1 chapter 12 the statement of cash flows financial accounting 4e by porter and norton

1

Chapter 12

The Statement of Cash Flows

A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

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ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

Financial Accounting 4e by Porter and Norton

2

Cash Flows and Net Income for Four Computer Companies in 2001

IBM

Sun Microsystems

Gateway, Inc.

Western Digital

Increase(Decrease) Net

Incomein Cash (Loss)

$ 2,767 $ 7,723

(377) 927

247 (1,034)

(16) (99)

(in millions)

3

Purpose of the Statement of Cash Flows

Explains changes in cash over a period of time

OperatingActivities

FinancingActivities

InvestingActivities

Summarizes cash inflows and outflows from:

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Cash EquivalentsA



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1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

Readily convertible to cash

Little risk of price change

Original maturity to investor of three months or less

Examples:• Commercial paper• U.S. Treasury bills• Certain money market funds

5

Statement of Cash Flows Format

Classified by:Operating activitiesInvesting activitiesFinancing activities

outflowsinflows Cash

Increase or decrease in cash

BeginningCash +

= EndingCash

=

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Statement of Cash Flows FormatCash flows from operating activities:

Inflows $ xxxOutflows (xxx)

Net cash provided (used) by operating activities $ xxxCash flows from investing activities:


Net cash provided (used) by investing activities xxxCash flows from financing activities:


Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $ xxxCash and cash equivalents at beginning of year xxxCash and cash equivalents at end of year $ xxx

from balance sheets

7

Cash transactions

concerned with acquiring and

selling products and services

Make Inventory Purchases

Sell Products and Services

Incur Employee Salaries and Wages

Incur Utility andother Operating

Costs

Operating Activities

8

Cash transactions concerned with acquiring and

disposing of long-term assets

Purchase/Sell Intangible Assets (i.e. Patents, trademarks, etc.)

Buy/SellProperty, plant

& equipment

Purchase/SellLong-Term Investments

Investing Activities

9

Cash transactions

concerned with internal and

external financing of the business

Issue/Retire Bonds

Borrow $/Repay Loans

Sell/Repurchase Stocks

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Issue DividendsPay

check

for

Date

Dept.

of Tre

asurer

Jane D

oe

Financing Activities

10

Categorizing Cash Flow Activities

Current Assets

andCurrent

Liabilities

IncomeStatement

Transactions

Operating Activities

Long-Term Liabilities

or Stockholders’

Equity

Financing ActivitiesLong-Term

Assets

Investing Activities

11

Methods to ReportCash from Operating Activities

Direct Method

Indirect Method

both methods arrive at same

cash from operating activities

reports major classes of cash receipts and payments

adjusts net income to remove effect of accruals and deferrals

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Preparing the Statement of CashFlows: Direct Method

Step 1– Set up three master T accounts

Cash Flows fromOperating Activities

Cash Flows fromInvesting Activities

Cash Flows fromFinancing Activities

Step 2– Determine the cash flows from operating

activities

13

Bal. Jan. 1 57,000

Bal. Dec. 31 63,000

From BalanceSheet

Accounts Receivable

??? Cash collections

Direct Method - Operating Activities

Review journal entries recorded during period:

Sales on account 670,000

Accounts receivable 670,000Sales (from income statement) 670,000

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Accounts Receivable

Bal. Jan. 1 57,000

Bal. Dec. 31 63,000

Sales on account 670,000

664,000 Cash collections


Review journal entries recorded during period:Accounts receivable 670,000

Sales (from income statement) 670,000

From BalanceSheet

15

Interest Revenue

15,000 Interest earned and received


Review journal entries recorded during period:Cash 15,000

Interest Revenue 15,000

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Inventory



Bal. Jan. 1 92,000

Bal. Dec. 31 84,000

From BalanceSheet

Purchases on account ???

