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VIEWS: 22 PAGES: 33

									Slide
22-1




        Strategic Accounting

        Statement of
         Cash Flows
Slide
22-2


                       CASH INFLOWS
Operating Activities      Investing Activities       Financing Activities
                        Sale of operational assets      Issuance of stock
    Cash received          Sale of investments         Issuance of bonds
    from revenues          Collections of loans             and notes




                           Business

    Cash paid for       Purchase of operational      Payment of dividends
     expenses                  assets
                                                     Repurchase of stock
                        Purchase of investments
                                                      Repayment of debt
                            Loans to others

                       CASH OUTFLOWS
Slide
22-3




        Cash and Cash Equivalents


  Resources         Short-term, highly liquid
 immediately         investments.
  available to      So near maturity that there
      pay            is insignificant risk of market
                     value fluctuation from
 obligations.        interest rate changes.
                    Maturity of 3 months or less
Slide
22-4




        Cash Equivalents
        Treasury bill   100,000
          Cash                 100,000

           Inflow or outflow of cash?
           Neither – moves $100,000 from one
            cash account to another “cash” account
Slide
22-5    Cash flows from operating activities:
        Cash inflows:
         From customers                            $98
         From investment revenue                     3
        Cash outflows:
         To suppliers of goods                     (50)
         To employees                              (11)
         For interest                                (3)
         For insurance                               (4)
         For income taxes                           (11)
        Net cash flows from operating activities           $22
        Cash flows from investing activities:
         Purchase of land                          ($30)
         Purchase of short-term investment          (12)
         Sale of land                                18
         Sale of equipment                            5
        Net cash flows from investing activities           (19)
        Cash flows from financing activities:
         Sale of common shares                     $26
         Retirement of bonds payable               (15)
         Payment of cash dividends                  (5)
        Net cash flows from financing activities             6
          Net increase in cash                             $9
        Cash balance, January 1                             20
        Cash balance, December 31                          $29
Slide
22-6


        Cash Flows From Operating
        Activities
           Cash flows from operating activities are
            both inflows and outflows of cash that
            result from activities reported on the
            income statement.
           Exception: IAS No. 7 allows companies
            to report interest and dividends
            received and paid as operating,
            investing, or financing cash flows,
            provided that they are classified
            consistently from period to period
Slide
22-7




        Income Statement                Cash Flows from Operating
                                               Activities
        Revenues:                       Cash inflows:
         Sales and service revenue     Cash received from customers
         Investment revenue            Cash revenue received
         Noncash revenues and gains
        (e.g., gain on sale of assets)          [Not reported]
        Less: Expenses:                 Less: Cash outflows:
        Cost of goods sold          Cash paid to suppliers
        Salaries expense            Cash paid to employees
        Noncash expenses and losses
         (depreciation, amortization, bad
         debts, loss on sale of assets)           [Not reported]
        Interest expense                    Cash paid to creditors
        Other operating expenses            Cash paid for expenses
        Income tax expense                  Cash paid to the government
        Net income                      Net cash flows from
                                          operating activities
Slide
22-8
        CASH FLOWS FROM OPERATING
        ACTIVITIES
        Direct Method

         Cash flows from operating activities are the elements
          of net income, but reported on a cash basis.

           Cash flows from operating activities:
           Cash inflows:
            From customers                          $98
            From investment revenue                   3
           Cash outflows:
            To suppliers of goods                   (50)
            To employees                            (11)
            For interest                             (3)
            For insurance                            (4)
            For income taxes                        (11)
           Net cash flows from operating activities      $22
Slide
22-9
        CASH FLOWS FROM OPERATING
        ACTIVITIES
        Indirect Method
          Derived indirectly by starting with reported net income and
          working backwards to convert that amount to a cash basis.
           Cash flows from operating activities:
           Net income                                     $12
           Adjustments for noncash effects :
            Gain on sale of land                           (8)
            Depreciation expense                            3
            Loss on sale of equipment                       2
           Changes in operating assets and liabilities:
            Increase in accounts receivable                (2)
            Decrease in inventory                           4
            Increase in accounts payable                    6
            Increase in salaries payable                    2
            Discount on bonds payable                       2
            Decrease in prepaid insurance                   3
            Decrease in income tax payable                 (2)
           Net cash flows from operating activities              $22
Slide
22-10


