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Chapter 14 - Cash Flows

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Chapter 14 - Cash Flows Powered By Docstoc
					                                         Chapter 12

                    The Statement of Cash Flows
                                                                      FEDERAL RESERVE NOTE

                                                        THE UNITED STATES OF AMERICA
                                                        THE UNITED STATES OF AMERICA
                                                        H OE       E A E DR
                                                       T IS NT IS L GL T NE

                                                     O L E T , UL       N R AE
                                                    F R AL DB S P B IC ADP IVT
                                                                                              L7 0 7 4 4 6 2 9 F

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                                               L7 0 7 4 4 6 2 9 F
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                                                                                               E IE                12
                                                                                                95
                                                                                               18




                                                                                 ONE DOLLAR
                                                                                 ONE DOLLAR




Financial Accounting 4e by Porter and Norton                                                                                    1
Cash Flows and Net Income for Four
   Computer Companies in 2001
                       (in millions)
                   Increase
                   (Decrease)    Net Income
                   in Cash        (Loss)
IBM                $ 2,767        $ 7,723
Sun Microsystems      (377)           927
Gateway, Inc.          247         (1,034)
Western Digital        (16)            (99)


                                              2
    Purpose of the Statement of
           Cash Flows
 Explains changes in cash
  over a period of time
 Summarizes cash inflows
 and outflows from:

     Operating
     Activities    Investing
                   Activities   Financing
                                Activities
                                             3
                                                                                                                                     E RALRE E
                                                                                                                                    F DE    S RVENOTE

                                                                                                                              THE UNITED STATES OF AMERICA
                                                                                                                              THE UNITED STATES OF AMERICA
                                                                                                                  I   O          A     D
                                                                                                                TH S N TE I S LEG L TEN ER

                                                                                                               R LL D
                                                                                                             FO A    EBTS,   PU       N       A
                                                                                                                               BLI C A D PRI V TE
                                                                                                                                                                    L70744629F

                                                                                                        12                                                          W S IN T N D C
                                                                                                                                                                     AH GO, . .      12




Cash Equivalents
                                                                                                                    A
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                                                                                                                                                    ONE DOLLAR
                                                                                                                                                    ONE DOLLAR




                                                                                              Readily convertible
                                                                                               to cash
4    5    6    7
                        1

                        8
                                  2

                                  9
                                            3

                                            10
                                                     1     2     3
                                                                                              Little risk of price
11


18
     12


     19
          13


          20
               14
                    4
                        15
                             5
                                  16


               2111 2212 23 13 2414
                                       6
                                            17
                                                 7   8

                                                     15
                                                      4
                                                           9

                                                           16
                                                            5
                                                                 10

                                                                 17
                                                                  6    7
                                                                            1

                                                                            8
                                                                                 2

                                                                                 9
                                                                                      3

                                                                                      10
                                                                                               change
25   26   27   2818 2919 30 20 3121                  22    23    24


                                                                                           
                                                      11    12    13   14   15   16   17

                   25        26        27       28   29
                                                      18   30
                                                            19   31
                                                                  20   21   22   23   24       Original maturity
                                                     25    26    27    28   29   30   31


                                                                                               to investor of three
                                                                                               months or less
Examples:
• Commercial paper
• U.S. Treasury bills
• Certain money market funds
                                                                                                                                                                                                 4
 Statement of Cash Flows Format

     inflows       Cash           outflows


                  Classified by:
               Operating activities
               Investing activities
               Financing activities
                                       =
Beginning      Increase or decrease      = Ending
 Cash +              in cash              Cash
                                                    5
Statement of Cash Flows Format
Cash flows from operating activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by operating activities                $ xxx
Cash flows from investing activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by investing activities                 xxx
Cash flows from financing activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by financing activities                  xxx
Net increase (decrease) in cash and cash equivalents            $ xxx
Cash and cash equivalents at beginning of year                    xxx
Cash and cash equivalents at end of year                        $ xxx
                                from balance sheets
                                                                        6
          Operating Activities
                                     Incur Employee
                                    Salaries and Wages
Sell Products          Cash
and Services       transactions
                 concerned with
                  acquiring and
                 selling products
                   and services
                                      Incur Utility and
                                      other Operating
Make Inventory                             Costs
  Purchases
                                                         7
           Investing Activities
                                          Purchase/Sell
                                           Long-Term
                  Cash transactions       Investments
                   concerned with
                    acquiring and
                  disposing of long-
   Buy/Sell
                     term assets
Property, plant
 & equipment
                      Purchase/Sell Intangible Assets
                       (i.e. Patents, trademarks, etc.)
                                                          8
                                                            Financing Activities
Sell/Repurchase                                                                                                  Borrow $/
     Stocks                                                                                       Cash          Repay Loans
                                                                                              transactions
                               F DE
                                E RALRE E
                                       S RVENOTE

