The Statement of Cash Flows

Chapter 17

AGRICULUTURAL TECHNICAL INSTITUTEBUS TEC T101 ACCOUNTING

ACCOUNTING CONCEPTSCH 1: ACCT & THE BUS ENVIRONMENTCH 2: RECORDING TRANSACTIONSCH 3: MEASURING INCOME; ADJUSTMENTSCH 4: COMPLETING THE ACCTING CYCLECH 5: MERCHANDISE OPERATIONSCH 6: MERCHANDISE INVENTORY CH 7: SPECIAL JOURNALSCH 8: CONTROLLING CASHCH 9: RECEIVABLESCH 10: PLANT ASSETS & INTANGIBLES CH 11: CURRENT LIABILTIES & PAYROLL

CH 17: CASH FLOW

LEARNING OBJECTIVES

AFTER COMPLETING THIS LESSON, THE STUDENT SHOULD BE ABLE TO:

1. Identify the purposes of the statement of cash flows.

2. Distinguish among operating, investing, and financing cash flows.

3. Prepare a statement of cash flows by the indirect method.

4. Prepare a statement of cash flows by the direct method.

CH 17: CASH FLOW STATEMENT

The statement of cash flowsreports the entity’s cash flows

(cash receipts and cash payments)during the period.

Purpose of The Statement ofCash Flows: Basic Concepts

Purposes of the Statementof Cash Flows

Statementof Retained

Earnings

12/31/x1 For the Year Ended 12/31/x2 12/31/x2(a point in time) (a period of time) (a point in time)

Statementof CashFlows

IncomeStatement

BalanceSheet

BalanceSheet

Purposes of the Statementof Cash Flows

The statement of cash flows is designed to– predict future cash flows– evaluate management decisions– determine the ability to pay dividends plus

interest and principal– show the relationship of net income to

changes in the firm’s cash

Cash Balance Includes...

– cash on hand.– cash in the bank.– cash equivalents.

Cash Equivalents Are....

– short-term, highly liquid investments convertible into cash with little delay.

– money market accounts.– U.S. Government Treasury bills.

Basic Organization of theStatement of Cash Flows

A business may be evaluated in terms of three types of business activities:

1 Operating activities2 Investing activities3 Financing activities

Operating Activities

Operating activities are related to thetransactions that make up net income.Operating activities are related to thetransactions that make up net income.

Interest and dividends received arerelated to investing activities.

Interest and dividends received arerelated to investing activities.

However, the FASB has decided to classify thecash received from these items as operating activities.

However, the FASB has decided to classify thecash received from these items as operating activities.

Investing activities increase and decreasethe assets that are available to the business.

Investing activities increase and decreasethe assets that are available to the business.

Investing Activities

Investing activities are related to theLong-Term Asset accounts.

Investing activities are related to theLong-Term Asset accounts.

Examples: purchases and sales of long term assets and loans to others and the collection of those loans

These are transactions involving obtainingresources from the owners or returning

resources to them.

These are transactions involving obtainingresources from the owners or returning

resources to them.

Financing Activities

It also involves obtaining resources from creditors and repaying the

amount borrowed.

It also involves obtaining resources from creditors and repaying the

amount borrowed.

Examples: issuing stock, borrowing money, paying back loans, paying dividends,

buying & selling treasury stock

WHEN: PERIOD OF TIMEB. OPERATING ACTIVITIES

III. CASH FLOW FORMATA. HEADING

WHAT: CASH FLOW STATEMENTWHO: NAME OF BUSINESS

E. SUMMARY

1. CASH FLOWING IN2. CASH FLOWING OUT

D. FINANCING ACTIVITIES

C. INVESTING ACTIVITIES

1. CASH FLOWING IN 2. CASH FLOWING OUT

1. CASH FLOWING IN 2. CASH FLOWING OUT

Distinguish Between Operating, Investing, & Financing Cash FlowsOBJ 2

659

1. BEGINNING CASH BALANCE

E. CASH FLOW SUMMARY

2. NET CHANGE IN CASH

3. ENDING CASH BALANCE

Distinguish Between Operating, Investing, & Financing Cash FlowsOBJ 2

659

Format of the Statementof Cash Flows

FASB has approved two methods for reporting cash flows from operating activities.

