ch17.ppt

1

CHAPTER 17

STATEMENT OF CASH FLOWSSlides Authored by Slides Authored by

Brian LeventhalBrian Leventhal University of Illinois at University of Illinois at

ChicagoChicago

FINANCIAL REPORTING & ANALYSISFINANCIAL REPORTING & ANALYSISBYBY

REVSINE – COLLINS – JOHNSON REVSINE – COLLINS – JOHNSON 22ndnd Edition Edition

Copyright © Prentice Hall 2002

Ch 17-2

I. General Format

A. The purpose of this SCFSCF is to explain the sources and usesuses of cashcash from three distinct types of activities: 1. Operating cash flowsOperating cash flows result from events or

transactions that enter into the determination of net net income.income.

a. Operating cash flowsOperating cash flows result from transactions related to the production and delivery of goods and services to customers.

b. In effect, operating cash flowsoperating cash flows are the cash basis revenuescash basis revenues and expensesexpenses of a company.

Ch 17-3

I. General Format

2.2. Investing cash flowsInvesting cash flows result from the purchase or sale of productive assetsproductive assets like :

plant and equipment, buying and selling marketable securities (government

bonds or stocks and bonds issued by other companies), and

acquisitionsacquisitions and divestituresdivestitures of other companies.

A. Statement of Cash FlowsStatement of Cash Flows explain the sources and uses of cash from three distinct types of activities:

Ch 17-4

I. General Format

3.3. Financing cash flowsFinancing cash flows result from a company: sellingselling its own stocks or bonds, paying dividends , treasury stock, borrowing money and repaying amounts borrowed.

A. Statement of Cash FlowsStatement of Cash Flows explain the sources and uses of cash from three distinct types of activities:

Ch 17-5

I. General Format

B.B. SFAS No. 95SFAS No. 95 allows firms the option of choosing between two alternative formats for presenting cash flows from operating cash flows from operating activitiesactivities:

(1) the direct approach (2) the indirect approach.

Ch 17-6

II. The Direct Approach

A. The direct direct approachapproach requires that firms report major major classesclasses of: gross cash receipts (cash

revenues) and gross cash paymentsgross cash payments

(cash expenses).

27.74727.747 35.03535.03532.06132.061Cash NICash NI

Why and how these adjustment are made will be discussed later.

Ch 17-12

III. The Indirect Approach

A. The indirect approachindirect approach begins with the accrual basis net income (before extraordinary items) and adjusts for: 1. ItemsItems included in accrual basis net incomeaccrual basis net income that

did not affect cashnot affect cash in the current periodcurrent period, such as: a. Non-cash revenues or gains (e.g.,

revenues earnedrevenues earned but not received in cashreceived in cash, and gains on gains on disposaldisposal of fixed assetsfixed assets).

b. Non-cash expenses or losses (e.g., depreciation and amortization, provision for bad debt expense, and expenses accrued but not paid in cashnot paid in cash).

Ch 17-13

A. The indirect approachindirect approach begins with the accrual basis net income (before extraordinary items) and adjusts for:


2. ItemsItems excluded from accrual basis incomeaccrual basis income that did did affectaffect operating cash flowsoperating cash flows in the current period, such as:

a. Cash inflowsCash inflows (revenuesrevenues) received but not not recognized as earnedrecognized as earned in the current periodcurrent period (e.g., rent rent received in advancereceived in advance and collections on accountcollections on account).

b. Cash outflowsCash outflows (expensesexpenses) paid but not not recognized for accrual purposesrecognized for accrual purposes in the current periodcurrent period (e.g., prepaid insuranceprepaid insurance and payments on accountpayments on account).

Ch 17-14


B. The indirect approachindirect approach for reporting CFOP Activities is used by 98.8 percent98.8 percent of the 600 companies included in the AICPA's annual financial reporting survey. 1. The indirect approachindirect approach is easier for firms to

implement because it relies exclusively on data already available in the accrual accountsaccrual accounts.

2. The indirect approachindirect approach is more familiarfamiliar to many accountants because this format was widely used in the changes in working capital statement that preceded SFAS No. 95.

Ch 17-15


C. The indirect approachindirect approach reconcilesreconciles accrual accounting NIaccrual accounting NI with cash cash flows from operations.flows from operations.

1.1. Noncash adjustmentsNoncash adjustments such as:

• depreciation and amortization,

• equity in the net (income) loss of affiliated comp.