390,000 Cost of goods sold

Cost of Goods Sold (from Inc. Stmt.) 390,000 Inventory 390,000

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Accounts Payable



31,000 Bal. Jan. 1

38,000 Bal. Dec. 31

From BalanceSheet

Cash payments ??? 382,000 Purchases

Inventory 382,000 Accounts Payable 382,000

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Accounts Payable



31,000 Bal. Jan. 1

38,000 Bal. Dec. 31

From BalanceSheet

Cash payments 375,000 382,000 Purchases

Accounts Payable 375,000 Cash 375,000

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Salaries and Wages Payable



9,000 Bal. Jan. 1

7,000 Bal. Dec. 31

From BalanceSheet

Cash payments ??? 60,000 Expense

Salary and Wages Expense 60,000 Salaries and Wages Payable 60,000

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Salaries and Wages Payable



9,000 Bal. Jan. 1

7,000 Bal. Dec. 31

From BalanceSheet

Cash payments 62,000 60,000 New unpaid wages

Salary and Wages Payable 62,000 Cash 62,000

21


Review journal entries recorded during period:Depreciation Expense 40,000

Accumulated Depreciation 40,000

There is no effect on cash flow from depreciation.

22

Prepaid Insurance



Bal. Jan. 1 18,000

Bal. Dec. 31 12,000

From BalanceSheet

Cash payments ??? 12,000 Expense

Insurance Expense 12,000 Prepaid Insurance 12,000

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Prepaid Insurance



Bal. Jan. 1 18,000

Bal. Dec. 31 12,000

From BalanceSheet

Cash payments 6,000 12,000 Expense

Prepaid Insurance 6,000 Cash 6,000

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Interest Expense



Bal. Jan. 1 0

Bal. Dec. 31 0

From BalanceSheet

Cash payments 15,000 15,000 Expense

Interest Expense 15,000 Cash 15,000

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Income Taxes Payable



5,000 Bal. Jan. 1

8,000 Bal. Dec. 31

From BalanceSheet

Cash payments ???50,000 Expense

Income Taxes Expense 50,000 Income Taxes Payable 50,000

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5,000 Bal. Jan. 1

8,000 Bal. Dec. 31

From BalanceSheet

Cash payments 47,00050,000 Expense

Income Taxes Payable 47,000 Cash 47,000

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Cash Flows From Operating Activities

Net cashinflows 174,000

375,000 Inventory purchases 62,000 Salaries and wages 6,000 Insurance 15,000 Interest 47,000 Taxes

Cash receipts from: Cash payments for: Sales on account 664,000 Interest 15,000

Master T Account for Cash Flows from Operating Activities

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Step 3– Determine the cash flows from investing

activities

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Long-Term Investments

Direct Method – Investing Activities


Bal. Jan. 1 90,000

Bal. Dec. 31 120,000

From BalanceSheet

Purchases 30,000

Long-Term Investments 30,000 Cash 30,000

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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

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Property & Equipment



Bal. Jan. 1 280,000

Bal. Dec. 31 320,000

From BalanceSheet

Acquisitions 75,000

Property & Equipment 75,000 Cash 75,000

??? Disposals

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Accumulated Depreciation


Book value of equipment sold was $20,000. Original cost of equipment was $35,000.

75,000 Bal. Jan. 1

100,000 Bal. Dec. 31

From BalanceSheet

40,000 ExpenseDisposals 15,000

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Cash Flows From Investing Activities

80,000 Net cash outflows

30,000 Purchase of investments

75,000 Purchase of property and equipment

Cash receipts from: Cash payments for: Sale of machine 25,000

Master T Account for Cash Flows from Investing Activities

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Step 4– Determine the cash flows from

financing activities

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1985

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Payche

ck for

Date

Dept.

