The Statement of Cash Flows

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					The Statement of Cash
        Flows

     Chapter 17
Purpose of The Statement of
Cash Flows: Basic Concepts


   The statement of cash flows
  reports the entity’s cash flows
(cash receipts and cash payments)
        during the period.
        Objective 1

  Identify the Purposes of
the Statement of Cash Flows.
          Purposes of the Statement
               of Cash Flows
   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)
                            Income
                           Statement



Balance                    Statement              Balance
 Sheet                    of Retained              Sheet
                           Earnings


                          Statement
                           of Cash
                            Flows
     Purposes of the Statement
          of Cash Flows
• The statement of cash flows is designed to
  fulfill the following:
– 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.
        Objective 2


Distinguish Among Operating,
Investing, and Financing Cash
             Flows.
     Basic Organization of the
     Statement of Cash Flows
• A business may be evaluated in terms of
  three types of business activities:
1 Operating activities
2 Investing activities
3 Financing activities
          Operating Activities

    Operating activities are related to the
   transactions that make up net income.

Operating activities also affect current assets
 and current liabilities on the balance sheet.
          Investing Activities

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

   Investing activities are related to the
       Long-Term Asset accounts.
         Financing Activities

These are transactions involving obtaining
 resources from the owners or returning
            resources to them.

   It also involves obtaining resources
      from creditors and repaying the
             amount borrowed.
     Format of the Statement
         of Cash Flows
• FASB Statement 95 approved two methods
  for reporting cash flows from operating
  activities.
1 Indirect method
2 Direct method
        Objective 3


Prepare a Statement of Cash
            Flows
  by the Indirect Method.
      Preparing the Statement
• Follow the template provided in the text
• Use comparative balance sheets to
  determine the change in cash, current
  assets and current liabilities
• Use the income statement to gather net
  income, depreciation, amortization, gains
  or losses on asset sales
• Complete the statement of cash flows
              The Indirect Method

                  Current Assets

  Add to Net Income if this account has decreased


Deduct from Net Income if this account has increased
              The Indirect Method

                 Current Liabilities

  Add to Net Income if this account has increased


Deduct from Net Income if this account has decreased
 Computing Individual Amounts
 for the Statement of Cash Flows
            Income Statement
Year Ended December 31, 2005 (Thousands)
 Revenues and gains:
 Sales revenue                    $284
 Interest revenue                   12
 Dividend revenue                    9
 Gain on sale of plant assets        8
 Total revenues and gains         $313
Computing Individual Amounts
for the Statement of Cash Flows
Expenses:
Cost of goods sold        $150
Salary expense              56
Depreciation expense        18
Other operating expense     17
Interest expense            16
Income tax expense          15
Total expenses            $272
 Computing Individual Amounts
 for the Statement of Cash Flows
            Income Statement
Year Ended December 31, 2005 (Thousands)

 Total revenues and gains         $313
 Total expenses                    272
 Net income                       $ 41
        Comparative Balance Sheets
    Assets            2005   2004   Inc./(Dec.)
Current:
Cash                  $ 22   $ 42      $ (20)
Accounts receivable     96     81         15
Inventory              143    145          (2)
Plant assets, net      464    219       245
Total assets          $725   $487      $238
        Comparative Balance Sheets
    Liabilities         2005   2004   Inc./(Dec.)
Current:
Accounts payable        $ 91   $ 57      $ 34
Accrued liabilities        5      9         (4)
Long-term notes payable 160      77        83
Stockholders’ equity:
Common stock             359   258        101
Retained earnings        110    86         24
Total liabilities and
shareholders’ equity    $725   $487      $238
           The Indirect Method
    Statement of Cash Flows (Indirect Method)
   Year Ended December 31, 2005 (Thousands)
Cash flows from operating activities:
Net Income                                   $41
Adjustments to reconcile net income to net cash
 provided by operating activities:
Depreciation                                   18
Gain on sale of plant                           8
Increase in accounts receivable               (15)
Decrease in inventory                           2
           The Indirect Method
    Statement of Cash Flows (Indirect Method)
   Year Ended December 31, 2005 (Thousands)
Adjustments to reconcile net income to net cash
 provided by operating activities:
Increase in accounts payable                  34
Decrease in accrued liabilities                (4)
Net cash provided by operating activities    $68
            The Indirect Method
  Statement of Cash Flows (Indirect Method)
       Year Ended December 31, 2005
                (Thousands)
Cash flows from investing activities:
Acquisition of plant assets              $(317)
Proceeds from sale of plant assets          62
Net cash used for investing activities   $(255)
       Acquisition and Sales
         of Plant Assets
• The business had plant assets net of
  depreciation of $219,000 at the beginning
  of the year and $464,000 at year end.
• Further, the acquisition of plant assets
  amounted to $317,000 during the year.
       Acquisition and Sales
         of Plant Assets
• The income statement shows depreciation
  expense of $18,000 and a $8,000 gain on
  sale of plant assets.
• What is the book value of the assets sold?
• Beginning net balance + Acquisitions –
  Depreciation – Book value of assets sold =
  Ending balance
      Acquisition and Sales
        of Plant Assets
• $219,000 + $317,000 – $18,000 – x =
  $464,000
• x = $464,000 -$219,000 - $317,000 +
  $18,000
• x = $54,000 (book value)
• How much are the proceeds from the sale
  of plant assets?
         Acquisition and Sales
           of Plant Assets
•   Book value + Gain or – Loss = Proceeds
•   $54,000 + $8,000 = $62,000
•   How do we determine acquisitions?
•   Beginning net balance + Acquisitions
    – Depreciation – Book value of assets sold
    = Ending balance
  Computing the Cash Amounts
    of Financing Activities
• Financing activities affect liability and
  stockholders’ equity accounts.
– Long-Term Notes Payable
– Bonds Payable
– Common Stock
– Retained Earnings
            The Indirect Method
       Statement of Cash Flows (Indirect Method)
      Year Ended December 31, 2005 (Thousands)