• (gains) losses on disposals of fixed assets, and

• deferred income tax provisions

• Must be addedadded to (subtracted fromsubtracted from) net net incomeincome since they do not havedo not have a cash flow cash flow effecteffect.


This is in effecteffect ConvertingConverting Accrual Basis RevenuesAccrual Basis Revenues and ExpensesExpenses back to Cash Basis RevenueCash Basis Revenue and ExpensesExpenses.

Cash Flow for Operating Activities Cash Flow for Operating Activities SectionSection

Accrual Basis Net Income Accrual Basis Net Income XXXXXXXX

+ Non Cash Expenses(Losses)+ Non Cash Expenses(Losses)

- Non Cash Revenues(Gains)- Non Cash Revenues(Gains)

+ Decrease in Current Assets+ Decrease in Current Assets X X

+ Increase in Current Liabilities + Increase in Current Liabilities XX

- Increase in Current Assets - Increase in Current Assets X X

- Decrease in Current Liabilities - Decrease in Current Liabilities X X

Cash Flows from Oper. Activities Cash Flows from Oper. Activities XXXXXXXX

Ch 17-17


D. Both the direct and indirect approaches for computingcomputing net cash net cash provided by operating activitiesprovided by operating activities will report the same amount.same amount.

1. Those who preferprefer the direct approach justify their preference because this method disclosesdiscloses operating cash flows by category—inflows from customers, outflows to suppliers, etc.—facilitating cash flow predictions.

Ch 17-18


D. Both the direct and indirect approaches for computingcomputing net cash net cash provided by operating activitiesprovided by operating activities will report the same amount.same amount.

2. Analysts who preferprefer the indirect approachindirect approach do so because the size and directionsize and direction of the items reconciling income to operating cash flow provide a rough yardstickyardstick for evaluating the quality of earningsquality of earnings.

Ch 17-19


3. For comparability purposes, the FASB requires firms using the direct approachusing the direct approach to reconcilereconcile accrual accrual earningsearnings and operating cash flowsoperating cash flows as would occur under the indirect approach.

4. Firms using the indirect approachindirect approach are required to separately disclose the amount of interest paidamount of interest paid and income taxes paidincome taxes paid.

D. Both the direct and indirect approaches for computingcomputing net cash provided by net cash provided by operating activitiesoperating activities will report the same same amount.amount.

Ch 17-20


5. The entire amount of cash taxes paidentire amount of cash taxes paid is included in the cash flows from operating activities computationcash flows from operating activities computation, even though some of the taxessome of the taxes relate, for example, to gains on sales of assetsgains on sales of assets whose gross cash flowsgross cash flows are includedincluded in the cash flows from cash flows from investing activitiesinvesting activities section of the statement.

a. On the income statementincome statement, items not includednot included in the computation of income from continuing operationsincome from continuing operations such as extraordinary items and cumulative effects of changes in extraordinary items and cumulative effects of changes in accounting principlesaccounting principles are reflected net of their associated income tax effects to facilitate predictions by statement users.

D. Both the direct and indirect approaches for computing NCPOANCPOA will be the same amountsame amount.

Ch 17-21


5. The entire amount of cash taxes paidentire amount of cash taxes paid is included in the cash cash flows from operating activities computationflows from operating activities computation, even though some of some of the taxesthe taxes relate, for example, to gains on sales of assetsgains on sales of assets whose gross gross cash flowscash flows are includedincluded in the cash flows from investing activitiescash flows from investing activities section of the statement.

D. Both the direct and indirect approaches for computing NCPOANCPOA will be the same amountsame amount.

b. Therefore, tax expensetax expense associated with the presumablypresumably recurring income from continuing operationsrecurring income from continuing operations is reported separatelyreported separately from the tax expensetax expense associated with items appearing belowappearing below income from continuing operationsincome from continuing operations.

Ch 17-22


D. Both the direct and indirect approaches for computing NCPOA will be the same amount.5.The entire amountentire amount of cash taxes paidcash taxes paid is included in the CFOACFOA

……..

c. Regrettably, SFAS No. 95 does not treatdoes not treat cash outflows for income taxescash outflows for income taxes in the same way.

d. This failure to differentiate tax cash flowsdifferentiate tax cash flows by type (those pertaining to income from continuing operations versus other items) complicatescomplicates forecasts of future cash flows.future cash flows.

Ch 17-23


E. Other elements of the cash flow statement:

1. The investing activitiesinvesting activities and financing financing activities sectionsactivities sections of the statement show items that are relatively straightforward and there should be little difficultylittle difficulty in interpreting these disclosures.

