Stock Statement Format

					Statement of Cash Flows

THE CONTENT AND VALUE OF THE STATEMENT OF CASH FLOWS
The cash flow statement reconciles beginning and ending cash by presenting the cash receipts
and cash disbursements of an enterprise for an accounting period. The receipts and
disbursements are segregated into three classes of activities. Cash receipts and disbursements
from operating activities report on the cash flows of the enterprise related to its business
operations. Cash receipts and disbursements from investing activities report on the cash flows of
the enterprise related to the acquisition and disposition of noncurrent assets. Cash receipts and
disbursements from financing activities report on the cash flows of the enterprise related to the
acquisition and repayment of debt and equity. The information contained in the statement is
useful to creditors and investors for the following reasons:
1 To assess the entity’s ability to generate cash flows in the future
2 The ability of the entity to pay dividends and meet its obligations
3 Reconciliation between net income in the income statement as net cash flow from operating
    activities in the statement of cash flows.
4 To assess cash and noncash investing and financing activities of the entity during the
    accounting period.

Classification of Cash Flows
There are three classifications of cash flows:
1 Operating activities
   Cash receipts and disbursements are transactions that relate to net income. More specifically
   these transactions relate to operating income. They include cash receipts from the sale of
   products or services, the payment to vendors for inventory and the payment of salaries and
   wages to employees.
2 Investing activities
   Cash receipts and disbursements are transactions that relate to noncurrent assets. They
   include the purchase and disposition of investments and long-lived assets and loans and
   collection of loans to outside parties.
3 Financing activities
   Cash receipts and disbursements are transactions that relate to long-term debt and
   stockholders’ equity. They include borrowing cash from creditors and repayment of such
   loans and the sale of capital stock and the payment of dividends and return of capital to
   equity investors.

Format of the Statement of Cash Flows
The following format is for a statement of cash flows using the indirect method of reporting cash
flows from operating activities.




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Statement of Cash Flows

                                   Spencer Company
                                Statement of Cash Flows
                       For the Period Ended December 31, 20001

Cash flows from operating activities
 Net income                                                           $
 Amortization                                                     +
 Depreciation                                                     +
 Changes in current assets:
  Increases                                                       -
  Decreases                                                       +
 Changes in current liabilites:
  Increases                                                       +
  Decreases                                                       -
Gains from investing or financing                                 -
Losses from investing or financing                                +   $
 Net cash flow from operating activities                              $

Cash flows from investing activities
 Sale of long-term assets                                         +
 Sales of investments                                             +
 Collection of loans                                              +
 Purchase of long-term assets                                     -
 Purchase of investments                                          -
 Loan of funds to outside entities                                -
 Net cash flow from investing activities                              $

Cash flows from financing activities
 Sale of equity securities                                        +
 Issuance of long-term debt                                       +
 Dividends to stockholders                                        -
 Repayment of long-term debt                                      -
 Reacquisition of capital stock                                   -
 Net cash flow from financing activities                              $

Net increase (decrease) in cash                                       $
Cash at beginning of period                                           $
Cash at ending of period                                              $

Steps in Preparation
The statement of cash flows is prepared using the following information:
1 Comparative balance sheets



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Statement of Cash Flows

    The changes between the beginning and ending balance sheets are analyzed to determine the
    sources of changes in cash flows.
2   Current income statement
    The current income statement provides the information required to determine the sources and
    uses of cash during the accounting period.
3   T-account analysis of selected general ledger accounts
    A T-account analysis must be conducted on each account that resulted in a gain or loss from
    investing or financing activities during the accounting period.

