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Learning Objectives

Power Notes

1. Purpose of the Statement of Cash Flows

2. Reporting Cash Flows

3. Statement of Cash Flows – The Indirect Method

4. Statement of Cash Flows – The Direct Method

5. Financial Analysis and Interpretation

Chapter F14

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Statement of Cash Flows Statement of Cash Flows

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Cash FlowsCash Flows

Increases in Cash

(receipts from revenues)

(payments for dividends, and redemption of debt securities)

(payments for expenses)

(receipts from sales of noncurrent assets)

(receipts from issuing equity and debt securities)

(payments for aquiring noncurrent assets)

Decreases in Cash

Operating Operating

Investing Investing

Financing Financing

Operating Operating

Investing Investing

Financing Financing

CashCash

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Cash Flows – Operating ActivitiesCash Flows – Operating Activities

Typical cash inflows Typical cash outflows

Sales of goodsSales of goodsand servicesand services

Merchandise Merchandise purchasespurchases

Payments of wages Payments of wages & other expenses& other expenses

Tax paymentsTax payments

Interest RevenueInterest Revenue

Dividend RevenueDividend Revenue

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Cash Flows – Investing ActivitiesCash Flows – Investing Activities

Typical cash inflows Typical cash outflows

Sales of fixed assets Sales of fixed assets and other long-term and other long-term

investmentsinvestments

Sale of marketable Sale of marketable securities and securities and investmentsinvestments

Purchase of fixed assets Purchase of fixed assets and other long-term and other long-term

investmentsinvestments

Purchase of Purchase of marketable securities and marketable securities and

investmentsinvestments

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Cash Flows – Financing ActivitiesCash Flows – Financing Activities

Typical cash inflows Typical cash outflows

Sales (issuance) Sales (issuance) of stockof stock

Sale (issuance) of Sale (issuance) of bonds and other money bonds and other money

market debtmarket debt

Purchase ofPurchase oftreasury stocktreasury stock

Repayment and Repayment and redemption of debt redemption of debt

(bonds, notes, other)(bonds, notes, other)

Payment of cash Payment of cash dividendsdividends

Borrowing from banks Borrowing from banks and other lending and other lending

institutionsinstitutions

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Cash flows from operating activities:

Cash flows from investing activities:

Cash flows from financing activities:

NetSolutionsStatement of Cash Flows – Direct MethodFor the Month Ended November 30, 2002

Cash received from customers $ 7,500Deduct cash payments for expenses

and payment to creditors 4,600Net cash flow from operating activities $ 2,900

Cash payments for acquiring land (20,000)

Cash received as owner’s investment $25,000Deduct cash withdrawal by owner 2,000Net cash flow from financing activities 23,000

Net cash flow and ending cash balance $ 5,900

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Cash flows from operating activities:

Cash flows from investing activities:

Cash flows from financing activities:

Net income, per income statement $ 3,050Add increase in accounts payable 400Deduct increase in supplies (550)Net cash flow from operating activities $ 2,900

Cash payments for acquiring of land (20,000)

Cash received as owner’s investment $25,000Deduct cash withdrawal by owner 2,000Net cash flow from financing activities 23,000

Net cash flow and ending cash balance $ 5,900

NetSolutionsStatement of Cash Flows – Indirect Method

For the Month Ended November 30, 2002

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Cash flows from operating activities:

NetSolutionsStatement of Cash Flows – Direct MethodFor the Month Ended November 30, 2002

Cash flows from operating activities:

NetSolutionsStatement of Cash Flows – Indirect Method

For the Month Ended November 30, 2002

Cash received from customers $ 7,500Deduct cash payments for expenses

and payment to creditors 4,600Net cash flow from operating activities $ 2,900$ 2,900

Net income, per income statement $ 3,050Add increase in accounts payable 400Deduct increase in supplies (550)Net cash flow from operating activities $ 2,900$ 2,900

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CashLiabilitiesLiabilities

Stockholders’Stockholders’EquityEquity

Balance Sheet

NoncashNoncashAssetsAssets

The cash flows are determined by analyzing liabilities, stockholders’ equity, and noncash assets.

Assets = Liabilities + Stockholders’ Equity

Cash + Noncash Assets = Liabilities + Stockholders’ Equity

Cash Cash = Liabilities + Stockholders’ Equity – Noncash Assets

11 22 33

11

22

33

Cash Relationships and Cash Flows Cash Relationships and Cash Flows

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Changes in Current AccountsChanges in Current Accounts

Change

Accounts 2003 2002 Debit Credit

Trade receivables (net) $74,000 $65,000

Inventories 172,000 180,000

Accounts payable (mdse.) 43,500 46,700

Accrued expenses payable 26,500 24,300

Income taxes payable 7,900 8,400

9,000

8,000

3,200

2,200

500

These debit changes are subtracted from net income in the operating activities section of the statement of cash flows.

