chapter 13-1. chapter 13-2 chapter 13 statement of cash flows managerial accounting, fourth edition

Chapter 13-1

Chapter 13-2

CHAPTER CHAPTER 1313CHAPTER CHAPTER 1313

STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

Managerial Accounting, Fourth Edition

Chapter 13-3 LO 1 Indicate the usefulness of the statement of cash flows.

Provides information to help assess:

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and net cash provided (used) by operating activities.

4. Cash investing and financing transactions during the period.

Usefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlowsUsefulness of the Statement of Cash Usefulness of the Statement of Cash FlowsFlows

Chapter 13-4

LO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

Income

Statement

Items.

Operating Activities

Generally Investments and Long-

Term Assets.

Investing Activities

Generally Long-Term Liability

and Stockholders’

Equity .

Financing Activities

Chapter 13-5

Classification of Typical Inflows and Outflows



Operating activities - Income statement itemsCash inflows: From sale of goods or services. From interest received and dividends received.Cash outflows: To suppliers for inventory. To employees for services. To government for taxes. To lenders for interest. To others for expenses.

Illustration 13-1

Chapter 13-6




Investing activities - Changes in investments and long-term assets

Cash inflows: From sale of property, plant, and equipment. From sale of investments in debt or equity

securities. From collection of principal on loans to other entities.Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or equity securities. To make loans to other entities.

Illustration 13-1

Chapter 13-7




Financing activities - Changes in long-term liabilities and stockholders’ equityCash inflows: From sale of common stock. From issuance of long-term debt (bonds and notes).Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock).

Illustration 13-1

Chapter 13-8

Significant Noncash Activities

1. Issuance of common stock to purchase assets.

2. Conversion of bonds into common stock.

3. Issuance of debt to purchase assets.

4. Exchanges of plant assets.

Companies report these activities in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements.



Chapter 13-9

Order of Presentation:

1. Operating activities.

2. Investing activities.

3. Financing activities.

The cash flows from operating activities section always appears first, followed by the investing and financing sections.

Direct Method

Indirect Method

Format of the Statement of Cash Format of the Statement of Cash FlowsFlowsFormat of the Statement of Cash Format of the Statement of Cash FlowsFlows


Chapter 13-10

Format of the Statement of Cash Format of the Statement of Cash FlowsFlowsFormat of the Statement of Cash Format of the Statement of Cash FlowsFlows


Illustration 13-2

Chapter 13-11

Three Sources of Information:

1. Comparative balance sheets

2. Current income statement

3. Additional information

LO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash Preparing the Statement of Cash FlowsFlowsPreparing the Statement of Cash Preparing the Statement of Cash FlowsFlows

Three Major Steps:

Illustration 13-3

Chapter 13-12 LO 3 Prepare a statement of cash flows using the indirect method.


Three Major Steps:

Illustration 13-3

Chapter 13-13

Indirect and Direct Methods

Companies favor the indirect method for two reasons:

1. It is easier and less costly to prepare, and

2. It focuses on the differences between net income and net cash flow from operating activities.





Indirect Method

Illustration 13-4

Demonstration Problem

Chapter 13-15


Indirect Method


Illustration 13-4





Indirect Method

Illustration 13-4

Chapter 13-17


Indirect Method


Illustration 13-4


Chapter 13-18

Step 1: Operating ActivitiesDetermine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis.


Preparing the Statement of Cash Preparing the Statement of Cash Flows – Indirect MethodFlows – Indirect MethodPreparing the Statement of Cash Preparing the Statement of Cash Flows – Indirect MethodFlows – Indirect Method

Common adjustments to Net Income (Loss):Add back non-cash expenses (depreciation and amortization expense).Deduct gains and add losses.Changes in current assets and current liabilities.

Chapter 13-19

Depreciation Expense

Although depreciation expense reduces net income, it does not reduce cash. Depreciation is a noncash charge. The company must add it back to net income.


Illustration 13-6

Step 1: Operating ActivitiesStep 1: Operating ActivitiesStep 1: Operating ActivitiesStep 1: Operating Activities

Chapter 13-20

Loss on Sale of Equipment

Because companies report as a source of cash in the investing activities section the actual amount of cash received from the sale:

Any loss on sale is added to net income in the operating section.

Any gain on sale is deducted from net income in the operating section.


Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities



Illustration 13-7

Loss on Sale of Equipment

Chapter 13-22

When the Inventory balance increases, the cost of merchandise purchased exceeds the cost of goods sold.



Changes to Noncash Current Asset Accounts

Merchandise Inventory

1/1/11 Balance 10,000Purchases 155,000

Cost of goods sold 150,000

12/31/11 Balance 15,000

As a result, cost of goods sold does not reflect cash payments made for merchandise. The company deducts from net income this inventory increase.

Chapter 13-23

Changes to Noncash Current Asset AccountsWhen the Accounts Receivable balance decreases, cash receipts are higher than revenue earned under the accrual basis.



Therefore, the company adds to net income the amount of the decrease in accounts receivable.