Ch 17-24


2. Investing and financing transactionsInvesting and financing transactions that do not do not directlydirectly and immediatelyimmediately affect cashaffect cash are not included in the statement of cash flowsstatement of cash flows.

a. Because cashcash is initially unaffectedinitially unaffected, SFAS No. 95 does not include either the increaseincrease in the investmentinvestment or the increaseincrease in the financingfinancing within the statement of cash flows.

b. These transactions must be disclosedmust be disclosed in a separate scheduleseparate schedule or as a footnote footnote to theto the statement statement of of cash flowscash flows.

E. Other elements of the cash flow cash flow statementstatement:

Ch 17-25

IV. Preparing the Cash Flow Statement

A. The following three-step processthree-step process is used to build the components of the statement: 1. Identify the journal entry(s)journal entry(s) or T-AccountsT-Accounts

that led to the reported net balance sheet changenet balance sheet change in each accounteach account.

2. Determine the net cash flow effectnet cash flow effect of the journal entry(s)journal entry(s) or T-AccountsT-Accounts identified in Step 1Step 1.

3. Compare the financial statement effectfinancial statement effect of the entry / T-Account (Step 1)entry / T-Account (Step 1) with its cash flow effect cash flow effect (Step 2)(Step 2) to determine what cash flow statement cash flow statement treatmenttreatment is necessary for each itemeach item.

Ch 17-26

IV. Preparing the Cash Flow Statement

B. Comparative balance sheetsComparative balance sheets and an income statementincome statement will provide much of the information necessary to use the three-step approach.

Ch 17-27

V. Cash Flows from Operations

A. The purposepurpose of this section is to reconcile net incomenet income to cash from operations (Cash cash from operations (Cash NI) .NI) .

B. Noncash itemsNoncash items are addedadded to (subtracted fromsubtracted from) net incomenet income to reconcilereconcile to cash from operations (Cash NI)cash from operations (Cash NI).

C. Noncash componentsNoncash components of CA&CLCA&CL are addedadded toto (subtracted fromsubtracted from) net incomenet income to reconcilereconcile to cash from operations (Cash NI)cash from operations (Cash NI).

Ch 17-28

VI. Cash Flows from Investing Activities

A. This section shows component increasescomponent increases and decreasesdecreases in long-term asset accounts.long-term asset accounts.

PP &EPP &E PP &EPP &E

InvestmentsInvestments

Ch 17-29


1. A loss on saleloss on sale occursoccurs when book valuebook value is greater than the cash proceedscash proceeds.

2. The lossloss is added backadded back to cash flows cash flows from operationsfrom operations since it is a nonoperating nonoperating lossloss.

3. The lossloss is then subtractedsubtracted from the book valuebook value of the item(s) solditem(s) sold so that the cash cash proceedsproceeds are reportedreported.

B. Sales of equipmentSales of equipment are shownshown at the cash transaction price.cash transaction price.

Ch 17-30


1. A gain on salegain on sale occursoccurs when book valuebook value is lesser than the cash proceedscash proceeds.

2. The gaingain is deducteddeducted from cash flows cash flows from operationsfrom operations since it is a nonoperating nonoperating gaingain.

3. The gaingain is then addedadded to the book valuebook value of the item(s) solditem(s) sold so that the cash proceedscash proceeds are reportedreported.

B. Sales of equipmentSales of equipment are shownshown at the cash transaction price.cash transaction price.

Ch 17-31


C. PurchasesPurchases of long-term assetslong-term assets with debt issuancesdebt issuances are not shownnot shown in the statement of cash flowsstatement of cash flows.

Ch 17-32

VII. Cash Flows from Financing Activities

A. This section reports cash flow effectscash flow effects of transactions affecting long-term long-term liabilityliability and owners’ equity accountsowners’ equity accounts.

B. Net incomeNet income, which is one componentone component of the change in retained earningsretained earnings, is reportedreported in the operating sectionoperating section.

C. ComponentComponent increasesincreases and decreasesdecreases in these accountsaccounts are reported separatelyreported separately.

Dep. Exp

Building &Building &EquipmentEquipment A/DA/D

DepreciationDepreciationExpenseExpense

$518,000 Beg bal.

$653,000 End bal.