There are five steps involved in preparing the statement of cash flows:
1 Determine the change in cash
   Using the work sheet approach (which will be discussed in lesson 2) we compare the
   beginning and ending cash balances to determine the change in cash during the accounting
   period.
2 Determine the net cash flows from operating activities
   a) Direct Method
       The direct method reports cash receipts from sales, cash disbursements as a result of the
       cost of goods sold, operating expenses and income taxes. It is essentially a cash flow
       statement using the income statement format. To determine the cash receipts from sales a
       T-account analysis is conducted of the changes in accounts receivable. Any increase in
       the accounts receivable during the accounting period is subtracted from sales to derive
       the cash collected from sales activities for the period. Likewise, to determine the cost of
       goods sold a T-account analysis of accounts payable and inventory must be conducted to
       calculate the cash paid for inventory sold. The cash disbursements are segregated so that
       cash payments to suppliers (vendors for inventory items), operating expenses and income
       taxes are presented separately. Although the FASB recommends this approach in
       practice few companies actually report using this method. Not only is this more
       complicated and time consuming but entities reporting under this approach must still
       provide the reconciliation that is presented using the indirect method as well.

    Exercise: Spencer Company had the following 2003 income statement:

                   Sales                                          $200,000
                   Cost of goods sold                              120,000
                   Gross profit                                     80,000
                   Operating expenses                               29,000
                   Deprecation                                      21,000
                   Net income                                     $ 30,000

    The following accounts increased during 2003:

                Accounts receivable                          $17,000
                Inventory                                     11,000
                Accounts payable                              13,000
    Prepare the cash flows from operating activities section of Azure’s 2002 statement of cash
    flows using the direct method.


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Statement of Cash Flows


     Cash flows from operating activities:
      Cash received from customers                                      $
      Cash payments:
        Vendors                                                   $
        Operating expenses                                        $
      Net cash provided by operating activities                         $

    Solution:

     Cash flows from operating activities:
      Cash received from customers                                              183,000
      ($200,000 - $17,000)
      Cash payments:
        Vendors                                                       118,000
         ($120,000 + $11,000 - $13,000)
        Operating expenses                                             29,000   147,000
      Net cash provided by operating activities                                 $36,000

    b) Indirect Method
       The indirect method or reconciliation method reports cash flow from operating activities
       by starting with net income. Added back are all noncash charges such as amortization
       and depreciation. Next changes in most current assets and current liabilities are added or
       subtracted. The last adjustment to net income includes the gains and losses from
       investing and financing activities. This reconciliation clearly shows the adjustments from
       the income statement that result in cash flows from operating activities for the accounting
       period. This method is easier to use and is widely used in practice.

    Exercise: Use the information from the exercise above for Spencer Company. Prepare the
    cash flows from operating activities section of Spencer Company’s 2003 statement of cash
    flows using the indirect method.

     Cash flows from operating activities:
      Net income                                                        $
      Adjustments to reconcile net income to net
     cash provided by operating activities:
        Depreciation                                              $
        Increase in accounts payable                              $
        Increase in accounts receivable                           $
        Increase in inventory                                     $     $
      Net cash provided by operating activities                         $




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Statement of Cash Flows

    Solution:

     Cash flows from operating activities:
      Net income                                                                     30,000
      Adjustments to reconcile net income to net cash
     provided by operating activities:
        Depreciation                                                      21,000
        Increase in accounts payable                                      13,000
        Increase in accounts receivable                                  (17,000)
        Increase in inventory                                            (11,000)     6,000
      Net cash provided by operating activities                                     $36,000

3   Determine the net cash flows from investing activities
    Cash flows from investing activities requires an analysis of the purchase or disposition of
    noncurrent assets. This is accomplished by conducting a T-account analysis of the general
    ledger accounts affected by the transaction. For example, if we disposed of a piece of
    equipment, we would need to look at the change in the equipment account, the change in the
    accumulated deprecation account and the reported gain or loss on the income statement. To
    determine the cash flow we would need to start with the gain or loss, add the original cost of
    the equipment that was removed from the general ledger account and subtract the
    accumulated deprecation that was removed from the general ledger account. The result
    would be the actual cash flow from the sale of the piece of equipment.