                         THE UNITED STATES OF AMERICA
                         THE UNITED STATES OF AMERICA
                                                                                            concerned with
   12




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                                                               W S IN T N D C   12



                                                                                     H293
                                                                                              internal and
                                                                                                external
   12                                                       SERI ES             12
                                                             1985




                                               ONE DOLLAR
                                               ONE DOLLAR




                                                                                            financing of the
                                                                                                business
   Issue/Retire
      Bonds                                                                                                    Issue Dividends

                                                                                                                                 9
Categorizing Cash Flow Activities

Operating Activities    Current       Income
                          Assets     Statement
                           and      Transactions
                        Current
                        Liabilities
Investing Activities
                                      Long-Term
                                       Liabilities
                       Financing          or
 Long-Term
                       Activities    Stockholders’
   Assets
                                        Equity
                                                     10
       Methods to Report
 Cash from Operating Activities
 Direct   Method
                             both methods
    reports major classes
                             arrive at same
     of cash receipts and
     payments
                               cash from
                               operating
 Indirect   Method
                                activities
    adjusts net income to
     remove effect of
     accruals and
     deferrals

                                              11
  Preparing the Statement of Cash
       Flows: Direct Method
 Step    1
    – Set up three master T accounts
 Cash Flows from      Cash Flows from      Cash Flows from
Operating Activities Investing Activities Financing Activities




 Step    2
    –   Determine the cash flows from operating
        activities
                                                                 12
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Accounts receivable                670,000
  Sales (from income statement)             670,000
From Balance   Accounts Receivable
   Sheet

      Bal. Jan. 1 57,000
                                 ???   Cash
Sales on                               collections
account           670,000

    Bal. Dec. 31   63,000
                                                      13
  Direct Method - Operating Activities
Review journal entries recorded during period:
  Accounts receivable              670,000
     Sales (from income statement)          670,000
From Balance   Accounts Receivable
   Sheet

     Bal. Jan. 1 57,000
                             664,000 Cash
  Sales on                           collections
  account        670,000

    Bal. Dec. 31   63,000
                                                      14
  Direct Method - Operating Activities
Review journal entries recorded during period:
  Cash                             15,000
     Interest Revenue                     15,000

               Interest Revenue


                             15,000 Interest earned
                                    and received



                                                   15
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Cost of Goods Sold (from Inc. Stmt.) 390,000
    Inventory                                 390,000
From Balance       Inventory
   Sheet

    Bal. Jan. 1   92,000
 Purchases on                390,000 Cost of goods
 account            ???              sold

    Bal. Dec. 31 84,000
                                                     16
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Inventory                          382,000
    Accounts Payable                        382,000
                 Accounts Payable
  From Balance
     Sheet
                             31,000 Bal. Jan. 1

 Cash payments       ???    382,000 Purchases


                             38,000 Bal. Dec. 31
                                                      17
   Direct Method - Operating Activities
 Review journal entries recorded during period:
  Accounts Payable                   375,000
     Cash                                    375,000
                  Accounts Payable
   From Balance
      Sheet
                               31,000 Bal. Jan. 1

Cash payments      375,000   382,000 Purchases


                               38,000 Bal. Dec. 31
                                                       18
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Salary and Wages Expense             60,000
    Salaries and Wages Payable               60,000
         Salaries and Wages Payable
From Balance
   Sheet
                             9,000   Bal. Jan. 1
 Cash payments ???
                            60,000   Expense

                             7,000   Bal. Dec. 31
                                                      19
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Salary and Wages Payable             62,000
    Cash                                     62,000
         Salaries and Wages Payable
From Balance
   Sheet
                             9,000   Bal. Jan. 1
Cash payments 62,000        60,000   New unpaid
                                      wages
                             7,000   Bal. Dec. 31
                                                      20
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Depreciation Expense                 40,000
   Accumulated Depreciation                  40,000



    There is no effect on cash flow from
               depreciation.