Asset retirements

or Asset Sales

Dep. Exp158,000

Statement of Cash Flows Example- Indirect

Step 1. Identify the journal entry(s)journal entry(s) or T-AccountsT-Accounts that led to the reported net balance sheet changenet balance sheet change in each accounteach account.

1.1. DEPRECIATIONDEPRECIATION

158,000

Beg bal. $1,430,000

End bal.$1,628,000

Asset retirements

or Asset Sales

Dr Deprecation Expense $158,000 Cr A/D $158,000

ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Depreciation does Depreciation does notnot involve a involve a cash outflowcash outflow so so add it backadd it back..

Step 3. What Cash Flow Statement treatment is necessarynecessary?

Step 2. What is the Cash Flow effectCash Flow effect?


1.1. DEPRECIATIONDEPRECIATIONADDED BACK TO NET INCOME ADDED BACK TO NET INCOME –– Depreciation does Depreciation does notnot involve a involve a cash outflowcash outflow so so add it backadd it back..

Cash from Operating ActivitiesCash from Operating ActivitiesDepreciation Expense Depreciation Expense $ ($ (158,000)158,000)

Accrual Basis NI Accrual Basis NI $ 182,000$ 182,000

Add back Expenses not affecting Cash FlowAdd back Expenses not affecting Cash Flow +Depreciation+Depreciation 158,000 158,000

Notice the Notice the net effectnet effect is is $0$0 since since there is there is no no cash effectcash effect!!



2.2. Gain on Equipment SaleGain on Equipment Sale

Equipment with a cost of $63,000 and a BV of $40,000 was sold for $57,000.

BV = Cost – BV = Cost – A/DA/D

$40,000 = $63,000 – $40,000 = $63,000 – ??????

$40,000 = $63,000 – $40,000 = $63,000 – 23,00023,000

Gain = Sales Price – Book Gain = Sales Price – Book ValueValue

$17,000 = $17,000 = $57,000 – $40,000$57,000 – $40,000

$$ Sale of Equipmen

t




A/DA/D

$518,000 Beg bal.

$653,000 End bal.

Asset retirements

or Asset Sales

158,000 Dep Exp


Dr A/D $23,000Dr Cash 57,000Cash 57,000 Cr Equipment $63,000 Cr Gain on Sale 17,000

Gain on SaleGain on SaleBldg & PPEBldg & PPE

Beg bal. $1,430,000

End bal.$1,628,000

Asset retirements

or Asset Sales

EquipmentPurchases

23,00063,00

0

17,000

CashCash

57,0057,0000



A/DA/D

$518,000 Beg bal.

$653,000 End bal.

Asset retirements

or Asset Sales

158,000 Dep Exp

Dr A/D $23,000Dr Cash 57,000Cash 57,000 Cr Equipment $63,000 Cr Gain on Sale 17,000Gain on Sale 17,000


Beg bal. $1,430,000

End bal.$1,628,000

Asset retirements

or Asset Sales

EquipmentPurchases

23,000

63,000

17,00017,000

CashCash

57,0057,0000





Dr A/D $23,000Dr Cash 57,000Cash 57,000 Cr Equipment $63,000 Cr Gain on Sale 17,000Gain on Sale 17,000

Gain on SaleGain on Sale

17,00017,000

CashCash

57,0057,0000


Step 3. What Cash Flow Statement treatment is necessarynecessary?1.1. Gain on Sale $17,000 Gain on Sale $17,000 DEDUCTED FROM NET INCOMEDEDUCTED FROM NET INCOME- Operating - Operating

Activities Section- Activities Section- Gain on saleGain on sale does notdoes not involve a involve a cash inflowcash inflow. The . The cash inflowcash inflow resultsresults from the from the sales price of the asset. sales price of the asset.

2.2. Investing Section- Investing Section- InflowInflow of Cash of of Cash of $57,000$57,000..



2.2. Gain on Equipment SaleGain on Equipment Sale• Gain on Sale $17,000 Gain on Sale $17,000 DEDUCTED FROM NET INCOMEDEDUCTED FROM NET INCOME- Operating - Operating

Activities Section- Activities Section-

• Investing Section- Investing Section- InflowInflow of Cash of of Cash of $57,000$57,000..

Cash from Operating Cash from Operating ActivitiesActivities

Gain on Sale of Eq. Gain on Sale of Eq. 17,00017,000

Accrual Basis NI $ 182,000Accrual Basis NI $ 182,000

Subtract Gains not affecting Cash FlowSubtract Gains not affecting Cash Flow

--Gain on Sale of Equip Gain on Sale of Equip (17,000)(17,000)

Investing ActivitiesInvesting Activities

Sale of Equipment $57,000Sale of Equipment $57,000

Notice the Notice the net effectnet effect is is $0$0 since since there is there is no no cash effectcash effect

in thein the operating operating activities activities sectionsection!!

