statement of cash flows management accounting: the cornerstone for business decisions copyright...
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Statement of Cash Flows
Management Accounting: The Cornerstone for
Business Decisions
Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved.
Learning Objectives
1. Explain the basic elements of a statement of cash flows.
2. Prepare a statement of cash flows using the indirect method.
3. Calculate operating cash flows using the direct method.
4. Prepare a statement of cash flows using a worksheet approach.
Define Cash
The Statement of Cash Flows
◙ Provides information regarding ◙ Sources of funds – Where funds
come from – referred to as Cash Inflows
◙ Uses of funds- Where they go – referred to as Cash Outflows
◙ They are organized into one of three groupings◙ Cash flows from operating activities◙ Cash flows from investing activities◙ Cash flows from financing activities
How to classify activities and identify them as
sources or uses of cash.Operating activities are the ongoing , day-to-
day, revenue generating activities of an organization. Cash inflows from operating activities come from the collection of sales revenues. Cash outflows are caused by the payment of operating costs. The difference between the two produces the net cash inflow (outflow) from operations.
Investing activities are those activities that involve the acquisition or sale of long-term assets. Long-term assets may be productive assets (e.g., acquiring new equipment) or long-term activities (e.g., acquiring stock in another company).
15-1
Financing activities are those activities that raise or (provide) cash from (to) creditors and owners. Although interest payments could be seen as financing outflows, the statement includes these payments in the operating activities.
REQUIRED: Classify the following major activities as belonging to the operating, investing, or financing categories. Identify them as sources or uses of cash.
How to classify activities and identify them as
sources or uses of cash.15-1
How to classify activities and identify them as
sources or uses of cash.Calculation:1. Issuing capital stock -
Financing - Source2. Retiring capital stock –
Financing - Use3. Purchasing long-term
assets – Investing - Use
4. Reporting unprofitable operations – Operating – Use
5. Issuing long-term debt- Financing - Source
6. Selling long-term assets (e.g., plant, equipment, and securities) – Investing - Source
7. Reporting profitable operations – Operating - Source
8. Reducing long-term debt – Financing - Use
9. Paying cash dividends – Financing - Use
15-1
Illustration of Sources and Uses of Cash
Define Indirect & Direct Method of Calculating Operating Cash Flows
◙ Indirect method◙ Computes operating cash flows by
adjusting net income for items that do not affect cash flows
◙ Direct method◙ Computes operating cash flows by
adjusting each line on the income statement to reflect it as if the income statement were prepared on a cash basis
What are the five steps to prepare the statement of
cash flows?1. Compute the change in cash for
the period2. Compute the cash from
operating activities3. Identify the cash flows from
investing activities4. Identify the cash flows from
financing activities5. Prepare the statement of cash
flows based on the previous four steps
Lemmons Company Comparative Balance
Sheetsfor the Years Ended December 31, 2008
and 2009 Net Change
2008 2009 Debit Credit
Assets
Cash $175,000 $210,000 $ 35,000
A/R 112,500 127,500 15,000
Invent. 60,000 70,000 10,000
P & E 410,000 450,000 40,000
A/D (210,000) (235,000) 25,000
Land 287,500 287,500
Tot. Assets $835,000 $910,000
Lemmons Company Comparative Balance
Sheetsfor the Years Ended December 31,
2008 and 2009 Net Change
2008 2009 Debit Credit
L & S. E.
A/P $ 95,000 $110,000 15,000
Mort. Pay 100,000 90,000 10,000
Comm. Stk 75,000 75,000
CCIEP 100,000 100,000
RE 465,000 535,000 - 70,000
Tot L&SE $835,000 $910,000 $110,000 $110,000
How to compute the change in cash flow.
From the prior two slides, we extract the information on cash and cash equivalents:
Net ChangesAssets 2008 2009 Debits CreditsCash $175,000 $210,000 $35,000REQUIRED: Calculate the change in cash flow.Calculation: The change in cash flow is simply the
difference in the ending and beginning cash flows. $210,000 - $175,000 = $35,000
15-2
Four Types of Adjustments
◙ Type A Adjustment◙ Decreases in non-cash current assets or
increases in current liabilities added to cash
◙ Type B Adjustment◙ Increases in non-cash current assets or
decreases in current liabilities deducted from cash
◙ Type C Adjustment◙ Expense deductions that do not require the
outlay of cash added as increases in cash (Add back non-cash items)
◙ Typed D Adjustment◙ Elimination of any income items that belong
in either the investing or financing section.
