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CASH FLOWS

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					                     16-1




   CHAPTER 16
ANALYSIS USING THE
  STATEMENT OF
   CASH FLOWS
                                                   16-2




Statement of Cash Flows




 As the cartoon implies, business investments
   with good long-term cash flow prospects
frequently provide poor cash flow in their early
 years. Measuring net income by means of the
   accrual basis of accounting mitigates the
   short-sightedness of cash flow measures.
                                           16-3

Purpose of the Statement of
       Cash Flows
The statement summarizes the effects
on cash of the operating, investing, and
   financing activities of a company
      during an accounting period.

(i.e., it tells where the cash came from
 and where it went while explaining the
        change in the cash balance.)
                                                 16-4

Purpose of the Statement of
       Cash Flows
The statement summarizes the effects
on cash of the operating, investing, and
   financing activities of a company
      during an accounting period.
                           We need to sell our
                         inventory and collect
                       our receivables, if we plan
                          to have a good year.
                                            16-5

Purpose of the Statement of
       Cash Flows
 The statement summarizes the effects
 on cash of the operating, investing, and
    financing activities of a company
       during an accounting period.
  In addition, we have to
  make an investment in
new equipment to improve
     our productivity.
                                              16-6

Purpose of the Statement of
       Cash Flows
The statement summarizes the effects
on cash of the operating, investing, and
   financing activities of a company
      during an accounting period.
                    I guess we will have to
                    borrow some money to
                       afford all this new
                           equipment.
                                                                16-7

 Helps Financial Statement
    Users Assess the...
        Ability to
                                         Ability to
   generate positive
                                      meet obligations.
 future net cash flows.


                            P. 582

  Ability to                                Need for external
pay dividends.                                 financing.




                  Reasons for differences
                   between accrual and
                    cash-basis income.
                                           16-8




      Cash Flow Terminology
   Operating Activities
      Transactions that enter into the
      determination of net income
   Investing Activities
      Transactions involving acquisition
      or disposal of noncurrent assets
   Financing Activities
      Transactions involving creditors
      and stockholders
                             16-9




      Operating Activities
Cash inflows from:
 Sale of goods or
  services
 Interest revenue

 Dividend revenue

 Sale of trading
  securities
 Other


       583
                                  16-10




Operating Activities
          Cash outflows for:
           Purchase of
            inventory
           Payment of salaries
            and wages
           Interest expense

           Other expenses

           Purchase of trading
            securities
                           583
                                     16-11




   Operating Activities
         Direct Method
Deducts from cash sales only those
 operating expenses that consumed
               cash.
                                             16-12




     Operating Activities
          Indirect Method
Starts with accrual basis net income and
adjusts net income for items that affected
   net income but did not involve cash.

              This is the most
              popular method
               and is used by
                about 95% of
                 companies.
                                                        16-13




          Investing Activities
Cash inflows from:          Cash outflows for:
   Sale of property,          Purchase of property,
    plant, and equipment.       plant, and equipment.
   Sale of securities.        Purchase of
   Collections of long-        securities.
    term loans.                Making loans.




                                                583
                                                          16-14




          Financing Activities
Cash inflows from:           Cash outflows for:
   Issuing capital stock.      Purchase of treasury
                                 stock.
                                Payment of cash
                                 dividends.
   Issuing debt.               Payment of debt.
                                   What about payment
                                   of interest on debt?



                                                   583
                                            16-15

    Steps in Preparing the
   Statement of Cash Flows
Determine cash flows from operating
 activities using the indirect method.
Analyze all noncurrent accounts for
 changes in cash resulting from investing
 or financing activities.
Arrange the information
 from 1 and 2 in the
 proper format.
                                            16-16


        Indirect Method
       Operating Activities
Accrual basis net income
Add: Non-cash expenses
     (e.g., Depreciation, Depletion
     and Amortization)
Add: Losses not affecting cash
Deduct: Gains not affecting cash
Adjust: For changes in current assets and
        current liabilities
Cash provided by operating activities
(i.e., cash-basis net income)
                                                        16-17


            Indirect Method
     Operating Activities Section
                          Add Change     Deduct Change
For Changes in:          to Net Income   from Net Income
Current assets. . . .      Decreases        Increases
Current liabilities. .     Increases        Decreases




                                          589
                                             16-18




Operating Activities Example
East, Inc. reports $125,000 Net Income for the
  year ended December 31, 1999. Accounts
  Receivable increased by $7,500 during the
   year and Accounts Payable increased by
      $10,000. During 1999, East reported
        $12,500 of Depreciation Expense.

