the statement of cash flows

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The Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash FlowsThe Statement of Cash Flows

Chapter 14


Objective 1Objective 1Objective 1Objective 1

Identify the purposes of the statement of cash flows


Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

• How did a company acquire cash and how did it spend it?

• Why did cash increase/decrease during the period?


Purposes of the Purposes of the Statement of Cash FlowsStatement of Cash Flows

Purposes of the Purposes of the Statement of Cash FlowsStatement of Cash Flows

• Predict future cash flows

• Evaluate management decisions

• Predict ability to pay debts and to pay dividends


CashCashCashCash

• Cash on hand and in the bank

• Cash equivalents– Highly liquid investments– Can convert into cash quickly– Money-market accounts– Investments in U.S. government securities



Distinguish among operating, investing, and financing cash

flows


Basic Cash FlowsBasic Cash FlowsBasic Cash FlowsBasic Cash Flows

1. Operating activities

2. Investing activities

3. Financing activities


Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

• Transactions that make up net income

• Also affect current assets and current liabilities on the balance sheet


Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

• Inflows – cash receipts from earning revenues– Sale of goods or

services– Interest revenue– Dividend revenue– Other revenues

• Outflows – cash paid from incurring expenses– Salaries and wages– Payments to suppliers

for inventory– Taxes and fines– Interest paid to lenders– Other expenses

Focus your attention on: income statement, and changes in current assets, current liabilities


Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

• Transactions that increase and decrease long-term assets


Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

• Inflows– Selling long-term

productive assets– Selling equity

investments– Collecting of principal

on loans– Other

• Outflows– Purchase long-term

productive assets– Purchase equity

investments– Purchase debt

investments– Make loans

Focus your attention on changes in:plant assets, long-term investments, other long-term assets


Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

• Increases and decreases in long-term liabilities and owner’s equity


Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

• Inflows– Issuing stock– Issuing bonds and

notes

• Outflows– Cash dividends or

withdrawals by owner– Purchase treasury

stock– Repay cash loans

Focus your attention on changes in:long-term debt and stockholder’s equity


Avery CorporationStatement of Cash Flows

Year Ended December 31, 2008

Cash flows from Operating activities:

List activities

Net Cash Provided (Used) by Operating Activities $ xxxx

Cash Flows from Investing Activities:

List activities

Net Cash Provided (Used) for Investing Activities xxxx

Cash Flows from Financing Activities:

List activities

Net Cash Provided (Used) by Financing Activities xxxx

Net Increase (Decrease) in Cash $ xxxx

Cash Balance, beginning xxxx

Cash Balance, ending $ xxxx


Noncash Investing and Noncash Investing and FinancingFinancing

Noncash Investing and Noncash Investing and FinancingFinancing

• Investing and financing activities that do not affect cash– Acquire land by issuing a note payable– Retire debt by issuing stock– Convert preferred stock to common stock

• Report in separate schedule or in a note


Format of the StatementFormat of the Statementof Cash Flowsof Cash Flows

Format of the StatementFormat of the Statementof Cash Flowsof Cash Flows

Two acceptable methods for reporting cash flows from operating activities

1. Indirect method

2. Direct method

The Investing and Financing sections of the statement will not differ



Prepare the statement of cash flows by the indirect method


Indirect MethodIndirect MethodIndirect MethodIndirect MethodCash flows from operating activities:Net incomeAdjustments to reconcile net income to net cash

provided by operating activities:+ Depreciation / amortization/depletion expense+ Loss on sale of long-term assets- Gain on sale of long-term assets- Increases in current assets other than cash+ Decreases in current assets other than cash+ Increases in current liabilities- Decreases in current liabilitiesNet cash provided by operating activities


Indirect MethodIndirect MethodIndirect MethodIndirect Method

Cash flows from investing activities:

+Sales of long-term assets

- Purchases of long-term assets

Net cash provided by (used for) investing activities



Cash flows from financing activities:

+ Issuance of stock

+ Sale of treasury stock

- Purchase of treasury stock

+ Issuance of notes or bonds payable

- Payment of notes or bonds payable

- Payment of dividends

Net cash provided by (used for) financing activities



Net increase (decrease) in cash during the year

+ Cash at December 31, beginning

= Cash at December 31, ending


E14-20E14-20E14-20E14-20Cash flows from operating activities:

Net income

Adjustments to reconcile net income to net cash provided by operating activities:

+ Depreciation / amortization/depletion expense

+ Loss on sale of long-term assets

- Gain on sale of long-term assets

- Increases in current assets other than cash

+ Decreases in current assets other than cash

+ Increases in current liabilities

- Decreases in current liabilities

Net cash provided by operating activities


E14-20E14-20E14-20E14-20

Cash flows from operating activities:

Net income $43,000

Start with net income


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Net income $43,000


+ Depreciation / amortization/depletion expense

29,000

Think of the journal entry to record depreciation. Cash is not affected. When accrual basis net income was computed, depreciation decreased net income, but did not decrease cash. This is why it is added


E14-20E14-20E14-20E14-20Cash flows from operating activities:

Net income $43,000


+ Depreciation 29,000

+ Loss on sale of long-term assets

- Gain on sale of long-term assets

The cash received from the sale of a long-term asset is reported in the Investing Activities section. The gain or loss does not affect cash. There were no gains or losses reported on the income statement


E14-20E14-20E14-20E14-20


Net income $43,000




+ Decreases in current assets other than cash




Cash + Other Assets = Liabilities + Owner’s Equity

-15,000+15,000

15,000Now it is time to refer to the balance sheet. Think of the accounting equation in this way: Cash + Other Assets = Liabilities + Owner’s Equity.If you have a cash transaction and a noncash asset is increasing, then cash must be decreasing. If the noncash asset is decreasing, then cash is increasing. In this exercise accounts receivable decreased, which means the company collected more cash than the recorded revenues



Net income $43,000



+ Decreases in accounts receivable 15,000





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+7,000-7,000

(7,000)

Inventory increased. The company bought more inventory, which requires the use of cash



Net income $43,000




- Increases in inventory (7,000)




E14-20E14-20E14-20E14-20


+13,000+13,000

13,000If you have a cash transaction and a liability is increasing, then cash must be increasing. If the liability is decreasing, then cash is decreasing. In this exercise accounts payable increased. The company paid less than the expense recognized



Net income $43,000





+ Increases in accounts payable 13,000



E14-20E14-20E14-20E14-20


-8,000-8,000

(8,000)


E14-20E14-20E14-20E14-20


Net income $43,000





+ Increases in accounts payable 13,000

- Decreases in accrued liabilities (8,000)

Net cash provided by operating activities 85,000


E14-20E14-20E14-20E14-20



- Purchases of long-term assets



E14-20E14-20E14-20E14-20



- Purchases of plant assets

(101,000)



E14-20E14-20E14-20E14-20



$24,000


(101,000)



E14-20E14-20E14-20E14-20



$24,000


(101,000)

Net cash Used for investing activities

$(77,000)


E14-20E14-20E14-20E14-20


+ Issuance of stock








E14-20E14-20E14-20E14-20


+ Issuance of stock $30,000








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- Payment of notes payable (15,000)




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- Payment of dividends (11,000)



E14-20E14-20E14-20E14-20




- Payment of dividends (11,000)

Net cash provided by financing activities $4,000


Vitamin Plus, Inc.Statement of Cash Flows

Year Ended June 30, 2006Cash inflows from operating activities $85,000Cash flows from investing activities: Acquired land ($101,000) Sold land 24,000 Net cash flows from investing activities (77,000)Cash flows from financing activities:

Issued common stock $30,000Paid long-term note (15,000)Paid dividends (11,000)

Net cash flows from financing activities: 4,000Net increase in cash during the year $12,000Cash balance, June 30, 2007 20,000Cash balance, June 30, 2008 $32,000


E14-20E14-20E14-20E14-20

Note:

Noncash investing and financing activities:

Acquired land by issuing a note payable $15,000


E14-20 (2)E14-20 (2)E14-20 (2)E14-20 (2)

• Vitamins Plus’ cash flows look fairly strong– Operations are the main source of cash– The company is investing in new plant assets

without having to borrow much– It was able to issue stock and pay off a long-

term note payable — both financing transactions

• All of these signs are favorable


E14-21E14-21E14-21E14-21

Retained Earnings

45,000 Beg. Bal.

70,000 End. Bal.

60,000 Net income

105,000 Bal.?35,000

You start with $45,000. Net income increases retained earnings. If no dividends had been

declared, the retained earnings balance should have been $105,000. Since the balance is $70,000,

we declared dividends for the difference


Exercise 14-21Exercise 14-21Exercise 14-21Exercise 14-21Plant Assets

103,000

107,000

16,000 Depreciation 27,000

?114,000

Cash Gain on sale of assets 4,000 Plant assets (net) 7,000

11,000

7,000

You start with $103,000, depreciation reduces the carrying value of the asset. Purchasing new assets increases the carrying value. If no assets were sold, the balance should have been $114,000. Since the balance is $107,000, the company sold $7,000 of

assetsRemember the journal entry that was prepared when

you sold an asset? In this case, you know the amounts credited. The debit to cash was $11,000


End of Chapter 14End of Chapter 14End of Chapter 14End of Chapter 14

the statement of cash flows

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