How to compute operating cash flows:
indirect method.1. Four types of adjustments from prior
slide.2. Current assets and liabilities
extracted from Lemmons CompanyNet Changes
CA 2008 2009 Debits CreditsA/R $112,500 $127,500 $15,000Invent. 60,000 70,000 10,000CLA/P $95,000$110,000
$15,000
15-3
Lemmons CompanyIncome Statement
For the Year Ended December 31, 2009Revenues $400,000Gain on sale of equipment 10,000Less: Cost of goods sold (230,000)Less: Depreciation expense (50,000)Less: Interest expense (10,000)
Net income $12,000
Dividends of $50,000 were paid.REQUIRED: Calculate operating cash flows using
the indirect method.
How to compute operating cash flows:
indirect method.15-3
Calculation:Operating net income $120,000Add (deduct) adjusting items:
Increase in A/R (15,000) (B)Increase in Inventories (10,000) (B)Increase in A/P 15,000 (A)Depreciation expense 50,000 (C)Gain on sale of equipment(10,000)(D)
Net cash from operating activities$150,000
How to compute operating cash flows:
indirect method.15-3
How to compute investing cash flows.
a. Equipment with a net book value of $75,000 was sold for $85,000 (original purchase price cost was $100,000). New equipment was purchased.
b. Information extracted from the comparative balance sheets of the Lemmons Company.
Long-Term Assets NetChanges2008 2009 Debit Credit
P & E $410,000 $450,000 $40,000A/D (210,000)(235,000) 25,000Land 287,500 287,500REQUIRED: Calculate the investing cash flows.
15-4
Calculation:Sale of equipment $ 85,000Purchase of equipment (140,000)
Net cash from investing activities$(55,000)
How to compute investing cash flows.15-4
Beginning P & E $410,000Purchase of Equipment ?Less: Sale of Equipment 100,000 Ending balance, P & E $450,000? = $450,000 + $100,000 - $410,000 = $140,000
How to compute financing cash flows.
a. Net income of $120,000 was earned, while cash dividends of $50,000 were paid in 2009.
b. Information extracted from the comparative balance sheets of the Lemmons Company.
NetChanges2008 2009 Debit Credit
Mort. Pay$100,000$90,000 $10,000CCIEP 100,000 100,000RE 465,000 535,000 70,000REQUIRED: Calculate the financing cash flows.
15-5
Calculation:Payment of mortgage principle$(10,000)Payment of dividends (50,000)
Net cash from financing activities$(60,000)
How to compute financing cash flows.15-5
Retained Earnings, End of 2008 $465,000Net income (2008) 120,000 Total $585,000Less: Retained Earnings, End of 2009 535,000
Dividends paid in 2009 $ 50,000
How to prepare the statement of cash
flows.Cornerstones 15-2; 15-3; 15-4; 15-5REQUIRED: Prepare a statement of
cash flows for the Lemmons Company.
Calculations:Lemmons Company
Statement of Cash FlowsFor the Year Ended December 31,
2009
15-6
How to prepare the statement of cash
flows.15-6
Cash flows from operating activities:
Net income $ 120,000
Add (deduct) adjusting items:
Increase in accounts receivable (15,000)
Increase in inventory (10,000)
Increase in accounts payable 15,000
Depreciation expense 50,000
Gain on sale of equipment (10,000)
Net operating cash $ 150,000
How to prepare the statement of cash
flows.15-6
Cash flows from investing activities
Sale of equipment
Purchase of equipment (140,000)
Net cash from investing activities (140,000)
Cash flows from financing activities
Payment of mortgage principle $ (10,000)
Payment of dividends
(50,000)
Net cash from financing activities (60,000)
Net increase in cash $ (50,000)
How to calculate cash flows using the direct
method.15-7a. Current assets and liabilities extracted
from Lemmons CompanyNet
ChangesCA 2008 2009 Debits
CreditsA/R $112,500 $127,500 $15,000Invent. 60,000 70,000 10,000CLA/P $95,000$110,000
$15,000
b. The income statement for Lemmons Company.
Lemmons CompanyIncome Statement
For the Year Ended December 31, 2009Revenues $400,000Gain on sale of equipment 10,000Less: Cost of goods sold (230,000)Less: Depreciation expense (50,000)Less: Interest expense (10,000)
Net income $12,000REQUIRED: Calculate operating cash
flows using the direct method.
How to calculate cash flows using the direct
method.15-7
Calculation: Income CashStatementAdjustments Flows
Revenues $400,000 ($15,000)$385,000Gain on Sale 10,000 (10,000)
Less: COGS (230,000) 15,000(225,000)
(10,000)Less: Depn. Exp.(50,000) 50,000Less: Int. Exp. (10,000) (10,000) Net income $120,000Net operating cash $150,000
How to calculate cash flows using the direct
method.15-7
Worksheet Approach to the Statement of Cash
Flows◙ As the transactions increase and
become more complex a worksheet is a handy tool to organize in preparing a statement of cash flows.
◙ It uses a spreadsheet format, that is efficient and logical means to organize the data to proceed from to prepare a statement of cash flows.
◙ It is a tool for preparing a statement of cash flows. It is not the actual statement of cash flows.