        CASH FLOWS FROM
        INVESTING ACTIVITIES
         Related to the acquisition and disposition of assets, other than
         (a) inventory and (b) assets classified as cash equivalents.
         Included in this classification are cash payments to acquire:
           Property, plant and equipment and other productive assets [except
            inventories].
           Investments in securities [except cash equivalents].
           Nontrade receivables.
         When these assets later are liquidated, any cash receipts from
         their disposition also are classified as investing activities.
          Cash Flows from Investing Activities:
           Purchase of land                          $(30)
           Purchase of short-term investments         (12)
           Sale of land                                18
           Sale of equipment                            5
          Net cash flows from investing activities           (19)
Slide
22-11


             CASH FLOWS FROM
           FINANCING ACTIVITIES
        Inflows and outflows of cash resulting from the external financing of a
            business, including cash inflows from:
         The sale of common and preferred stock
         The issuance of bonds and other debt securities
        Subsequent transactions related to these financing transactions are also
           classified as financing activities, such as:
         The repurchase of common or preferred stock (retirement or treasury
           stock)
         The repayment of debt
         The payment of cash dividends to shareholders
           Cash Flows from Financing Activities:
            Sale of common stock                         $26
            Retirement of bonds payable                  (15)
            Payment of cash dividends                     (5)
           Net cash flows from financing activities             6
Slide
22-12


        Significant
        Noncash Activities
              Common noncash
               activities include:
  Retiring bonds by                  Acquiring an asset
   issuing stock.                     by issuing a note
                                           payable.



     Acquiring an                     Retiring debt by
    asset by capital                    transferring
        lease.                        noncash assets.
Slide
22-13


        Cash Flows from Operating
        Activities
Slide
22-14


        Direct Method
        Analyzing Sales Revenue
         We can compare sales and the change in accounts receivable to
          determine the amount of cash received from customers. This
          relationship can be viewed in T–account format as follows:

                       Accounts Receivable
               _______________________________________
          Beginning balance   30
          Credit sales      100    ?       Cash received
          (increases A/R)     __________      (decreases A/R)
          Ending balance        32

        Cash received from customers must have been $98 million.
Slide
22-15


        SUMMARY ENTRY FOR SALES
        AND COLLECTION ACTIVITIES
  Note that even if some of the year's sales were cash sales, say
   $40 million cash sales and $60 million credit sales, the result is
   the same:
             Accounts Receivable
        _______________________
        Beg. bal.     30                  Cash sales       $40
        Credit sales 60 58               Rec„d on acct. 58
                     _______
                                         Cash rec„d        $98
        Ending bal. 32
                                                   ($ in millions)
 Entry Cash (received from customers)              98
       Accounts receivable (given)                  2
         Sales revenue ($100 - 0)                         100
Slide
22-16


        Analyzing Sales
        Review Question
            Accounts Receivable was $40,000 on 1/1/09
              and $52,000 on 12/31/09. If total sales
             revenue for 2009 was $800,000, then how
              much cash was received from customers?
        a. $800,000 A/R increased $12,000 during 2009.
        b. $760,000 Cash (received from customers) 788
        c. $812,000 Accounts receivable
                         Sales revenue
                                                    12
                                                       800
        d. $788,000
Slide
22-17




        Cost of Goods Sold
         UBC sold goods that had cost $60 million.
          Inventory decreased by $4 million and
          accounts payable increased by $6 million.
                                    ($ in millions)

          Cost of goods sold         60
             Inventory                        4
             Accounts payable                 6
             Cash (paid to suppliers)        50
Slide
22-18


