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

Chapter 13-1

CHAPTER CHAPTER 1313CHAPTER CHAPTER 1313

STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

Managerial Accounting, Fourth Edition

Chapter 13-2 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 13-3

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 13-4

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 13-5




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 13-6




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 13-7

Brief Exercise 13-2Brief Exercise 13-2

Classify each item as an operating, Classify each item as an operating, investing or financing activity. Assume all investing or financing activity. Assume all items involve cash unless there is items involve cash unless there is information to the contrary. information to the contrary.

A.A. A. Purchase of equipmentA. Purchase of equipment

B.B. B. Sale of BuildingB. Sale of Building

C.C. C. Redemption of BondsC. Redemption of Bonds

D.D. DepreciationDepreciation

E.E. Payment of DividendsPayment of Dividends

F.F. Issuance of Capital stockIssuance of Capital stock

Chapter 13-8

Brief Exercise 13-2Brief Exercise 13-2

Classify each item as an operating, Classify each item as an operating, investing or financing activity. Assume all investing or financing activity. Assume all items involve cash unless there is items involve cash unless there is information to the contrary. information to the contrary.

A.A. A. Purchase of equipment - A. Purchase of equipment - INVESTINGINVESTING

B.B. B. Sale of Building - B. Sale of Building - INVESTINGINVESTING

C.C. C. Redemption of Bonds - C. Redemption of Bonds - FINANCINGFINANCING

D.D. Depreciation - Depreciation - OPERATINGOPERATING

E.E. Payment of Dividends - Payment of Dividends - FINANCINGFINANCING

F.F. Issuance of Capital stock - Issuance of Capital stock - FINANCINGFINANCING

Chapter 13-9

Do It! Review 13-1Do It! Review 13-1 Rapture Corporation had the following Rapture Corporation had the following

transactions.transactions.

A.A. Issued $200,000 of bonds payableIssued $200,000 of bonds payable

B.B. Paid Utilities expensePaid Utilities expense

C.C. Issued 500 shares of preferred stock for Issued 500 shares of preferred stock for $45,000$45,000

D.D. Sold land and a building for $250,000Sold land and a building for $250,000

E.E. Lent $30,000 to Dead End Corporation, Lent $30,000 to Dead End Corporation, receiving Dead End’s 1 year 12% notereceiving Dead End’s 1 year 12% note

Classify each of these transactions by type of Classify each of these transactions by type of cash flow activitycash flow activity

Chapter 13-10

Do It! Review 13-1Do It! Review 13-1 Rapture Corporation had the following Rapture Corporation had the following

transactions.transactions.

A.A. Issued $200,000 of bonds payable - Issued $200,000 of bonds payable - FINANCINGFINANCING

B.B. Paid Utilities expense - Paid Utilities expense - OPERATINGOPERATING

C.C. Issued 500 shares of preferred stock for Issued 500 shares of preferred stock for $45,000 - $45,000 - FINANCINGFINANCING

D.D. Sold land and a building for $250,000 - Sold land and a building for $250,000 - INVESTINGINVESTING

E.E. Lent $30,000 to Dead End Corporation, Lent $30,000 to Dead End Corporation, receiving Dead End’s 1 year 12% note - receiving Dead End’s 1 year 12% note - INVESTINGINVESTING

Chapter 13-11

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 13-12

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 13-13

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 13-14

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 13-15 LO 3 Prepare a statement of cash flows using the indirect method.


Three Major Steps:

Illustration 13-3

Chapter 13-16

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.



Chapter 13-17

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 13-18

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 13-19

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 13-21

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 13-22

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 13-23

When the Prepaid Expense balance increases, cash paid for expenses is higher than expenses reported on an accrual basis. The company deducts the increase 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 13-25

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 13-28

Self Study Question #4Self Study Question #4

Which is an example of a cash flow from Which is an example of a cash flow from operating Activity?operating Activity?

a.a. Payment of cash to lenders for interestPayment of cash to lenders for interest

b.b. Receipt of cash from the sale of capital stockReceipt of cash from the sale of capital stock

c.c. Payment of cash dividends to the company’s Payment of cash dividends to the company’s stockholdersstockholders

d.d. None of the aboveNone of the above

Chapter 13-29

Self Study Question #9Self Study Question #9

Net Income is $132,000, accounts payable Net Income is $132,000, accounts payable increased $10,000 during the year, increased $10,000 during the year, inventory decreased $6,000 during the year inventory decreased $6,000 during the year and accounts receivable increased $12,000 and accounts receivable increased $12,000 during the year. Under the indirect method during the year. Under the indirect method which is the net cash provided by operating which is the net cash provided by operating activities?activities?

a.a. $102,000$102,000

b.b. $112,000$112,000

c.c. $124,000$124,000

d.d. $136,000$136,000

Chapter 13-30

Self Study Question # 11Self Study Question # 11

The following data are available from Allen Clapp The following data are available from Allen Clapp CorporationCorporation