    Calculate cash provided by operating
            activities during 1999.
                                         16-19




Operating Activities Solution

Net Income                  $ 125,000
Add: Depreciation Expense      12,500
Add: Increase in A/P           10,000
Deduct: Increase in A/R        (7,500)
Cash provided by
 operating activities       $ 140,000
                                            16-20




     Cash Flow Statement
              XYZ Corporation
          Statement of Cash Flows
   For the year ended December 31, 1999
   Operating Activities           $xx,xxx
   Investing Activities             x,xxx
   Financing Activities             x,xxx
   Net Increase (decrease) in cash    xxx
   Cash at beginning of year        x,xxx
   Cash at end of year           $ x,xxx

Optional - see p. 593
                                              16-21




       Cash Flows Question
     On the Statement of Cash Flows, the
      sale of the company’s own Capital
     Stock for cash would be classified as
a.     Cash flow from operating activities.
b.     Cash flow from investing activities.
c.     Cash flow from financing activities.
d.     None of the above.
                                              16-22




       Cash Flows Question
     On the Statement of Cash Flows, the
      sale of the company’s own Capital
     Stock for cash would be classified as
a.
a.     Cash flow from operating activities.
b.
b.     Cash flow from investing activities.
c.
c.     Cash flow from financing activities.
d.
d.     None of the above.
                                             16-23




       Cash Flows Question
     On the Statement of Cash Flows, the
      purchase of plant assets would be
                 classified as
a.    Cash flow from operating activities.
b.    Cash flow from investing activities.
c.    Cash flow from financing activities.
d.    None of the above.
                                             16-24




       Cash Flows Question
     On the Statement of Cash Flows, the
      purchase of plant assets would be
                 classified as
a.
a.    Cash flow from operating activities.
b.
b.    Cash flow from investing activities.
c.
c.    Cash flow from financing activities.
d.
d.    None of the above.
                                             16-25




       Cash Flows Question
     On the Statement of Cash Flows, the
     payment of cash dividends would be
                 classified as
a.    Cash flow from operating activities.
b.    Cash flow from investing activities.
c.    Cash flow from financing activities.
d.    None of the above.
                                             16-26




       Cash Flows Question
     On the Statement of Cash Flows, the
     payment of cash dividends would be
                 classified as
a.
a.    Cash flow from operating activities.
b.
b.    Cash flow from investing activities.
c.
c.    Cash flow from financing activities.
d.
d.    None of the above.
                                             16-27




       Cash Flows Question
     On the Statement of Cash Flows, the
       change in Accounts Receivable
        balance for the year would be
                 classified as
a.    Cash flow from operating activities.
b.    Cash flow from investing activities.
c.    Cash flow from financing activities.
d.    None of the above.
                                             16-28




       Cash Flows Question
     On the Statement of Cash Flows, the
       change in Accounts Receivable
        balance for the year would be
                 classified as
a.
a.    Cash flow from operating activities.
b.
b.    Cash flow from investing activities.
c.
c.    Cash flow from financing activities.
d.
d.    None of the above.
                                              16-29




       Cash Flows Question
     On the Statement of Cash Flows, the
     purchase of plant assets through the
      issuance of Capital Stock would be
                 classified as
a.     Cash flow from operating activities.
b.     Cash flow from investing activities.
c.     Cash flow from financing activities.
d.     None of the above.
                                                      16-30




        Cash Flows Question
     On the Statement of Cash Flows, the
     purchase of plant assets through the
      issuance of Capital Stock would be
                    classified as
a.
a.   This should be classified as a non-cash financing
       Cash flow from operating activities.
     and investing activity and disclosed in a separate
b.
b.     Cash or footnote investing activities.
     scheduleflow from to the financial statements.
c.
c.     Cash flow from financing activities.
d.
d.     None of the above.
                                                16-31




       Non-Cash Activities
The reason that non-cash investing and
financing activities must be disclosed in
  notes to the statement of cash flows:
  The reader wants to know why all amounts on
  the comparative balance sheet changed from
the beginning to end of year, whether cash was
 involved or not. Therefore, this is a good place
                  to disclose it.
                                            16-32




Cash Flow Statement Example
 Sample Company is preparing its annual
    financial statements. The Company
   provides you with Balance Sheets for
   12/31/98 and 12/31/99, and the Income
   Statement for the year ended 12/31/99.
    During 1999, the Company paid cash
            dividends of $10,000.