Cash Interest Paid

Accrual Interest

Exp



3.3. Amortization of Bond Discount-Getting Amortization of Bond Discount-Getting Cash Interest Cash Interest ExpenseExpense

Discount onDiscount onBonds PayableBonds Payable

Beg bal. $70,000

End bal. $66,000

Amortization

Dr Interest Expense $44,000 Cr Discount of B/P $4,000 Cr Cash 40,000Cash 40,000

$4,000

$44,000

CashCash

$40,000$40,000Interest ExpenseInterest Expense

44,000 44,000 End End balbal


Step 3. What Cash Flow Statement treatment is necessarynecessary?ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Bond Discount does Bond Discount does notnot involve a involve a cash outflowcash outflow so so add it add it backback..


Cash from Operating ActivitiesCash from Operating Activities

Interest Expense (Interest Expense (44,000)44,000)


Adjustments to reconcile NI to CashAdjustments to reconcile NI to Cash

+Bond Discount+Bond Discount 4,000 4,000

ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Bond Discount does Bond Discount does notnot involve a involve a cash outflowcash outflow so so add it backadd it back..

3.3. Amortization of Bond Discount-Getting Cash Interest Amortization of Bond Discount-Getting Cash Interest ExpenseExpense

Notice the Notice the net effectnet effect

is is (($40,000$40,000) )

cash effectcash effect in thein the

operating operating activities activities sectionsection!!

Cash Taxes Paid

Accrual Income Tax

Exp



5.5. Deferred Income Taxes- Getting Deferred Income Taxes- Getting Cash Taxes PaidCash Taxes Paid

Deferred Tax Deferred Tax LiabilityLiability

$94,000 Beg bal

$100,000 End bal

Increase in Deferred Tax

Dr Income Tax Expense $102,375 Cr Deferred Income Taxes $4,000 Cr Cash 96,375Cash 96,375

$6,000

$102,375

CashCash

$96,375$96,375Income Tax ExpIncome Tax Exp

102,375 102,375 End End balbal


Step 3. What Cash Flow Statement treatment is necessarynecessary?ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Deferred Tax does Deferred Tax does notnot involve involve a a cash outflowcash outflow so so add it backadd it back..



Income Tax Exp Income Tax Exp (102,375)(102,375)

Accrual Basis NI Accrual Basis NI $ 182,000$ 182,000Adjustments to reconcile NI to CashAdjustments to reconcile NI to Cash

+Increase in Deferred +Increase in Deferred Tax Tax 6,000 6,000

ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Operating Activities Section Operating Activities Section Cash RevenuesCash Revenues are are higherhigher than than Accrual Basis Accrual Basis Revenues.Revenues.

4.4. Deferred Income Taxes- Getting Cash Taxes PaidDeferred Income Taxes- Getting Cash Taxes Paid


is is (($96,375)$96,375)

cash effectcash effect in thein the

operating operating activities activities sectionsection!!



5.5. Accounts Receivable- Getting Accounts Receivable- Getting Cash Revenues ReceivedCash Revenues Received

End bal $171,000

Cash Collections

AccountsAccountsReceivableReceivable

Beg bal $180,000CreditSales

Dr Accounts Receivable $3,030,000 Cr Sales Revenue $3,030,000 Dr CashCash $3,039,000$3,039,000Cr Accounts ReceivableAccounts Receivable $3,039,000

$3,039,000

CashCash

Sales RevenueSales Revenue

End bal End bal $3,030,000$3,030,000


Step 3. What Cash Flow Statement treatment is necessarynecessary?ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Cash RevenuesCash Revenues are are higherhigher than than Accrual Basis RevenuesAccrual Basis Revenues

CreditSales

Cash Collections

$3,030,000

$3,030,000

$3,039,00$3,039,0000



Sales Revenue Sales Revenue $3,030,000$3,030,000


Adjustments to reconcile NI to CashAdjustments to reconcile NI to Cash +Decrease in A/R 9,000+Decrease in A/R 9,000

ADDED BACK TO NET INCOMEADDED BACK TO NET INCOME – Operating Activities Section– Operating Activities Section Cash RevenuesCash Revenues are are higherhigher than than Accrual Basis Revenues.Accrual Basis Revenues.


