the statement of cash flows

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© The McGraw-Hill Companies, Inc., 1999

The Statement of Cash Flows


11Part One: Financial Accounting

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• Operations

• New borrowings

• New stock issues

• Sale of property, plant, and equipment

• Sale of other noncurrent assets

Sources of Cash Slide 11-1

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• Cash dividends

• Repayment of borrowings

• Repurchase of stock

• Purchase of property, plant, and equipment

• Purchase of other noncurrent assets

Uses of Cash Slide 11-2

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• How much cash was provided by the normal, ongoing operations of the company?

• In what other ways were significant amounts of cash raised?

• Is the company investing enough in new plant and equipment to maintain or increase capacity and to replace old facilities with more efficient ones?

• Is the company reinvesting excess cash in productive assets, or is it using the cash to retire stock?

• How much cash was provided by the normal, ongoing operations of the company?

• In what other ways were significant amounts of cash raised?

• Is the company investing enough in new plant and equipment to maintain or increase capacity and to replace old facilities with more efficient ones?

• Is the company reinvesting excess cash in productive assets, or is it using the cash to retire stock?

Typical Questions Answered by the SCF Slide 11-3

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Operating activities:Transactions associated with sales revenues and cash outflows associated with the operating expenses

Investing activities:

Transactions involving acquiring and disinvesting in long-lived assets

Financing activities:Transactions involving borrowing of cash through noncurrent instruments and the issuance of equity securities

Major Categories on the SCF Slide 11-4

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Cash flows from investing activities: Acquisition of plant and equipment (500)Proceeds from disposals of plant and equipment 20 Purchase of investment securities (25)Proceeds from sales of investment securities 75

Net cash used by investing activities (430)



Investing Activities Section of SCF Slide 11-5

Equipment costing $500,000 was purchased for cash during the year.

Equipment costing $500,000 was purchased for cash during the year.

Equipment that originally cost $150,000 was sold for $20,000, resulting in an inflow of cash .

Equipment that originally cost $150,000 was sold for $20,000, resulting in an inflow of cash .



The net result of these two transaction on the balance sheet is an increase in plant and equipment of $350,000.

The net result of these two transaction on the balance sheet is an increase in plant and equipment of $350,000.

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Investing Activities Section of SCF Slide 11-6



Investment securities decreased $50,000 ($450,000 to $400,000) during the year.

Investment securities decreased $50,000 ($450,000 to $400,000) during the year.

The firm purchased $25,000 of new securities (an inflow of cash) and and sold $75,000 of old securities (and

outflow of cash)

The firm purchased $25,000 of new securities (an inflow of cash) and and sold $75,000 of old securities (and

outflow of cash)



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Financing Activities Section of SCF Slide 11-7

Short-term borrowing decreased $21,000 (from $147,000 to $126,000).

Short-term borrowing decreased $21,000 (from $147,000 to $126,000).

Cash flows from financing activities: Proceeds from short-term debt 15 Payments to settle short-term debt (36) Proceeds from long-term debt 375 Payments on long-term debt (40)Proceeds from issuing common stock 44 Dividends paid (160)

Net cash provided by financing activities 326



The firm borrowed $15,000 using short-term debt and paid $36,000 on old borrowings.

The firm borrowed $15,000 using short-term debt and paid $36,000 on old borrowings.

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Long-term debt increased $335,000 (from $500,000 in 1997 to $835,000 in 1998).

Long-term debt increased $335,000 (from $500,000 in 1997 to $835,000 in 1998).

The firm borrowed $375,000 using long-term debt and paid $40,000 on old long-term debt.

The firm borrowed $375,000 using long-term debt and paid $40,000 on old long-term debt.

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On the balance sheet, common stock increased $10,000 and paid-in capital increased by

$34,000 between 1997 and 1998.

On the balance sheet, common stock increased $10,000 and paid-in capital increased by

$34,000 between 1997 and 1998.

During 1998, Fairway issued 10,000 additional shares of $1 par value common stock resulting in

cash proceeds of $44,000.