                                                      21
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Insurance Expense                    12,000
    Prepaid Insurance                        12,000
From Balance   Prepaid Insurance
   Sheet

     Bal. Jan. 1   18,000

 Cash payments      ???      12,000    Expense


    Bal. Dec. 31 12,000
                                                      22
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Prepaid Insurance                    6,000
    Cash                                    6,000
From Balance   Prepaid Insurance
   Sheet

    Bal. Jan. 1    18,000

   Cash payments 6,000       12,000 Expense


    Bal. Dec. 31   12,000
                                                    23
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Interest Expense                     15,000
    Cash                                    15,000
From Balance      Interest Expense
   Sheet

    Bal. Jan. 1          0
                              15,000 Expense
 Cash payments      15,000

    Bal. Dec. 31         0
                                                     24
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Income Taxes Expense                 50,000
    Income Taxes Payable                    50,000
From Balance   Income Taxes Payable
   Sheet

                             5,000    Bal. Jan. 1
                            50,000    Expense
 Cash payments        ???

                             8,000    Bal. Dec. 31
                                                     25
  Direct Method - Operating Activities
Review journal entries recorded during period:
 Income Taxes Payable                 47,000
    Cash                                    47,000
From Balance   Income Taxes Payable
   Sheet

                             5,000    Bal. Jan. 1
                             50,000   Expense
 Cash payments      47,000

                             8,000    Bal. Dec. 31
                                                     26
      Master T Account for Cash Flows
         from Operating Activities

  Cash Flows From Operating Activities
 Cash receipts from:         Cash payments for:
Sales on account   664,000   375,000   Inventory purchases
Interest            15,000    62,000   Salaries and wages
                               6,000   Insurance
                              15,000   Interest
                              47,000   Taxes
     Net cash
     inflows       174,000
                                                        27
Preparing the Statement of Cash
     Flows: Direct Method

Step   3
 –   Determine the cash flows from investing
     activities




                                               28
  Direct Method – Investing Activities
Review journal entries recorded during period:
 Long-Term Investments                30,000
    Cash                                     30,000
From BalanceLong-Term   Investments
   Sheet

   Bal. Jan. 1     90,000

   Purchases       30,000

   Bal. Dec. 31   120,000
                                                      29
  Direct Method – Investing Activities
Review journal entries recorded during period:
 Land                               50,000
    Notes Payable                           50,000


 No cash was involved in this transaction
  so it should be reported in a separate
         schedule instead of on the
         Statement of Cash Flows


                                                     30
  Direct Method – Investing Activities
Review journal entries recorded during period:
 Property & Equipment                 75,000
    Cash                                    75,000
From Balance Property   & Equipment
   Sheet

   Bal. Jan. 1    280,000

   Acquisitions    75,000       ??? Disposals

   Bal. Dec. 31   320,000
                                                     31
  Direct Method – Investing Activities
Book value of equipment sold was $20,000.
Original cost of equipment was $35,000.


From Balance
          Accumulated      Depreciation
   Sheet

                              75,000   Bal. Jan. 1
                              40,000   Expense
    Disposals     15,000

                             100,000   Bal. Dec. 31
                                                      32
      Master T Account for Cash Flows
         from Investing Activities

  Cash Flows From Investing Activities
 Cash receipts from:       Cash payments for:
Sale of machine   25,000    30,000 Purchase of
                                   investments
                            75,000 Purchase of
                                   property and
                                   equipment
                           80,000 Net cash
                                  outflows
                                                  33
Preparing the Statement of Cash
     Flows: Direct Method

Step                                                    4
             –                              Determine the cash flows from
                                            financing activities
                             E RALRE E
                            F DE    S RVENOTE

                      THE UNITED STATES OF AMERICA
                      THE UNITED STATES OF AMERICA
          I   O          A     D
        TH S N TE I S LEG L TEN ER

       R LL D
     FO A    EBTS,   PU       N       A
                       BLI C A D PRI V TE
                                                            L70744629F

12                                                          W S IN T N D C
                                                             AH GO, . .      12
            A
                                                                                  H293

     L70744629F
12                                                       SERI ES             12
                                                          1985




                                            ONE DOLLAR
                                            ONE DOLLAR




                                                                                         34
  Direct Method – Financing Activities
Review journal entries recorded during period:
 Land                               50,000
    Notes Payable                           50,000