Illustration 13-8

Chapter 13-24

When the Prepaid Expense balance increases, cash paid for expenses is higher than expenses reported on an accrual basis. The company deducts the decrease from net income to arrive at net cash provided by operating activities.

If prepaid expenses decrease, reported expenses are higher than the expenses paid. The company adds the decrease to net income.






Illustration 13-9


Chapter 13-26

Changes to Noncash Current Liability AccountsWhen Accounts Payable increases, this means the company received more in goods than it actually paid for. The increase is added to net income to determine net cash provided by operating activities.

When Income Tax Payable decreases, this means the income tax expense reported on the income statement was less than the amount of taxes paid during the period. The decrease is subtracted from net income to determine net cash provided by operating activities.





Illustration 13-10

Changes to Noncash Current Liability Accounts



Illustration 13-11

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method

Chapter 13-29

From the additional information, the company purchased land of $110,000 by issuing long-term bonds. This is a significant noncash investing and financing activity that merits disclosure in a separate schedule.


Step 2: Investing and Financing Step 2: Investing and Financing ActivitiesActivitiesStep 2: Investing and Financing Step 2: Investing and Financing ActivitiesActivities

Land

1/1/11 Balance 20,000Issued bonds 110,000

12/31/11 Balance 130,000

Bonds Payable

1/1/11 Balance 20,000For land 110,000

12/31/11 Balance 130,000


Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

Illustration 13-13

Partial Statement

Chapter 13-31

From the additional information, the company acquired an office building for $120,000 cash. This is a cash outflow reported in the investing section.



1/1/11 Balance 40,000Office building 120,000

12/31/11 Balance 160,000

Building



Illustration 13-13

Partial statement

Chapter 13-33

The additional information explains that the equipment increase resulted from two transactions: (1) a purchase of equipment of $25,000, and (2) the sale for $4,000 of equipment costing $8,000.



Cash 4,000Accumulated depreciation 1,000Loss on sale of equipment 3,000

Equipment 8,000

Journal Entry


StatemenStatement of Cash t of Cash FlowsFlows


Illustration 13-13

Indirect Method

Chapter 13-35

The additional information notes that the increase in common stock resulted from the issuance of new shares.



1/1/11 Balance 50,000Shares sold 20,000

12/31/11 Balance 70,000

Common Stock


Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesIllustration 13-

13Partial statement

Chapter 13-37

Retained earnings increased $116,000 during the year. This increase can be explained by two factors: (1) Net income of $145,000 increased retained earnings. (2) Dividends of $29,000 decreased retained earnings.



1/1/11 Balance 48,000Net income 145,000

12/31/11 Balance 164,000

Dividends 29,000

Retained Earnings




Illustration 13-13

Indirect Method

Chapter 13-39

P13-3B P13-3B The current sections of Powell Inc.'s balance sheets at December 31, 2010 and 2011, are The current sections of Powell Inc.'s balance sheets at December 31, 2010 and 2011, are presented here.presented here.

Powell's net income for 2011 was $125,000. Depreciation expense was $15,000. Powell's net income for 2011 was $125,000. Depreciation expense was $15,000.

Prepare the operating activities section—indirect method.

Chapter 13-40

Use Illustration 13-13 as guide to Use Illustration 13-13 as guide to Operating Section of Cash flow Operating Section of Cash flow

StatementStatement

Chapter 13-41

Unit 8 Assignment ExampleUnit 8 Assignment Example

Cash flows from operating activitiesNet income $125,000Adjustments to reconcile net income to netcash provided by operating activitiesDepreciation expense 15,000 Increase in accounts receivable (16,000) Decrease in inventory 19,000 Increase in prepaid expenses (5,000) Increase in accrued expenses payable 10,000 Decrease in accounts payable (12,000) $11,000Net cash provided by operating activities $136,000

Chapter 13-42

Unit 8 Example Quiz Question #1Unit 8 Example Quiz Question #1

Wilton Company reported net income of $40,000 for the year. During the Wilton Company reported net income of $40,000 for the year. During the year, accounts receivable decreased by $7,000, accounts payable year, accounts receivable decreased by $7,000, accounts payable increased by $3,000 and depreciation expense of $5,000 was recorded. increased by $3,000 and depreciation expense of $5,000 was recorded. Net cash provided by operating activities for the year is : Net cash provided by operating activities for the year is :

a)a) $30,000. $30,000.

b)b) $55,000. $55,000.

c)c) $39,000. $39,000.

d)d) $35,000. $35,000.

Chapter 13-43

Which of the following would be subtracted from net income using the Which of the following would be subtracted from net income using the indirect method? : indirect method? :

a)a) Depreciation expense Depreciation expense

b)b) An increase in accounts receivableAn increase in accounts receivable

c)c) An increase in accounts payable An increase in accounts payable

d)d) A decrease in prepaid expenses A decrease in prepaid expenses

Unit 8 Example Quiz Question #2Unit 8 Example Quiz Question #2

chapter 13-1. chapter 13-2 chapter 13 statement of cash flows managerial accounting, fourth edition

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