17 - 1 ©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber the...

17 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

The Statement of Cash Flows

Chapter 17


The statement of cash flowsreports the entity’s cash flows

(cash receipts and cash payments)during the period.

Purpose of The Statement ofCash Flows: Basic Concepts


Identify the purposes ofthe statement of cash

flows.

Objective 1


Purposes of the Statementof Cash Flows

Statementof Retained

Earnings

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)

Statementof CashFlows

IncomeStatement

BalanceSheet

BalanceSheet


Purposes of the Statementof 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.


Report cash flows from operating,

investing, and financing activities.

Objective 2


Basic Organization of theStatement of Cash Flows

A business may be evaluated in terms of three types of business activities:

1 Operating activities2 Investing activities3 Financing activities


Operating Activities

Operating activities are related to thetransactions that make up net income.Operating activities are related to thetransactions that make up net income.

Interest and dividends received arerelated to investing activities.

Interest and dividends received arerelated to investing activities.

However, the FASB has decided to classify thecash received from these items as operating activities.

However, the FASB has decided to classify thecash received from these items as operating activities.


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

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

Investing Activities

Investing activities are related to theLong-Term Asset accounts.

Investing activities are related to theLong-Term Asset accounts.


These are transactions involving obtainingresources from the owners or returning

resources to them.

These are transactions involving obtainingresources from the owners or returning

resources to them.

Financing Activities

It also involves obtaining resources from creditors and repaying the

amount borrowed.

It also involves obtaining resources from creditors and repaying the

amount borrowed.


Format of the Statementof Cash Flows

FASB Statement 95 approved two methods for reporting cash flows from operating activities.

1 Direct method2 Indirect method


Format of the Statementof Cash Flows

The direct method lists cash receipts from specific operating activities and cash payments for each major operating activity.

The indirect method is a short-cut method for accrual systems.


Prepare a statement of cash

flows by the direct method.

Objective 3


Cash flows from operating activities:Receipts:Collections from customers $271Interest received on notes receivable 10Dividends received on investments in stock 9Total receipts $290

Statement of Cash Flows (Direct Method)Year Ended December 31, 2002 (Thousands)

The Direct Method


Payments:To suppliers $133To employees 58For interest 16For income tax 15Total payments 222Net cash inflows from operating activities $ 68

The Direct Method



Cash flows from investing activities:Acquisition of plant assets $(306)Loan to another company (11)Proceeds from sale of plant assets 62Net cash outflow frominvesting activities $(255)

The Direct Method



Cash flows from financing activities:Proceeds from issuance of common stock $101Proceeds from issuance of long-term notes payable 94Payment of long-term notes payable (11)Payment of dividends (17)Net cash inflow from financing activities $167

The Direct Method



Net cash inflows from operating activities $ 68Net Cash outflow from investing activities (255)Net Cash inflow from financing activities 167Net (decrease in cash) $(20)Cash balance, December 31, 2001 42Cash balance, December 31, 2002 $ 22

The Direct Method



Compute the cash effects

of a wide variety ofbusiness transactions.

Objective 4


Revenues or expenses from the income statement

+–

Adjusted for the change in therelated balance sheet account(s)

Amount for the statement of cash flows

=

Computing Individual Amounts for the Statement of Cash Flows


Revenues and gains:Sales revenue $284Interest revenue 12Dividend revenue 9Gain on sale of plant assets 8Total revenues and gains $313


Income StatementYear Ended December 31, 2002 (Thousands)


Expenses:Cost of goods sold $150Salary expense 56Depreciation expense 18Other operating expense 17Interest expense 16Income tax expense 15Total expenses $272



Total revenues and gains $313Total expenses 272Net income $ 41


Income StatementYear Ended December 31, 2002 (Thousands)