 No cash was involved in this transaction
  so it should be reported in a separate
         schedule instead of on the
         Statement of Cash Flows


                                                     35
   Direct Method – Financing Activities
 Review journal entries recorded during period:
  Loss on Retirement of Bonds           3,000
  Bonds Payable                        60,000
     Cash                                    63,000
                 Bonds Payable
From Balance
   Sheet                    260,000     Bal. Jan. 1

  Retirement       60,000

                            200,000     Bal. Dec. 31
                                                       36
   Direct Method – Financing Activities
 Review journal entries recorded during period:
  Cash                               25,000
    Capital Stock                           25,000
                 Capital Stock
From Balance
   Sheet                     75,000 Bal. Jan. 1

                              25,000 Stock issued

                            100,000 Bal. Dec. 31
                                                     37
   Direct Method – Financing Activities
 Review journal entries recorded during period:
  Retained Earnings                  67,000
    Cash                                    67,000
                 Retained Earnings
From Balance
   Sheet                     193,000 Bal. Jan. 1
                             120,000 Net income 2004
Cash dividends      67,000

                             246,000 Bal. Dec. 31
                                                     38
    Master T Account for Cash Flows
       from Financing Activities

Cash Flows From Financing Activities
Cash receipts from:   Cash payments for:

 • Sale of Stock          • Debt Retirements
 • Borrowings             • Dividends
                          • Stock Repurchases

     Net cash               Net cash
     inflows       -OR-
                            outflows
                                                39
      Master T Account for Cash Flows
         from Financing Activities

  Cash Flows From Financing Activities
 Cash receipts from:         Cash payments for:
Issuance of stock   25,000    63,000 Retirement of
                                     bonds
                              67,000 Payment of
                                     cash dividends

                             105,000 Net cash
                                     outflows
                                                      40
              Noncash Investing and
               Financing Activities
 Disclose  important financing and investing
  activities which do not require cash
 Examples:

   Exchange Stock for Assets


 Certificate of Stock




                 Buy Assets through Debt Financing
                           from Supplier
                                                     41
Statement of Cash Flows Format
Cash flows from operating activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by operating activities                $ xxx
Cash flows from investing activities:
   Inflows                                             $ xxx
   Outflows                                             (xxx)
Net cash provided (used) by investing activities                 xxx
Cash flows from financing activities:
   Inflows                                             $ xxx
   Outflows      Only section of statement              (xxx)
Net cash provided (used) by financing activities
               that differs in form between                       xxx
Net increase (decrease) in cash and cash equivalents            $ xxx
                direct and indirect method
Cash and cash equivalents at beginning of year                    xxx
                 (net cash flow total
Cash and cash equivalents at end of yearis the                  $ xxx
                            same)
                                                                        42
      Indirect Method -
     Operating Activities

        Income Statement

            Conversion
            of accrual
             to cash
               basis


Cash Flows from Operating Activities
                                       43
Indirect Method - Operating Activities
Net cash flows from operating activities:
     Net income                               xx,xxx
     Adjustments to reconcile net income:
        Increase in accounts receivable       (6,000)


                  Accounts Receivable
   Bal. Jan. 1        57,000
   Net increase        6,000
                                            Decrease $6,000
   Bal. Dec. 31       63,000



                                                              44
Indirect Method - Operating Activities
Net cash flows from operating activities:
     Net income                               xx,xxx
     Adjustments to reconcile net income:
        Increase in accounts receivable       (6,000)
        Decrease in inventory                  8,000

                     Inventory
      Bal. Jan. 1   92,000
                              8,000   Net decrease

    Bal. Dec. 31    84,000
                                            Increase $8,000


                                                              45
Indirect Method - Operating Activities
Net cash flows from operating activities:
      Net income                              xx,xxx
      Adjustments to reconcile net income:
          Increase in accounts receivable     ( 6,000)
          Decrease in inventory                 8,000
          Increase in accounts payable          7,000


                    Accounts Payable
                                   31,000 Bal. Jan. 1
                                    7,000 Net increase
                                   38,000 Bal. Dec. 31
        Increase $7,000
                                                         46
Indirect Method - Operating Activities
Net cash flows from operating activities:
      Net income                                 xx,xxx
      Adjustments to reconcile net income:
          Increase in accounts receivable        ( 6,000)
          Decrease in inventory                    8,000
          Increase in accounts payable             7,000
          Decrease in salaries & wages payable   ( 2,000)