Cash flows from financing activities:
Proceeds from issuance of common stock         $101
Proceeds from issuance of long-term
  notes payable                                  94
Payment of long-term notes payable              (11)
Payment of dividends                            (17)
Net cash provided by financing activities      $167
   Issuance of Common Stock
• Take beginning balance of common stock
• Subtract ending balance of common stock
• Equals issuance of new common stock
    Issuance and Payments of
    Long-Term Notes Payable
• Beginning balance was $77,000.
• New debt amounting to $94,000 was
  incurred during the year.
• The ending balance for the Long-Term
  Notes Payable account was $160,000.
• How much was the payment?
• $11,000
 Computing Dividend Payments
• Dividend payments are computed by
  analyzing Retained Earnings.
• Beginning balance + Dividends declared
  – Dividend payments = Ending balance
              The Indirect Method
        Statement of Cash Flows (Indirect Method)
       Year Ended December 31, 2005 (Thousands)
Net cash inflows from operating activities          $ 68
Net Cash outflow from investing activities          (255)
Net Cash inflow from financing activities            167
Net (decrease in cash)                              $(20)
Cash balance, December 31, 2004                       42
Cash balance, December 31, 2005                     $ 22
      Noncash Investing and
      Financing 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.
        Objective 4

Prepare a Statement of Cash
Flows by the Direct Method.
              The Direct Method
      Statement of Cash Flows (Direct Method)
    Year Ended December 31, 2005 (Thousands)
Cash flows from operating activities:
Receipts:
Collections from customers                    $269
Interest received on notes receivable           12
Dividends received on investments in stock       9
Total receipts                                $290
            The Direct Method
    Statement of Cash Flows (Direct Method)
  Year Ended December 31, 2005 (Thousands)
Payments:
To suppliers                              $(135)
To employees                              (56)
For interest                                 (16)
For income tax                               (15)
Total payments                              (222)
Net cash provided by operating activities $ 68
    Computing Individual Amounts
    for the Statement of Cash Flows
Revenues or expenses from the income statement
                       +
                       –
        Adjusted for the change in the
       related balance sheet account(s)
                      =
    Amount for the statement of cash flows
  Computing Cash Collections
      from Customers
• Collections can be computed by converting
  sales revenue to the cash basis.
• Beginning Accounts Receivable balance +
  Sales on account – Collections = Ending
  Accounts Receivable balance
  Computing Cash Collections
      from Customers
• $81,000 + $284,000 – 96,000 = $269,000
• Because Accounts Receivable increased by
  $15,000, the business received $15,000
  less cash than its sales revenue for the
  period.
• All collections of receivables are computed
  following the pattern illustrated for
  collections from customers.
      Payments for Operating
           Expenses
• Increases in prepaid expenses require cash
  payments, and decreases indicate that
  payments were less than expenses.
• Decreases in accrued liabilities can occur
  only from cash payments, and increases
  mean that cash was not paid.
      Reconciling Net Income
         to Net Cash Flow
• The FASB requires companies that format
  operating activities by the direct method to
  report a reconciliation from net income to
  net cash inflow (or outflow).
End of Chapter 17

				
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