        Cost of Goods Sold
        Review Question
       Determine how much was paid for inventory
        in 2009.
        Cost of goods sold $900,000
        Inventory Jan. 1 $130,000 Dec. 31 $165,000
        Accts Pay. Jan. 1 $ 23,000 Dec. 31 $ 35,000

   a. $900,000
   b. $923,000
   c. $947,000
   d. $877,000
Slide
22-19


        Cost of Goods Sold
        Review Question
       Determine how much was paid for inventory
        in 2009.
        Cost of goods sold $900,000
        Inventory Jan. 1 $130,000 Dec. 31 $165,000
        Accts Pay. Jan. 1 $ 23,000 Dec. 31 $ 35,000

   a. $900,000       Cost of goods sold 900,000
                       Cost of goods sold          900
                       Inventory                    35
   b. $923,000       Inventory payable
                          Accounts
                                                35,000 12
   c. $947,000            Cash (paid payable
                          Accountsto suppliers)          12,000
                                                       923
                          Cash (paid to suppliers) 923,000
   d. $877,000
Slide
22-20


        Direct Method
        Salaries Expense
           Cash paid to employees can be
            determined from the salaries expense.
Cash paid to
Employees       =
                    Salaries
                    Expense         {+ Decrease in Payable
                                     - Increase in Payable


                           Salaries expense           x
                           Salaries payable           x
                                    Salaries payable           x
                                    Cash (paid to employees)    ?
Slide
22-21


        Salaries Expense
        Question
         Determine how much was paid to employees during 2009.

             Salaries expense $700,000
             Salaries Pay. Jan. 1 $ 35,000 Dec. 31 $ 10,000

        a.   $700,000        Salaries expense       700,000
        b.   $735,000        Salaries payable        25,000
        c.   $725,000         Cash (paid to employees)        ?
        d.   $675,000
Slide
22-22


        Direct Method
        Estimated Expenses
          Depreciation, Amortization, and
               Depletion Expenses
         • These are non-cash expenses.
         • They are not disclosed in the SCF
           using the direct method.
Slide
22-23




        Depreciation
         UBC‟s income statement reports depreciation
          expense of $3 million.
                                        ($ in millions)

          Depreciation expense        3
             Accumulated depreciation              3

         Depreciation is a noncash expense. It is merely an
          allocation in the current period of a prior cash
          expenditure (for the depreciable asset).
         Therefore, the depreciation entry has no effect on
          the statement of cash flows.
Slide
22-24




        Bond Interest
         UBC‟s bond interest expense is $5 million and $2 million of the
          bond discount was reduced in 2009.

         The entry that summarizes the recording of bond interest
          expense:
                                                ($ in millions)
           Bond interest expense                5
               Discount on bonds                            2
               Cash (paid to bondholders)                   3
                                                            ?



         If a premium were being reduced, rather than a discount, the
          cash outflow would be greater than the expense.
Slide
22-25




        Insurance Expense
         UBC‟s insurance expense was $7 million.
          Prepaid insurance decreased by $3 million
          indicating that cash paid for insurance
          coverage was $3 million less than the
          insurance expense for the year.
                                         ($ in millions)

          Insurance expense               7
             Prepaid insurance                      3
             Cash (paid for insurance)              4
                                                    ?
Slide
22-26




        Gains and Losses on Sale of Assets
         Land that originally cost $10 million was sold for $18
          million:
                                          ($ in millions)
              Cash                        18
                 Land                               10
                 Gain on sale of land                8

         The gain is simply the difference between cash
          received in the sale of land (reported as an investing
          activity) and the book value of the land. To report
          the $8 million gain as a cash flow from operating
          activities, in addition to reporting $18 million as a
          cash flow from investing activities, would be double
          counting.
Slide
22-27


        LOSS ON SALE OF
        EQUIPMENT
         UBC sold equipment for $5 million that had cost $14 million and
          was half depreciated.
                                                            ($ in millions)
           Cash (from sale of equipment)                       5
           Loss on sale of equipment                           2
           Accumulated depreciation ($14 x 50%)                7
              Buildings and equipment (given)                         14

         The sale of equipment is an investing activity.

        Note: The loss is simply the difference between cash received in
          the sale of equipment (reported as an investing activity) and the
          book value of the equipment.
Slide
22-28




        INDIRECT METHOD
         By the indirect method, the net cash increase or decrease from operating
          activities is derived indirectly by starting with reported net income and "working
          backwards" to convert that amount to a cash basis.