  Prepare a Statement of Cash Flows,
       using the indirect method.
                                                16-33




Cash Flow Statement Example
Additional information:
   On June 8, 1999, Sample purchased land
    for cash of $11,000.
   During 1999, Sample purchased new
    equipment for $13,000 cash.
   On March 18, 1999, Sample sold additional
    shares of common stock for cash of
    $10,000.
                                        16-34




Cash Flow Statement Example
           Sample Company
           Income Statement
For the Year Ended December 31, 1999
Revenues                    $ 153,000
Cost of sales    $ 50,000
Wages              30,000
Depreciation        5,000
Insurance           4,000      89,000
Net income                  $ 64,000
                                                     16-35
                Sample Company
           Comparative Balance Sheet
          At December 31, 1999 and 1998
                      1999       1998    Change
Cash               $ 82,000 $ 30,000 $ 52,000
Acct. Receivable     120,000    100,000   20,000
Inventory             87,000     82,000    5,000
Land                 101,000     90,000   11,000
Equipment            113,000    100,000   13,000
Accum. Depr.         (20,000)   (15,000)  (5,000)
  Total            $ 483,000 $ 387,000 $ 96,000

Acct. Payable     $ 76,000    $ 60,000    $ 16,000
Wages Payable        33,000      17,000     16,000
Notes Payable        50,000      50,000
Capital Stock       170,000     160,000     10,000
Retained Earnings   154,000     100,000     54,000
 Total            $ 483,000   $ 387,000   $ 96,000
                                                  16-36
                  Sample Company
              Statement of Cash Flows
       For the Year Ended December 31, 1999
Cash flows from operating activities:
 Net income                      $ 64,000
 Adjustments to reconcile net
   income to net cash provided
   by operating activities
 Depreciation expense                5,000
        Start Acct. Receivable
 Increase in with accrual basis net(20,000) and
                                    income
 Increase in inventory              (5,000)
            make all necessary adjustments.
 Increase in Acct. Payable          16,000
 Increase in Wages Payable          16,000
 Net cash provided by operating
   activities                               $ 76,000
                                                     16-37
                  Sample Company
              Statement of Cash Flows
       For the Year Ended December 31, 1999
Cash flows from operating activities:
 Net income                         $ 64,000
 Adjustments to reconcile net
   income to net cash provided
   by operating activities
 Depreciation expense                   5,000
 Increase in Acct. Receivable        (20,000)
                 Add depreciation, depletion
 Increase in inventory                 (5,000)
                     and amortization.
 Increase in Acct. Payable            16,000
 Increase in Wages Payable            16,000
 Net cash provided by operating
   activities                                  $ 76,000
                                                     16-38
                  Sample Company
              Statement of Cash Flows
       For the Year Ended December 31, 1999
Cash flows from operating activities:
 Net income                          $ 64,000
 Adjustments to reconcile net
   income to net cash provided
   by operating activities
 Depreciation expense                   5,000
 Increase in Acct. Receivable         (20,000)
 Increase in Inventory                 (5,000)
 Increase in Acct. Payable increase 16,000
                   Deduct the          in
 Increase in Wages Payable - accounts
                the current assets     16,000
 Net cash provided by operating
                  receivable and Inventory.
   activities                                  $ 76,000
                                                  16-39
                  Sample Company
              Statement of Cash Flows
       For the Year Ended December 31, 1999
Cash flows from operating activities:
 Net income                      $ 64,000
      Add the increases in the
 Adjustments to reconcile net
    current to net cash provided
   income liabilities - accounts
    payable and wages payable.
   by operating activities
 Depreciation expense                5,000
 Increase in Acct. Receivable      (20,000)
 Increase in Inventory              (5,000)
 Increase in Acct. Payable          16,000
 Increase in Wages Payable          16,000
 Net cash provided by operating
   activities                               $ 76,000
                                                        16-40
                   Sample Company
              Statement of Cash Flows
       For the Year Ended December 31, 1999
Cash flows from operating activities:
 Net income                           $ 64,000
 Adjustments to reconcile net
   income to net cash provided
              Now that we have completed the
   by operating activitiesoperating activities
            cash flows from
         section of the statement let’s look at the
 Depreciation expense                     5,000
             cash flows for investing (20,000)
 Increase in Acct. Receivable activities.
 Increase in Inventory                   (5,000)
 Increase in Acct. Payable               16,000
 Increase in Wages Payable               16,000
 Net cash provided by operating
   activities                                     $ 76,000
                                                      16-41
                   Sample Company
               Statement of Cash Flows
        For the Year Ended December 31, 1999
Net cash flows from operating activities:       $ 76,000
Cash flows from investing activities:
 Purchase of Land                     $(11,000)
 Purchase of Equipment                 (13,000) (24,000)
                Sample purchased land for
                     cash during 1999.
Cash flows from financing activities:
 Sale of Capital Stock              $ 10,000
 Payment of Cash Dividends           (10,000)         -
Net Increase in Cash                            $ 52,000
Cash, January 1, 1999                             30,000
Cash, December 31, 1999                         $ 82,000
                                                     16-42
                   Sample Company
               Statement of Cash Flows
        For the Year Ended December 31, 1999
Net cash flows from operating activities:       $ 76,000
Cash flows from investing activities:
 Purchase of Land                     $(11,000)
 Purchase of Equipment                 (13,000) (24,000)