1 Indirect method2 Direct method

Format of the Statementof Cash Flows

The indirect method starts with net income and reconciles it to net cash from operating activities.

The direct method lists cash receipts from specific operating activities and cash payments for each major operating activity.

Noncash Investing andFinancing Activities...

– are not reported in the statement of cash flows.

The FASB requires that significant non-cash investing and financing activities be shown in a separate schedule at the bottom of the statement.

Operating Receipts: Payments Received

Prepare A Cash Flow Statement By Direct Method In Proper FormatOBJ 3

676

B. Cash Flows From Operating Activities:

IN

Net Cash Flow From OperatingOperating Activities

Operating Expenses: Payments madeOUTOUT

Cash Sales

To Vendors

Interest Received

For Interest

Collect Receivables

To Employees

For Co. Taxes

$ 68

Proceeds from sale of plant assets

Prepare A Cash Flow Statement By Direct Method In Proper FormatOBJ 3

676

C. Cash Flows From Investing Activities:

IN

Net Cash Flow From Investing Activities

Purchase of plant assetsOUTOUT

Sale of Land

Purchase of Floral Cooler

Sale of Building

Investment in Another Company

Sale of Equip

(-255)

Proceeds Increasing Financial Base

Prepare A Cash Flow Statement By Direct Method In Proper FormatOBJ 3

676

D. Cash Flows From Financing Activities:

IN

Net Cash Flow From Financing Activities

Paying Off DebtsOUTOUT

Issuing Stock

Dividend Payment

Borrowing Money

Paying off Notes Payable

Debt Repayment

Adding a Partner

167

Prepare A Cash Flow Statement By Direct Method In Proper FormatOBJ 3

676

E. Cash Flows Summary From All Activities:

Cash Balance, December 31, 2001 42

Cash Balance, December 31, 2002

Net Change in Cash

Net Cash Flow Fr OperatingOperating Activities $ 68

Net Cash Flow Fr Investing Activities (-255)

167Net Cash Flow Fr Financing Activities

$(20)

$ 22

Cash flows from operating activities:Receipts:Collections from customers $271Interest received on notes receivable 10Dividends received on investments in stock 9Total receipts $290

Statement of Cash Flows (Direct Method)Year Ended December 31, 2002 (Thousands)

The Direct Method

Payments:To suppliers $133To employees 58For interest 16For income tax 15Total payments 222Net cash inflows from operating activities $ 68

The Direct Method

Statement of Cash Flows (Direct Method)Year Ended December 31, 2002 (Thousands)

Cash flows from investing activities:Acquisition of plant assets $(306)Loan to another company (11)Proceeds from sale of plant assets 62Net cash outflow frominvesting activities $(255)

The Direct Method

Statement of Cash Flows (Direct Method)Year Ended December 31, 2002 (Thousands)

Cash flows from financing activities:Proceeds from issuance of common stock $101Proceeds from issuance of long-term notes payable 94Payment of long-term notes payable (11)Payment of dividends (17)Net cash inflow from financing activities $167

The Direct Method

Statement of Cash Flows (Direct Method)Year Ended December 31, 2002 (Thousands)

Net cash inflows from operating activities $ 68Net Cash outflow from investing activities (255)Net Cash inflow from financing activities 167Net (decrease in cash) $(20)Cash balance, December 31, 2001 42Cash balance, December 31, 2002 $ 22

The Direct Method

Statement of Cash Flows (Direct Method)Year Ended December 31, 2002 (Thousands)

Chapter 17 Recap Statement of Cash Flows

3 business activities Operating Investing Financing

2 methods to calculate cash flows from Operating Activities Indirect Direct