                  Net income                                         $12
                  Adjustments for noncash effects:
                   Increase in accounts receivable                     (2)
                   Gain on sale of land                                (8)
                   Decrease in inventory                                4
                   Increase in accounts payable                         6
                   Increase in salaries payable                         2
                   Depreciation expense                                 3
                   Discount on bonds payable                            2
                   Decrease in prepaid insurance                        3
                   Loss on sale of equipment                            2
                   Decrease in income tax payable                      (2)
                  Net cash flows from operating activities                      $22
Slide
22-29


         Net Income Adjustments for
         Noncash Components
        Amounts that
            were        Gains
                        
                                         Subtract
        increases in                     from net
         net income                       income

        Amounts that    Depreciation,
            were        depletion, and
                        amortization
                                         Add back
         reductions                        to net
                        Losses
        of net income                     income
 Slide
 22-30




         Some IS Items Don’t Affect Cash
                                                          Cash Flows from Operating Activities
          INCOME STATEMENT                  INDIRECT METHOD                    DIRECT METHOD
                                          Net income                $12
                                          Adjustments :
          Sales                   $100
          Investment rev.           3

          Gain - sale of land       8     Gain - sale of land       (8)        [Not reported–no cash effect]

          Cost of goods sold       (60)

 No       Salaries expense         (13)
effect    Depreciation exp.        (3)    Depreciation exp.          3         [Not reported – no cash effect]
  on
          Interest exp.            (5)
Cash      Insurance exp.           (7)
          Loss - sale of equip.    (2)    Loss - sale of equip.      2         [Not reported – no cash effect]

          Income tax exp.          (9)
                                          Net cash flows from                  Net cash flows from
          Net Income              $ 12     operating activities                 operating activities
Slide
22-31


        Net Income Adjustments for
        Changes in Assets and Liabilities
                       Increase   Decrease


            Asset        -          +
           Liability     +          -
  Slide
  22-32



          Others Affect Cash, but by an
          Amount Different from the Expense
                                                           Cash Flows from Operating Activities
           INCOME STATEMENT                  INDIRECT METHOD                    DIRECT METHOD
                                           Net income                $12
                                           Adjustments :
           Sales                   $100    Increase in A/R           (2)        Cash from customers     $98
           Investment rev.           3     [No adjustment]                      Cash from investments     3

           Gain - sale of land       8

           Cost of goods sold       (60)   Decr. in inventory         4
                                           Increase in A/P            6         Cash to suppliers       (50)
Convert    Salaries expense         (13)   Increase in sal. pay.      2         Cash to employees       (11)
 from
           Depreciation exp.        (3)
Accrual
           Interest exp.            (5)    Decr. in bond disc.        2         Cash for interest        (3)
to Cash
           Insurance exp.           (7)    Decr. in pre„d ins.        3         Cash for insurance       (4)
           Loss - sale of equip.    (2)

           Income tax exp.          (9)    Decrease in I.Tax/P       (2)        Cash paid for taxes     (11)
                                           Net cash flows from                  Net cash flows from
           Net Income              $ 12     operating activities                 operating activities
Slide
22-33


        COMPARISON OF DIRECT AND
        INDIRECT METHODS
                                                           Cash Flows from Operating Activities
         INCOME STATEMENT                  INDIRECT METHOD                      DIRECT METHOD
                                         Net income                  $12
                                         Adjustments :
         Sales                   $100    Increase in A/R             (2)        Cash from customers               $98
         Investment rev.           3     [No adjustment]                        Cash from investments               3

         Gain - sale of land       8     Gain - sale of land         (8)        [Not reported–no cash effect]

         Cost of goods sold       (60)   Decr. in inventory           4
                                         Increase in A/P              6         Cash to suppliers                 (50)
         Salaries expense         (13)   Increase in sal. pay.        2         Cash to employees                 (11)
         Depreciation exp.        (3)    Depreciation exp.            3         [Not reported – no cash effect]

         Interest exp.            (5)    Decr. in bond disc.          2         Cash for interest                  (3)
         Insurance exp.           (7)    Decr. in pre„d ins.          3         Cash for insurance                 (4)
         Loss - sale of equip.    (2)    Loss - sale of equip.        2         [Not reported – no cash effect]

         Income tax exp.          (9)    Decrease in I.Tax/P         (2)        Cash paid for taxes               (11)
                                         Net cash flows from                    Net cash flows from
         Net Income              $ 12     operating activities       $22         operating activities             $22

								
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