               Salaries & Wages Payable
                                    9,000 Bal. Jan. 1
     Net decrease 2,000
                                    7,000 Bal. Dec. 31
       Decrease $2,000
                                                            47
Indirect Method - Operating Activities
Net cash flows from operating activities:
      Net income                                 xx,xxx
      Adjustments to reconcile net income:
          Increase in accounts receivable        ( 6,000)
          Decrease in inventory                    8,000
          Increase in accounts payable             7,000
          Decrease in salaries & wages payable   ( 2,000)
          Decrease in prepaid insurance            6,000

                    Prepaid Insurance
  Bal. Jan. 1           18,000
                                    6,000 Net decrease
  Bal. Dec. 31          12,000        Decrease $6,000

                                                            48
Indirect Method - Operating Activities
Net cash flows from operating activities:
      Net income                                 xx,xxx
      Adjustments to reconcile net income:
          Increase in accounts receivable        ( 6,000)
          Decrease in inventory                    8,000
          Increase in accounts payable             7,000
          Decrease in salaries & wages payable   ( 2,000)
          Decrease in prepaid insurance            6,000
          Increase in income taxes payable         3,000

                 Income Taxes Payable
                                     5,000 Bal. Jan. 1
                                     3,000 Net increase

   Increase $3,000
                                     8,000 Bal. Dec. 31
                                                            49
 Indirect Method - Operating Activities
  Net cash flows from operating activities:
        Net income                                  xx,xxx
        Adjustments to reconcile net income:
            Increase in accounts receivable         ( 6,000)
            Decrease in inventory                     8,000
            Increase in accounts payable              7,000
            Decrease in salaries & wages payable    ( 2,000)
            Decrease in prepaid insurance             6,000
            Increase in income taxes payable          3,000
            Gain on sale of machine                 ( 5,000)
            Depreciation expense                    40,000
            Loss on retirement of bonds               3,000


Add back                                        Report entire
noncash          Gain is not part of
                                                 outflow as a
 expense         operating activities
                                              financing activity   50
                                                           FEDERALRESERVENOTE

                                                   THE UNITED STATES OF AMERICA
                                                   THE UNITED STATES OF AMERICA
                                          H    OE     E A E DR
                                         T IS N T IS L G L T N E

                                        R L   ET      BI    N    I AE
                                      FO A L D B S, PU L C A D PR V T
                                                                                     L70744629F




Cash Flow Adequacy
                                12                                                   WASHINGTON, D.C.   12
                                          A
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                                     L70744629F
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                                                                        ONE DOLLAR
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 Measures  company’s ability to meet
  principal and interest obligations
 Creditors concerned with cash available to
  repay debts after company has replaced its
  long-term assets

   Cash Flow from Operating Activities
          - Capital Expenditures         .
 Avg. Debt Maturing over Next Five Years
                                                                                                                     51
       Appendix

     Accounting Tools:
A Work-Sheet Approach to the
  Statement of Cash Flows




                               52
Indirect Method: Using a Work Sheet




                      Enter account
                        balances




                                      53
Indirect Method: Using a Work Sheet




                                      54
Indirect Method: Using a Work Sheet




                            Enter net
                             income

                                        55
Indirect Method: Using a Work Sheet




                             Enter noncash
                          revenues or expenses




                                             56
Indirect Method: Using a Work Sheet



                         Extend current assets
                          & current liabilities




                                                  57
Indirect Method: Using a Work Sheet




         Total
        columns

                                      58
Indirect Method: Using a Work Sheet




                          Determine net
                           cash inflow
                            (outflow)




                                          59
End of Chapter 12


                                    FEDERAL RESERVE NOTE

                      THE UNITED STATES OF AMERICA
                      THE UNITED STATES OF AMERICA
                      H OE       E A E DR
                     T IS NT IS L GL T NE

                   O L E T , UL N R AE
                  F R AL DB S P B IC ADP IVT
                                                            L70744629F

          12                                                 W SH G N D .
                                                              A IN TO , .C   12
                   A
                                                                                  H 293

               L70744629F
          12                                                SR S
                                                            E IE             12
                                                            1985




                                               ONE DOLLAR
                                               ONE DOLLAR




                                                                                          60

				
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