Think of these debits as deductions from net income in arriving at net cash flow from operations.

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Changes in Current AccountsChanges in Current Accounts

Change

Accounts 2003 2002 Debit Credit

Trade receivables (net) $74,000 $65,000

Inventories 172,000 180,000

Accounts payable (mdse.) 43,500 46,700

Accrued expenses payable 26,500 24,300

Income taxes payable 7,900 8,400

9,000

8,000

3,200

2,200

500

These credit changes are added to net income in the operating activities section of the statement of cash flows.

Think of these credits as additions to net income in arriving at net cash flow from operations.

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Cash flows from operating activities:

Operating Activities – Indirect MethodOperating Activities – Indirect Method

Start with the accrual basis net income shown on the income statement.

Net income, per income statement $108,000

Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200

$125,200 Increase in accounts receivables $ 9,000

Decrease in accounts payable 3,200Decrease in income taxes payable 500Gain on sale of land 12,000 24,700

Net cash flow from operating activities $100,500

Deduct:

Add:

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 Cost of merchandise sold 790,000 Gross profit $390,000Operating expenses:

Depreciation expense $ 7,000 Other operating expenses 196,000

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 Other expense:

Interest expense 8,000 4,000 Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000

Debit CreditSales 1,180,000Receivables 9,000Cash 1,171,000

ChangesCash collectedfrom customers

Note: The changes in the current balance sheet accounts are determined by comparing the beginning and ending balances. Receivables increased by $9,000 during the period.

Note: The changes in the current balance sheet accounts are determined by comparing the beginning and ending balances. Receivables increased by $9,000 during the period.

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000Gross profit $390,000Operating expenses:

Depreciation expense $ 7,000 Other operating expenses 196,000

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 Other expense:

Interest expense 8,000 4,000 Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000

Debit CreditCost of mdse. sold 790,000Inventories 8,000Accounts payable 3,200Cash

ChangesCash payments for

merchandise

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000Operating expenses:

Depreciation expense $ 7,000 Other operating expenses 196,000

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 Other expense:

Interest expense 8,000 4,000 Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000

Debit CreditDepr. expense 7,000Accum. depreciation 7,000

ChangesDepreciation

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000Operating expenses:

Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800)

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 Other expense:

Interest expense 8,000 4,000 Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000

ChangesDebit CreditOperating expenses 196,000Accrued expenses 2,200Cash 193,800

ChangesCash payments for operating expenses

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $390,000Operating expenses:

Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800)

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 0 Other expense:

Interest expense 8,000 4,000 Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000

Debit CreditCash 72,000Investments 60,000Gain on sale of invest. 12,000

ChangesGain on sale of investments

The cash inflow of $72,000 will be shown in the investing section of the statement of cash flows.

The cash inflow of $72,000 will be shown in the investing section of the statement of cash flows.

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000Operating expenses:

Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800)

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 0 Other expense:

Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000 Net income $ 108,000

Debit CreditInterest expense 8,000Cash

ChangesCash paid forinterest expense

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000Operating expenses:

Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800)

Total operating expenses 203,000Income from operations $187,000Other income:

Gain on sale of land $12,000 Other expense:

Interest expense 8,000 4,000 (8,000) Income before income tax $ 191,000Income tax 83,000 (83,500) Net income $ 108,000

Debit CreditIncome tax expense 83,000Income tax payable 500Cash 83,500

ChangesCash paid forincome taxes

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Rundell Inc.Income Statement

For the Year Ended December 31, 2003 Cash Basis

Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $ 390,000Operating expenses:

Depreciation expense $ 7,000 0 Other operating expenses 196,000 (193,800)

Total operating expenses 203,000Income from operations $ 187,000Other income:

Gain on sale of land $12,000 0 Other expense:

Interest expense 8,000 4,000 (8,000) Income before income tax $ 191,000Income tax 83,000 (83,500) Net income $ 108,000 $ 100,500

Two different viewsof income from

operations

Two different viewsof income from

operations

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Cash flows from operating activities:

Operating Activities – Direct MethodOperating Activities – Direct Method

Cash inflows:

Cash received from customers $1,171,000

Cash outflows:

Cash payments for merchandise $785,200

Cash payments for operating expenses 193,800

Cash payments for interest 8,000

Cash payments for income tax 83,500 1,070,500

Net cash flow from operating activities $ 100,500

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Financial Analysis and InterpretationFinancial Analysis and Interpretation

Free Cash Flow Free Cash Flow Free Cash Flow Free Cash Flow

Use: To measure operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.

Use: To measure operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends.

Cash flow from operations $1,400,000 Less: Cash invested in fixed

assets to maintain capacity (450,000)Less: Cash used for dividends (100,000) Free cash flow $ 850,000