is is $3,039,000$3,039,000 cash effectcash effect


5.5. Accounts Receivable- Getting Accounts Receivable- Getting Cash Revenues ReceivedCash Revenues Received

Assuming all Assuming all RevenuesRevenues come from come from Credit Credit SalesSales



6.6. Customer Advance Deposits- Getting Customer Advance Deposits- Getting Cash Revenues Cash Revenues ReceivedReceived

Cash Deposit

$99,000 End bal

CustomerCustomerAdv. DepositsAdv. Deposits

$110,000 Beg bal Service

Performed

Dr Customer Advance Deposits Customer Advance Deposits $11,000$11,000 Cr Sales Revenue Sales Revenue $11,000 $11,000

Sales RevenueSales Revenue

End bal End bal $3,030,000$3,030,000


Step 3. What Cash Flow Statement treatment is necessarynecessary?SUBTRACT FROM TO NET SUBTRACT FROM TO NET INCOMEINCOME – Operating – Operating Activities SectionActivities SectionDecrease in deposits, Decrease in deposits, Cash Cash Revenues Revenues are adjusted forare adjusted for decrease decrease in in deposits .deposits .

$11,000$11,000

DecreaseIn Deposits

Service Performed

From deposit

Services Performed Credit Sales$3,019,00$3,019,0000

$11,000$11,000

Assumed Cash Collections

Of Total Sales

$3,039,00$3,039,0000

CashCash

Total Cash Collections

Of Revenues

$3,028,00$3,028,0000

$11,000



Sales Revenue Sales Revenue $3,030,000$3,030,000


Adjustments to reconcile NI to CashAdjustments to reconcile NI to Cash +Decrease in A/R 9,000+Decrease in A/R 9,000

- Decrease in Adv- Decrease in Adv

Deposits Deposits (11,000)(11,000)

SUBTRACT FROM TO NET INCOMESUBTRACT FROM TO NET INCOME – Operating Activities Section– Operating Activities Section

Cash Revenues Cash Revenues are adjusted forare adjusted for decrease decrease in in deposits .deposits .


is is $3,028,000 $3,028,000 RevenuesRevenues cash effectcash effect


6.6. Customer Advance Deposits- Getting Customer Advance Deposits- Getting Cash Revenues Cash Revenues ReceivedReceived

COGSCOGSCOGSCOGS



7.7. Changes in Inventory & A/P- Getting Changes in Inventory & A/P- Getting Cash Purchases of Cash Purchases of InventoryInventory

