 49,000 $89,500 $40,500Land 77,250 75,000 2,250 60,250 62,500Buildings 412,500 225,000 187,500 187,500Accumulated depreciation (91,260) (81,220) 10,040 10,040Equipment 493,700 437,500 56,200 56,200Accumulated depreciation (179,700) (149,750) 29,950 29,950Accounts payable (58,715) (51,875) 6,840 6,840Accrued expenses (11,000) (10,500) 500 500Interest payable (1,875) (1,875)Income tax payable (5,000) (8,500) 3,500 3,500Dividends payable (15,660) (12,500) 3,160 $3,160Martgage note payable (175,000) 0 175,000 175,000Bonds payable (100,000) (250,000) 150,000 $150,000Common stock, $25 par value (450,000) (375,000) 75,000 75,000Paid-in capital in excess of par (47,250) (41,250) 6,000 6,000Retained earnings (304,200) (228,800) 75,400

$0 $0 431,850 440,180

8,330$431,850 $431,850

Analysis of retained earnings: Net income 111,400 Gain on sale of investments 11,000 11,000 Gain on sale of land 20,500 20,500 Dividends 36,000

159,690 75,730 181,250 346,700 259,160 186,000

Net Cash Flows $8,330 83,960 165,450 73,160

$75,730 $75,730 $181,250 $181,250 $186,000 $186,000

Changes in CashDecember 31, Operating Activities Investing Activities Financing Activities

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Cash flows from operating activities: Net income $111,400 Adjustments to reconcile net income to net cash used by operating activities: Depreciation expense $39,990 Increase in accounts receivable (19,380) Increase in inventories (21,350) Decrease in prepaid expenses 960 Increase in accounts payable 6,840 Increase in accrued expenses 500 Decrease in income tax payable (3,500) Gain on sale of investment (11,000) Gain on sale of land (20,500) (27,440) Net cash provided by operating activities 83,960Cash flows from investing activities: Cash received from sale of investments 100,500 Cash received from sale of land 80,750 Cash payments for purchase of investments (40,500) Cash payments for purchase of equipment (56,200) Cash payments for purchase of land (62,500) Cash payments for purchase of building (187,500) Net cash used in investing activities (165,450)Cash flows from financing activities: Cash received from issuance of mortage note 175,000 Cash received from issuance of stock 81,000 Cash paid for retirement of bonds payable (150,000) Cash paid for dividends (32,840) Net cash provided by financing activities 73,160Net decrease in cash (8,330)Cash, January 1, 2001 66,200Cash, December 31, 2001 $57,870

Supplemental Disclosures of Cash Flow Information: Cash paid for the year for: Interest $25,000 Income taxes 42,000

Spencer CompanyStatement of Cash Flows-Indirect Method

For the Year Ended December 31, 2001

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Format for Operating ActivitiesCash Flows From Operating Activities(Using the Indirect Method)

Net income (from the income statement) $

Noncash expenses: Amortization + Depreciation +

Changes in current assets: Increases - Decreases +Changes in current liabilities: Increases + Decreases -

Gains from investing or financing -Losses from investing or financing +

Net cash flows from operating activities $