                   During activities:
Cash flows from financingthe year Sample
                  purchased new equipment
 Sale of Capital Stock               $ 10,000
                    paying $13,000 cash.
 Payment of Cash Dividends            (10,000)       -
Net Increase in Cash                           $ 52,000
Cash, January 1, 1999                            30,000
Cash, December 31, 1999                        $ 82,000
                                                        16-43
                   Sample Company
               Statement of Cash Flows
        For the Year Ended December 31, 1999
Net cash flows from operating activities:       $ 76,000
Cash flows from investing activities:
 Purchase of Land                     $(11,000)
 Purchase of Equipment                 (13,000) (24,000)

Cash flows from financing activities:
 Sale of Capital Stock                $ 10,000
                                       (10,000)
 Payment of Cash Dividends capital Sample
              To raise addition                         -
           sold Cash
Net Increase in shares of stock for $10,000 cash. $ 52,000
Cash, January 1, 1999                               30,000
Cash, December 31, 1999                           $ 82,000
                                                      16-44
                   Sample Company
               Statement of Cash Flows
        For the Year Ended December 31, 1999
Net cash flows from operating activities:       $ 76,000
Cash flows from investing activities:
 Purchase of Land                     $(11,000)
 Purchase of Equipment                 (13,000) (24,000)

Cash flows from financing activities:
 Sale of Capital Stock                $ 10,000
 Payment of Cash Dividends             (10,000)       -
                Cash
Net Increase inThe company paid $10,000 in      $ 52,000
            cash 1999
Cash, January 1, dividends to its shareholders. 30,000
Cash, December 31, 1999                         $ 82,000
                                                      16-45
                    Sample Company
     We have now explained what
                Statement of Cash Flows
      caused the cash account to
        For the Year Ended December 31, 1999
      increase by $52,000 during
               from operating activities:
Net cash flows the year.                        $ 76,000
Cash flows from investing activities:
 Purchase of Land                     $(11,000)
 Purchase of Equipment                 (13,000) (24,000)

Cash flows from financing activities:
 Sale of Capital Stock                $ 10,000
 Payment of Cash Dividends             (10,000)       -
Net Increase in Cash                            $ 52,000
Cash, January 1, 1999                             30,000
Cash, December 31, 1999                         $ 82,000
                                              16-46

     Analyzing the
Comparative Balance Sheet
         Illustration 16.3, p. 587


             Retained Earnings
    Dividends 4,000 30,000 Beg. Bal.
                           X
                       10,000 Net Income
         30,000 + X - 4,000 = 36,000
                 X = 10,000
                                36,000 End.
                                       Bal.
                   16-47




 Hey, dude, how
about going over
  that stuff one
   more time?
  .

				
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