Cost of Cost of Goods SoldGoods Sold

CashCashPayments Payments

$ ??$ ??COGSCOGS

InventoryInventory A/PA/PBI $295,000BI $295,000

$163,000 EB $163,000 EB

$2,526,625 $2,526,625 $2,526,625 $2,526,625

EI $307,000EI $307,000

$160,000 BB $160,000 BB PurchasesPurchases

PurchasesPurchases2,538,6252,538,625

CashCash


$ ??$ ??COGSCOGS

CashCashPayments Payments $ 2,535,625$ 2,535,625


COGSCOGSCOGSCOGS






$ ??$ ??COGSCOGS

InventoryInventory

A/PA/P

BI $295,000BI $295,000

$163,000 EB $163,000 EB $2,526,625 $2,526,625 $2,526,625 $2,526,625

EI $307,000EI $307,000

$160,000 BB $160,000 BB

PurchasesPurchases

PurchasesPurchases

Pur $ 2,538,625Pur $ 2,538,625

2,538,6252,538,625

CashCash


$ ??$ ??COGSCOGS



DR COGS $2,526,625DR COGS $2,526,625

CR Inventory CR Inventory $2,526,625$2,526,625

DR Purchases $2,538,625DR Purchases $2,538,625

CR A/P CR A/P $2,538,625 $2,538,625

COGSCOGSCOGSCOGS






$ ??$ ??COGSCOGS

InventoryInventory

A/PA/P

BI $295,000BI $295,000

$163,000 EB $163,000 EB $2,526,625 $2,526,625 $2,526,625 $2,526,625

EI $307,000EI $307,000

$160,000 BB $160,000 BB

PurchasesPurchases

PurchasesPurchases

Pur $ 2,538,625Pur $ 2,538,625

2,538,6252,538,625

CashCash


$ ??$ ??COGSCOGS



DR A/P $2,535,625DR A/P $2,535,625

CR CR Cash Cash $2,535,625$2,535,625


COGSCOGSCOGSCOGS






$ ??$ ??COGSCOGS

InventoryInventory

A/PA/P

BI $295,000BI $295,000

$163,000 EB $163,000 EB $2,526,625 $2,526,625 $2,526,625 $2,526,625

EI $307,000EI $307,000

$160,000 BB $160,000 BB

PurchasesPurchases

PurchasesPurchases

Pur $ 2,538,625Pur $ 2,538,625

2,538,6252,538,625

CashCash


$ ??$ ??COGSCOGS



DR A/P $2,535,625DR A/P $2,535,625

CR CR Cash Cash $2,535,625$2,535,625


ADJUST NET INCOMEADJUST NET INCOME – – Operating Activities SectionOperating Activities SectionSubtractSubtract IncreaseIncrease in Inventory & in Inventory & AddAdd increaseincrease in in A/PA/P


Example:Indirect Method SCFExample:Indirect Method SCF


Cost of Goods Sold (Cost of Goods Sold (2,526,625)2,526,625)


Adjustments to reconcile NI to CashAdjustments to reconcile NI to Cash - Increase in Inv (12,000) - Increase in Inv (12,000)

+ Increase in A/P 3,000+ Increase in A/P 3,000

ADJUST NET INCOMEADJUST NET INCOME – Operating Activities Section– Operating Activities Section SUBTRACTSUBTRACT IncreaseIncrease in Inventory & in Inventory & ADDADD increaseincrease in A/P in A/P

Notice the Notice the net effectnet effect is is (($2,535,625$2,535,625)) cash effectcash effect



Land Purchase

SCF Example- INVESTING SECTIONStep 1. Identify the journal entry(s)journal entry(s) or T-AccountsT-Accounts that led to the

reported net balance sheet changenet balance sheet change in each accounteach account.

9.9. Long-Term Assets- Getting Long-Term Assets- Getting Land Cash effectLand Cash effect

Dr Land $86,000 Cr Cash 86,000Cash 86,000

LandLand

336,000 336,000 EBEB


Step 3. What Cash Flow Statement treatment is necessarynecessary?CASH OUTFLOWCASH OUTFLOW – –

Investing Activities Investing Activities SectionSection

250,000 250,000 BBBB

Land Purchase

CashCash

$86,000$86,000

$86,00$86,0000


Equipment Sale $57,000Equipment Sale $57,000

Land Purchase (86,000)Land Purchase (86,000)

CASH OUTFLOWCASH OUTFLOW – – Investing Activities SectionInvesting Activities Section

SCF Example- INVESTING SECTION9.9. Long-Term Assets- Getting Long-Term Assets- Getting Land Cash effectLand Cash effect


10.10.Buildings and Equipment purchaseBuildings and Equipment purchase

A/DA/D

$518,000 Beg bal.

$653,000 End bal.

Asset retirements

or Asset Sales

158,000 Dep Exp


Dr A/D $23,000Dr Cash 57,000Cash 57,000 Cr Equipment $63,000 Cr Gain on Sale 17,000


Beg bal. $1,430,000

End bal.$1,628,000

Asset retirements

or Asset Sales

Bldg. & Eq.Purchases

23,00063,00

0

17,000

CashCash

57,0057,0000

SCF Example- INVESTING SECTION

Bldg. & Eq.Purchases

261,000261,000

261,000261,000

Dr Bldg. & Eq. 261,000261,000 Cr Cash $261,000Cash $261,000

Step 2. What is the Cash Flow Cash Flow effecteffect?


CASH OUTFLOWCASH OUTFLOW – – Investing Activities SectionInvesting Activities Section

CASH OUTFLOWCASH OUTFLOW – – Investing Activities SectionInvesting Activities Section10.10.Buildings and Equipment purchaseBuildings and Equipment purchase

SCF Example- INVESTING SECTION


Equipment Sale $57,000Equipment Sale $57,000

Land Purchase (86,000)Land Purchase (86,000)

Bldg. & Eq. Purchase (261,000)Bldg. & Eq. Purchase (261,000)

SCF Example- FINANCING SECTIONStep 1. Identify the journal entry(s)journal entry(s) or T-AccountsT-Accounts that led to the


11.11.Long-Term Liabilities & SE- Getting Long-Term Liabilities & SE- Getting Financing Cash effectFinancing Cash effect