During 1998, Fairway issued 10,000 additional shares of $1 par value common stock resulting in

cash proceeds of $44,000.

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During 1998, cash dividends amounted to $60,000.

During 1998, cash dividends amounted to $60,000.

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Net cash flow from operating activities: Cash received from customers $3,103Dividends and interest received 19

Cash provided by operating activities 3,122Cash paid to suppliers and employers 2,729Interest paid 67Income taxes paid 98

Cash disbursed for operating activities 2,894Net cash flow from operating activities 228

Operating Activities Section of SCF Slide 11-11

Direct MethodDirect MethodDirect MethodDirect Method

FASB 95 encouragesuse of the

direct method.

FASB 95 encouragesuse of the

direct method.

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Net cash flow from operating activities: Net income $200 Noncash expenses, revenues, and losses included

in income:Depreciation 120 Deferred taxes 5 Increase in accounts receivable (87)Increase in inventories (47)Increase in accounts payable 56 Increase in taxes payable 1 Gain on sale of equipment (20) Cash flow from operating activities 228


Indirect MethodIndirect MethodIndirect MethodIndirect Method



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Depreciation Expense 120,000Accumulation Depreciation 120,000

The actual adjusting entry made:

Depreciation expense reduces net income, but has no effect on cash.

Let’s restate the entryby replacing depreciation.

Let’s restate the entryby replacing depreciation.

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Cash provided by operations 120,000Accumulation Depreciation 120,000

The restated entry:

Examine Illustration 11-6 closely. Notice that entry (3) matches the restated entry above.

Examine Illustration 11-6 closely. Notice that entry (3) matches the restated entry above.

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Inventories

Beginning balance 610,000Purchases 2,337,000

Cost of sales 2,290,000Ending balance 657,000

Beginning balance in next period 657,000

Purchases = Cost of sales + (Ending Balance - Beginning Balance)

Purchases = Cost of sales + (Ending Balance - Beginning Balance)

Actual cash payments (assume all purchases were cash purchases) $2,337,000Cost of sales (based on units sold) 2,290,000Excess of cash spent over amount recorded as a cost on the income statement $ 47,000

Actual cash payments (assume all purchases were cash purchases) $2,337,000Cost of sales (based on units sold) 2,290,000Excess of cash spent over amount recorded as a cost on the income statement $ 47,000

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Cash 20,000Accumulated Depreciation 150,000

Equipment, at Cost 150,000Gain on Disposal of Equipment 20,000

The journal entry made was:

Freeway Corporation sold equipment that originally cost $150,000 for $20,000. The asset was fully

depreciated at the time of sale.

Freeway Corporation sold equipment that originally cost $150,000 for $20,000. The asset was fully

depreciated at the time of sale.

This gain increasednet income by $20,000.

This gain increasednet income by $20,000.

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Cash provided by investing activities 20,000Accumulated Depreciation 150,000

Equipment, at Cost 150,000Cash provided by operating activities 20,000

The restated entry is:

The actual cash inflow should be treated as cash provided by investing activities and the gain on disposal subtracted

from net income through reducing cash provided by operations (see entry 6 in Illustration 11-6).

The actual cash inflow should be treated as cash provided by investing activities and the gain on disposal subtracted

from net income through reducing cash provided by operations (see entry 6 in Illustration 11-6).

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Suppose the equipment had a book value of $10,000 at the time of sale, and the cash proceeds totaled $15,000.


Cash 15,000Accumulated Depreciation 140,000

Equipment, at Cost 150,000Gain on Disposal of Equipment 5,000

The journal entry made was:

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Cash provided by investing activities 15,000Accumulated Depreciation 140,000

Equipment, at Cost 150,000Cash provided by operating activities 5,000

The entry restated is:

Cash provided by investing activities increased $15,000 and cash provided by operating activities decreased $5,000.

Cash provided by investing activities increased $15,000 and cash provided by operating activities decreased $5,000.

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Chapter 11

The End

the statement of cash flows

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