Net IncomeNet Income $200,000 $200,000

Depreciation ExpenseDepreciation Expense 40,00040,000

Dividends PaidDividends Paid 60,00060,000

Gain on sale of landGain on sale of land 10,00010,000

Decrease in accounts receivablesDecrease in accounts receivables 20,00020,000

Decrease in accounts payablesDecrease in accounts payables 30,00030,000

Net Cash provided by operating activities is:Net Cash provided by operating activities is:

a.a. $160,000$160,000

b.b. $220,000$220,000

c.c. $240,000$240,000

d.d. $280,000$280,000


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

Illustration 13-13

Partial Statement

Chapter 13-32

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

Chapter 13-33

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 13-35

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 13-37

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 13-39

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 13-41

Free Cash Flow

Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends.

LO 4 Analyze the statement of cash flows.

Using Cash Flows to Evaluate a Using Cash Flows to Evaluate a CompanyCompanyUsing Cash Flows to Evaluate a Using Cash Flows to Evaluate a CompanyCompany

Chapter 13-42

ANY QUESTIONS?ANY QUESTIONS?

Chapter 13-43

P13-1AP13-1A You are provided with the following transactions that took place during a

recent fiscal year.

Transaction

Where Reported on Statement

Cash inflow, Outflow or No

Effect

a. Recorded depreciation expense on the plant assets- O NEb. Recorded and paid interest expense – O OUTFLOWc. Recorded cash proceeds from a sale of plant assets I INFLOWd. Acquired land by issuing common stock – NC NEe. Paid a cash dividend to preferred stockholders – F OUTFLOWf. Distributed a stock dividend to common stockholders – NC NEg. Recorded cash sales – O INFLOWh. Recorded sales on account – O NEi. Purchased inventory for cash - O OUTFLOWj. Purchased inventory on account – O NE

Chapter 13-44

P13-3AP13-3A The Income Statement of Dillon Company is presented here:

Sales $7,700,000Cost of Goods Sold

Beginning Inventory $1,900,000Purchases $4,400,000Cost Available for Sale $6,300,000Ending Inventory $1,400,000

Cost of Goods Sold $4,900,000Gross Profit $2,800,000Operating Expenses $1,150,000Net Income $1,650,000

Additional Information:1.Accounts receivables increased $250,000 during the year and inventory decreased $500,0002.Prepaid expenses increased $150,0003.Accounts Payables to suppliers of merchandise decreased $340,000 during the year4.Accrued expenses payables decreased $100,000 during the year5.Operating Expenses include depreciation expense of $90,000

Instructions:Prepare the operating activities section of the statement of cash flows for the year ended Nov 30th 2011, for Dillon Company using the indirect method

Chapter 13-45

Net IncomeNet Income $1,650,000$1,650,000

Adjustments to reconcile net income Adjustments to reconcile net income to net cash provided by operating activities to net cash provided by operating activities Depreciation Expense Depreciation Expense $ 90,000$ 90,000 Increase in A/R Increase in A/R (250,000)(250,000) Decrease in Inventory Decrease in Inventory 500,000 500,000 Increase in Prepaid Expenses Increase in Prepaid Expenses (150,000)(150,000) Decrease in A/P Decrease in A/P (340,000)(340,000) Decrease in Accrued Expenses Payable Decrease in Accrued Expenses Payable (100,000) (100,000) (250,000)(250,000)

Net Cash Provided by Operating ActivitiesNet Cash Provided by Operating Activities$1,400,000$1,400,000

Dillon CompanyStatement of Cash

FlowsNovember 30,2011

Chapter 13-46

P13-5AP13-5ACotte Company’s Income statement contained the condensed information below:

COTTE COMPANYIncome Statement

For the Year Ended December 31, 2011Revenues $970,000

Operating expenses, excluding depreciation $624,000Depreciation expense 60,000Loss on Sale of Equipment 16,000 700,000

Income before Income Taxes 270,000Income Tax Expense 40,000Net Income $230,000

Cotte’s Balance Sheet contained the comparative data at December 31 shown below

2011 2010

Accounts receivable $75,000 $60,000

Accounts Payable 41,000 28,000Income taxes Payable 11,000

7,000

Accounts payable pertain to operating expenses

Chapter 13-47

Instructions: Prepare the operating Instructions: Prepare the operating activities section of the statement activities section of the statement of cash flows using the indirect of cash flows using the indirect method.method.

Net Income $230,000

Depreciation expense 60,000Increase in A/R (15,000)Increase in A/P 13,000Increase in Taxes Payable 4,000Loss on Sale of Equipment 16,000 78,000

Net Cash provided by Operating activities: $308,000

P13-5A

Chapter 13-48

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

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