Assets 20x2 20x1 Inc./(Dec.)Current:Cash $ 22 $ 42 $ (20)Accounts receivable 93 80 13Interest receivable 3 1 2Inventory 135 138 (3)Prepaid expenses 8 7 1Long-term receivable 11 – 11Plant assets, net 453 219 234Total assets $725 $487 $238

Comparative Balance Sheets


Liabilities 20x2 20x1 Inc./(Dec.)Current:Accounts payable $ 91 $ 57 $ 34Salary payable 4 6 (2)Accrued liabilities 1 3 (2)Long-term notes payable 160 77 83Stockholders’ equity:Common stock 359 258 101Retained earnings 110 86 24Total liabilities andshareholders’ equity $725 $487 $238

Comparative Balance Sheets


Computing Cash Collectionsfrom 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 Collectionsfrom Customers

$80,000 + $284,000 – 93,000 = $271,000 Because Accounts Receivable increased by

$13,000, the business received $13,000 less cash than its sales revenue for the period.

All collections of receivables are computed following the pattern illustrated for collections from customers.


Computing Paymentsto Suppliers

This computation includes two parts, payments for inventory and payments for expenses other than interest and income tax.

Payments for inventory are computed by converting cost of goods sold to the cash basis.

This is accomplished by analyzing the Inventory and Accounts Payable accounts.


Payments for Inventory

Inventory

Beg. inventory 138,000

Purchases x

Cost of goods sold 150,000

End. inventory 135,000



How much were the purchases? $138,000 + x – $150,000 = $135,000 x = $135,000 – $138,000 + $150,000 $147,000



Accounts Payable

Payments forinventory x

Beg. balance 57,000

End. balance 91,000

Purchases 147,000



How much did the business pay for this inventory?

$57,000 + $147,000 – x = $91,000 x = $57,000 + $147,000 – $91,000 x = $113,000


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.


Payments to Employees

Salary Payable was $6,000 at the beginning of the year and $4,000 at year end.

During the year Salary and Wages Expense was $56,000.

How much did the business pay? $58,000


Acquisition and Salesof Plant Assets

The business had plant assets net of depreciation of $219,000 at the beginning of the year and $453,000 at year end.

Further, the acquisition of plant assets amounted to $306,000 during the year.



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



$219,000 + $306,000 – $18,000 – x = $453,000 x = $219,000 + $306,000 – $18,000 – $453,000 x = $54,000 (book value) How much are the proceeds from the sale

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 Amountsof Financing Activities

Financing activities affect liability and stockholders’ equity accounts.

– Notes Payable– Bonds Payable– Long-Term Debt– Common Stock– Paid-in Capital– Retained Earnings


Issuance and Payments ofLong-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 the Dividends Payable account.

Beginning balance + Dividends declared – Dividend payments = Ending balance


Noncash Investing andFinancing 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.


Reconciling Net Incometo 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).


Prepare a statement of cash flows

by the indirect method.

Objective 5


Current Assets

Add to Net Income if this account has decreased

The Indirect Method

Deduct from Net Income if this account has increased


Current Liabilities

Add to Net Income if this account has increased

The Indirect Method

Deduct from Net Income if this account has decreased


Statement of Cash Flows (Indirect Method)Year Ended December 31, 2002 (Thousands)

Cash flows from operating activities:Net Income $41Add (deduct) items that affect net incomeand cash flows differently:Depreciation 18Gain on sale of plant 8Increase in accounts receivable (13)Increase in interest receivable (2)Decrease in inventory 3

The Indirect Method


Add (deduct) items that affect net incomeand cash flows differently:Increase in prepaid expenses (1)Increase in accounts payable 34Decrease is salary payable (2)Decrease in accrued liabilities (2)Net cash inflow from operating activities $68

The Indirect Method

Statement of Cash Flows (Indirect Method)Year Ended December 31, 2002 (Thousands)


End of Chapter 17

17 - 1 ©2002 prentice hall, inc. business publishing accounting, 5/e horngren/harrison/bamber the...

Documents