    Exercise: Spencer Company had the following activities in 2003:

               Sale of long                                           $130,000
               Purchase of inventory                                   845,000
               Purchase of treasury stock                               72,000
               Purchase of equipment                                   415,000
               Issuance of common stock                                320,000
               Purchase of available-for-sale securities                59,000

    Compute the amount Spencer Company should report as net cash provided (used by
    investing activities in its statement of cash flows.

     Cash flows from investing activities:
      Sale of land                                                $
      Purchase of equipment
      Purchase of available-for-sale securities
      Net cash used by investing activities                       $

    Solution:




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Statement of Cash Flows

     Cash flows from investing activities:
      Sale of land                                                      130,000
      Purchase of equipment                                            (415,000)
      Purchase of available-for-sale securities                         (59,000)
      Net cash used by investing activities                            (344,000)

4   Determine the net cash flows from financing activities
    Cash flows from financing activities requires an analysis of the issuance or repayment of
    long-term debt, issuance or repurchase of equity securities and the payment of dividends.
    This is accomplished by conducting a T-account analysis of the general ledger accounts
    affected by the transaction. For example, if the entity issued 100 shares of common stock
    with a par value of $5 for $45 per share, we would analyze the changes in the capital stock
    account and the additional paid-in capital accounts to determine the cash received from the
    sale of stock.

    Exercise: Spencer Company had the following activities in 2003:

               Payment of accounts payable                            $770,000
               Issuance of common stock                                250,000
               Payment of dividends                                    300,000
               Collection of note receivable                           100,000
               Issuance of bonds payable                               510,000
               Purchase of treasure stock                               46,000

    Compute the amount Spencer Company should report as net cash provided (used) by
    financing activities in its 2003 statement of cash flows.

     Cash flows from financing activities:
      Issuance of common stock                                    $
      Issuance of bonds payable                                   $
      Payment of dividends                                        $
      Purchase of treasury stock                                  $
      Net cash provided by financing activities                   $

    Solution:

     Cash flows from financing activities:
      Issuance of common stock                                          250,000
      Issuance of bonds payable                                         510,000
      Payment of dividends                                             (300,000)
      Purchase of treasury stock                                        (46,000)
      Net cash provided by financing activities                         414,000




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Statement of Cash Flows

5   Determine the noncash transactions that explain changes in some of the balance sheet
    accounts
    Every once in a while we will notice a change in a general ledger account that was not the
    result of a cash transaction. For example, if an entity acquires a piece of land worth
    $100,000 by issuing 10,000 share of $5 par value common stock, we would have a debit to
    the land account for $100,000, a credit to the common stock account for $50,000 and a credit
    to additional paid-in capital for $50,000. There was no cash that changed hands but we need
    to reconcile this in our analysis and report if at the bottom of the cash flow statement as a
    noncash transaction that took place during the accounting period.

    Exercise: In 2002, Spencer Company issued 1,000 shares of $10 par value common stock
    for land worth $50,000. Prepare the journal entry to record the transaction.

                         ACCOUNT                                  DEBIT   CREDIT
     Land
      Common stock
      Additional paid-in capital, common stock
     To record the purchase of land through the
     issuance of 1,000 shares of $10 par value
     common stock.

    Solution:

                             ACCOUNT                                  DEBIT      CREDIT
     Land                                                               50,000
      Common stock                                                                 10,000
      Additional paid-in capital, common stock                                     40,000

     To record the purchase of land through the issuance
     of 1,000 shares of $10 par value common stock.

Sources of Information for the Statement of Cash Flows
The comparative balance sheets provide the foundation for analyzing changes in cash.
Information contained in the current year income statement and analysis of selected general
ledger accounts will be necessary in order to complete the analysis. One of the more difficult
accounts to analyze will be the change in retained earning from the beginning to the end of the
period. The two basic entries will include a credit for net income and a debit for dividends
declared. We will discuss additional analysis when we get to C22b where we introduce the use
of the work sheet method. Writedowns, amortization charges, deprecation and amortization are
among those items that have no affect on cash flow although they are include in the income
statement. They must be backed out of net income in order to get cash flows.




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