Dr Cash $50,000$50,000 Cr Common Stock $50,000Common Stock $50,000

CashCash


Step 3. What Cash Flow Statement treatment is necessarynecessary?CASH INFLOWCASH INFLOW – –

Financing Activities Financing Activities SectionSection

Sale of Stock

Common StockCommon Stock

$50,00$50,0000

Sale of Stock$50,000$50,000

Financing ActivitiesFinancing Activities

Common stock issued Common stock issued $50,000$50,000

CASH INFLOWCASH INFLOW – – Financing Activities SectionFinancing Activities Section

SCF Example- FINANCING SECTION11.11.Long-Term Liabilities & SE- Getting Long-Term Liabilities & SE- Getting Financing Cash effectFinancing Cash effect

SCF Example- FINANCING SECTIONStep 1. Identify the journal entry(s)journal entry(s) or T-AccountsT-Accounts that led to the


12.12.Long-Term Liabilities & SE- Getting Long-Term Liabilities & SE- Getting Financing Cash effectFinancing Cash effect

Dr Retained Earnings $90,000 Cr Cash $90,000Cash $90,000

CashCash


Step 3. What Cash Flow Statement treatment is necessarynecessary?CASH OUTFLOWCASH OUTFLOW – –

Financing Activities Financing Activities SectionSection

Dividends Paid

Retained EarningsRetained Earnings

NetIncome

$76,000 BB

$168,000 EB

Dividends 182,000 90,000

90,000

Financing ActivitiesFinancing Activities

Dividends Paid ($90,000)Dividends Paid ($90,000)

Common stock issued $50,000Common stock issued $50,000

CASH OUTFLOWCASH OUTFLOW – – Financing Activities SectionFinancing Activities Section

SCF Example- FINANCING SECTION12.12.Long-Term Liabilities & SE- Getting Long-Term Liabilities & SE- Getting Financing Cash effectFinancing Cash effect

Ch 17-62

VIII. Reconciling Between Statements: Some Complexities

A. UsersUsers of financial statementsfinancial statements frequently encounterencounter situationssituations where changeschanges in balance sheet accountsbalance sheet accounts over the year do not reconciledo not reconcile to the corresponding account changecorresponding account change included in the statement of cash statement of cash flowsflows.

Ch 17-63

1. Asset write-offsAsset write-offs due to impairmentimpairment, corporate restructuringcorporate restructuring or retirementretirement.

2. Translation adjustmentsTranslation adjustments on assets heldassets held by foreign subsidiariesforeign subsidiaries.

3. AcquisitionsAcquisitions and divestituresdivestitures of other other companies. companies.


B. These differencesdifferences arise for at least three reasons:

Ch 17-64

C. Footnote disclosuresFootnote disclosures and information in the income income statementstatement and operating sectionoperating section of the cash flow statementcash flow statement may be helpful in reconciling some of these differences.


IX. Analytical Insights: Cash Burn Rates of Internet Stocks

A. The abilityability to generate positive generate positive operating cash flowsoperating cash flows is criticalcritical to the survival and successsurvival and success of any company.

IX. Analytical Insights: Cash Burn Rates of Internet Stocks B. The cash burn ratecash burn rate is a popular

metric for assessingassessing how quicklyhow quickly internet firmsinternet firms are using upusing up their cash cash reservesreserves. 1. May be calculatedcalculated as cash used for operationscash used for operations

plusplus cash used for capital expenditurescash used for capital expenditures and purchasespurchases of on-going businessesof on-going businesses divided by the number of months covered by the cash flow statement.cash flow statement.

2. Alternatively, this may be calculated as earnings earnings before interest, taxes, depreciation and amortizationbefore interest, taxes, depreciation and amortization (EBITDA) adjustedadjusted for non-recurring gains and lossesnon-recurring gains and losses divideddivided by number of monthsnumber of months covered by the income income statementstatement.

IX. Analytical Insights: Cash Burn Rates of Internet Stocks C. A related measure is months to months to

burnoutburnout.

1. This measure provides an estimateestimate of how how much longermuch longer a company can survivecompany can survive without an infusion of external capital.

2. CalculatedCalculated as cash, cash equivalents, and cash, cash equivalents, and short-term marketable securitiesshort-term marketable securities divideddivided by the cash cash burn rateburn rate.

ch17.ppt

Business

cash revenuesgains

cash expenseslosses

cash expensesorlossese

cash ni

cash basis revenueandexpenses

statement of cash flowsexplain

cash flow predictions

cash flowsbycategory