of Tre

asurer

Jane D

oe

35

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

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Bonds Payable



260,000 Bal. Jan. 1

200,000 Bal. Dec. 31

From BalanceSheet

Retirement 60,000

Loss on Retirement of Bonds 3,000Bonds Payable 60,000

Cash 63,000

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Capital Stock



75,000 Bal. Jan. 1

100,000 Bal. Dec. 31

From BalanceSheet

25,000 Stock issued

Cash 25,000 Capital Stock 25,000

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Retained Earnings



193,000 Bal. Jan. 1

246,000 Bal. Dec. 31

From BalanceSheet

120,000 Net income 2004

Retained Earnings 67,000 Cash 67,000

Cash dividends 67,000

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Cash Flows From Financing Activities

Net cash inflows

Cash receipts from: Cash payments for:

• Debt Retirements• Dividends• Stock Repurchases

• Sale of Stock• Borrowings

Master T Account for Cash Flows from Financing Activities

Net cash outflows-OR-

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Cash Flows From Financing Activities

105,000 Net cash outflows

63,000 Retirement of bonds

67,000 Payment of cash dividends

Cash receipts from: Cash payments for: Issuance of stock 25,000

Master T Account for Cash Flows from Financing Activities

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Noncash Investing and Financing Activities

Disclose important financing and investing activities which do not require cash

Buy Assets through Debt Financing from Supplier

Exchange Stock for Assets

Certificate of Stock

Examples:

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Statement of Cash Flows FormatCash flows from operating activities:


Net cash provided (used) by operating activities $ xxxCash flows from investing activities:


Net cash provided (used) by investing activities xxxCash flows from financing activities:


Net cash provided (used) by financing activities xxxNet increase (decrease) in cash and cash equivalents $ xxxCash and cash equivalents at beginning of year xxxCash and cash equivalents at end of year $ xxx

Only section of statement that differs in form between direct and indirect method (net cash flow total is the

same)

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Indirect Method - Operating Activities

Income Statement

Cash Flows from Operating Activities

Conversion of accrual

to cash basis

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Bal. Jan. 1 57,000

Bal. Dec. 31 63,000

Accounts Receivable

Net increase 6,000


Net cash flows from operating activities:Net income xx,xxxAdjustments to reconcile net income:

Increase in accounts receivable (6,000)

Decrease $6,000

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Bal. Jan. 1 92,000

Bal. Dec. 31 84,000

Inventory

8,000 Net decrease



Increase in accounts receivable (6,000)Decrease in inventory 8,000

Increase $8,000

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Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000

Increase $7,000

Accounts Payable

31,000 Bal. Jan. 1

38,000 Bal. Dec. 31

7,000 Net increase

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Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000)

Decrease $2,000

Salaries & Wages Payable

9,000 Bal. Jan. 1

7,000 Bal. Dec. 31

Net decrease 2,000

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Indirect Method - Operating ActivitiesNet cash flows from operating activities:

Net income xx,xxxAdjustments to reconcile net income:

Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000

Decrease $6,000

Prepaid Insurance

Bal. Jan. 1 18,000

Bal. Dec. 31 12,000

6,000 Net decrease

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Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Increase in income taxes payable 3,000

Increase $3,000


5,000 Bal. Jan. 1

8,000 Bal. Dec. 31

3,000 Net increase

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Increase in accounts receivable ( 6,000)Decrease in inventory 8,000Increase in accounts payable 7,000Decrease in salaries & wages payable ( 2,000) Decrease in prepaid insurance 6,000Increase in income taxes payable 3,000Gain on sale of machine ( 5,000)Depreciation expense 40,000Loss on retirement of bonds 3,000

Add back noncash expense

Gain is not part of operating activities

Report entire outflow as a

financing activity

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Cash Flow Adequacy

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

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Appendix

Accounting Tools:

A Work-Sheet Approach to the

Statement of Cash Flows

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Indirect Method: Using a Work Sheet

Enter account balances

54


Record investing &

financing activities

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Enter net income

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Enter noncash revenues or expenses

57


Extend current assets& current liabilities

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Total columns

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Determine net cash inflow (outflow)

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End of Chapter 12

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1985

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1 chapter 12 the statement of cash flows financial accounting 4e by porter and norton

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