5-1 statement of cash flows: direct and indirect methods chapter 5 illustrated solution: exercises...

5-1

Statement of Cash Flows:Direct and Indirect Methods

Chapter 5Illustrated Solution: Exercises 23 & 24Illustrated Solution: Exercises 23 & 24

5-2

Accrual AccountingAccrual Accounting

Revenues and Expenses Cash Flows

5-3



Ending Cash = $22

Beginning Cash = 16

Change in Cash = 6

5-4



Ending Cash = $22

Beginning Cash = 16

Change in Cash = 6

Three Activities: Two Methods:

Operating Indirect

* Investing Direct

* Financing

* Identical under both the Indirect and the Direct Method

5-5

Indirect MethodIndirect Method

Worksheet format illustrated on text page 245

Cash Flows from OperationsIncome Statement Adjustments

5-6


Cash Flows from Operations

Sales 1,300

Depreciation expense (60)General expenses (240)Interest expense (15)Income tax expense (35)Net income 70

Income Statement Adjustments

Cost of goods sold (880)

5-7


a. Decrease in accounts receivable

b. Increase in inventory

c. Increase in accounts payable

d. Amount of reported depreciation expense

e. Increase in prepaid general expenses

f. Increase in interest payable

g. Decrease in income taxes payable


Sales 1,300 abc

Depreciation expense (60) dGeneral expenses (240) eInterest expense (15) fIncome tax expense (35) gNet income 70



5-8









a. Cash………….50A/R ………..50


Sales 1,300 abc




5-9


a. Cash………….50A/R ………..50

Add decrease in accounts receivable—cash inflow > revenue









Sales 1,300 a 50 1,350 bc




5-10


b. Inventory….….30????………..30









Sales 1,300 a 50 1,350 bc




5-11


Assume no changein Accounts Payable

b. Inventory….….30Cash………..30









Sales 1,300 a 50 1,350 bc




5-12


Add increase in inventory—cash outflow > expense









Sales 1,300 a 50 1,350 b (30)c



Cost of goods sold (880) (910)

b. Inventory….….30Cash………..30

5-13










Sales 1,300 a 50 1,350 b (30)c




c. Inventory….….25Acct. Pay…..25

5-14










Sales 1,300 a 50 1,350 b (30)c 25




c. Inventory….….25Acct. Pay…..25

5-15










Sales 1,300 a 50 1,350 b (30)c 25




d. Dep. Exp….….60Acc. Dep…..60

5-16


Add back depreciation expense—cash outflow is

zero.









Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) eInterest expense (15) fIncome tax expense (35) gNet income 70

(885)



d. Dep. Exp….….60Acc. Dep…..60

5-17


Problem assumes all A/P relate to inventory

purchases









Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) eInterest expense (15) fIncome tax expense (35) gNet income 70

(885)



e. Prepaids.….….8Cash………..8

5-18


Add increase in prepaids—cash outflow > expense









Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) e (8) (248)Interest expense (15) fIncome tax expense (35) gNet income 70



e. Prepaids.….….8Cash………..8

5-19










Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) e (8) (248)Interest expense (15) fIncome tax expense (35) gNet income 70



f. Int. Exp….….….2Int. Pay……..2

5-20


Subtract increase in interest payable—cash

outflow < expense









Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) e (8) (248)Interest expense (15) f 2 (13)Income tax expense (35) gNet income 70

(885)



f. Int. Exp….….….2Int. Pay……..2

5-21










Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) e (8) (248)Interest expense (15) f 2 (13)Income tax expense (35) gNet income 70

(885)



g. Tax Pay...….….17Cash….……..17

5-22


Add decrease in taxes payable—cash

outflow > expense









Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) e (8) (248)Interest expense (15) f 2 (13)Income tax expense (35) g (17) (52)Net income 70

(885)



g. Tax Pay...….….17Cash….……..17

5-23


Compute Net Cash Flow from Operations









Sales 1,300 a 50 1,350 b (30)c 25

Depreciation expense (60) d 60 - General expenses (240) e (8) (248)Interest expense (15) f 2 (13)Income tax expense (35) g (17) (52)Net income 70 152

(885)



5-24


To compute Cash Flows from operating activities under the indirect method, we start with net income and make adjustments for changes in all current assets and current liabilities.


Sales 1,300 a 50 1,350 b (30)c 25




5-25



Sales 1,300 a 50 1,350 b (30)c 25


(885)



To compute Cash Flows from operating activities under the indirect method, we start with net income and make adjustments for changes in all current assets and current liabilities.

We just did this on the worksheet!

5-26


LaForge CompanyStatement of Cash Flows (Indirect Method)

For the Year Ended December 31, 2002(Dollars in thousands)

Cash flows from operating activities:Net income $ 70Adjustments:

Depreciation expense $ 60Decrease in accounts receivable 50Increase in inventory (30)Increase in prepaid general expenses (8)Increase in accounts payable 25Increase in interest payable 2Decrease in income taxes payable (17) 82

Net cash provided by operating activities $ 152

5-27

Direct MethodDirect Method

To compute Cash Flows from operating activities under the direct method, we simply list all the cash inflows and cash outflows from operations—we don’t start with net income.

5-28


To compute Cash flows from operating activities under the direct method, we simply list all the cash inflows and cash outflows from operations—we don’t start with net income.

We just did this on the worksheet!


Sales 1,300 a 50 1,350 b (30)c 25




5-29


LaForge CompanyStatement of Cash Flows (Direct Method)For the Year Ended December 31, 2002

(Dollars in thousands)

Cash flows from operating activities:Cash receipts from customers $ 1,350Cash payments for:

Purchases of inventory $ (885)General expenses (248)Interest expense (13)Income tax expense (52) (1,198)

Net cash provided by operating activities $ 152

5-30

Investing ActivitiesInvesting Activities

COMPUTATIONS:

Beginning plant assets $ 1,000Less: Plant assets sold 330Add: Plant assets purchased ??Equals Ending plant assets $ 1,019

Cash flows from investing activities:Sale of plant assets $ 200Purchase of plant assetsNet cash used in investing activities

5-31

Investing ActivitiesInvesting Activities

Cash flows from investing activities:Sale of plant assets $ 200Purchase of plant assets (349)Net cash used in investing activities $ (149)

COMPUTATIONS:

Beginning plant assets $ 1,000Less: Plant assets sold 330Add: Plant assets purchasedEquals Ending plant assets $ 1,019

349

5-32

Cash flows from financing activities:Issuance of bonds payable $ 40Issuance of common stock 38Payment of cash dividends (75)

Net cash provided by financing activities $ 3

COMPUTATIONS:

Beginning bonds payable $ 77Ending bonds payable 117Increase (bonds payable issued) $ 40

Beginning common stock $ 300Ending common stock 338Increase (common stock issued) $ 38

Financing ActivitiesFinancing Activities

5-33

Solution to Exercise 5-23 (Indirect)Solution to Exercise 5-23 (Indirect)

5-34

Solution to Exercise 5-24 (Direct)Solution to Exercise 5-24 (Direct)

5-35

End of ProblemEnd of Problem

5-1 statement of cash flows: direct and indirect methods chapter 5 illustrated solution: exercises...

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