Chapter 13-1

CHAPTER CHAPTER 1414CHAPTER CHAPTER 1414

STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWS

Managerial Accounting, Fourth Edition

Wiley & Richard McDermott

Chapter 13-2

1. Indicate the usefulness of the statement of cash flows.

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

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

4. Analyze the statement of cash flows.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 13-3

The Statement of The Statement of

Cash Flows: Cash Flows:

Usefulness and Usefulness and

FormatFormat

The Statement of The Statement of

Cash Flows: Cash Flows:

Usefulness and Usefulness and

FormatFormat

Preparing the Preparing the

Statement of Statement of

Cash Flows—Cash Flows—

Indirect MethodIndirect Method

Preparing the Preparing the

Statement of Statement of

Cash Flows—Cash Flows—

Indirect MethodIndirect Method

Using Cash Using Cash

Flows to Evaluate Flows to Evaluate

a Companya Company

Using Cash Using Cash

Flows to Evaluate Flows to Evaluate

a Companya Company

UsefulnessUsefulness

ClassificationsClassifications

Significant Significant noncash activitiesnoncash activities

FormatFormat

PreparationPreparation

Indirect and direct Indirect and direct methodsmethods

Step 1: Operating Step 1: Operating activitiesactivities

Step 2: Investing Step 2: Investing and financing and financing activitiesactivities

Step 3: Net Step 3: Net change in cashchange in cash

Free cash flowFree cash flow

Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

Chapter 13-4 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 13-5

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 13-6

Classification of Typical Inflows and Outflows

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

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

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

Note: Current asset

Note: Not financing

Chapter 13-7

Classification of Typical Inflows and Outflows

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

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

Investing activities - Changes in investments and long-term assets

Cash inflows: From sale of property, plant, and equipment. From sale of 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 13-8

Classification of Typical Inflows and Outflows

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

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

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 13-9

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.

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

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

Chapter 13-10

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

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

We won’t learn direct methodin this class

Chapter 13-11

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

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

Illustration 13-2

Chapter 13-12

Three Sources of Information:

1. Comparative balance sheets

2. Current income statement

3. Additional information

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

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.

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

Chapter 13-14

Note from Dr. McDermottNote from Dr. McDermott

I have never seen the method for preparing cash I have never seen the method for preparing cash flow statements used by the author.flow statements used by the author.

I have looked at probably a dozen textbooks.I have looked at probably a dozen textbooks. It is hard enough to teach cash flow statements It is hard enough to teach cash flow statements

with traditional methods.with traditional methods. For a beginner, the author’s method is more For a beginner, the author’s method is more

difficult.difficult. I will teach the traditional method.I will teach the traditional method.

Chapter 13-15

Step 1: Set up a worksheet like this, Step 1: Set up a worksheet like this, memorize the column headings!memorize the column headings!

Statement of Cash Flow Worksheet        (3+4) 

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

  2007 2008 Change or Use Effect Adjustmts Effect ficationAssets Except Cash &Cash Equivalents               Accounts Receivable $ 76,000.00 $ 85,000.00

Inventories $ 189,000.00 $ 170,000.00

Land $ 100,000.00 $ 75,000.00

Equipment $ 200,000.00 $ 260,000.00

     

Contra Assets, Liabilities    

and Stockholder Equity    

Accumulated depreciation $ 32,000.00 $ 66,000.00

Accounts payable $ 47,000.00 $ 39,000.00

Bonds payable $ 200,000.00 $ 150,000.00

Common stock $ 174,000.00 $ 216,000.00

Retained earnings    

Net Income    

Dividends    

     

Additional Entries    

   

   

There are several important things to notice:1.We did not list a row for cash or cash equivalents.2.We listed accounts that are increased with a debit balance in the top section (Assets Except Cash and Cash Equivalents) and accounts that are increased with credits on the bottom (Contra Assets, Liabilities and Stockholder Equity.3.Since Accumulated Depreciation is increased with a credit, it goes in the second section.

We will get to this section later.

Chapter 13-16

Step 1: Set up a worksheet like this, Step 1: Set up a worksheet like this, memorize the column headings!memorize the column headings!

Statement of Cash Flow Worksheet        (3+4) 

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

  2007 2008 Change or Use Effect Adjustmts Effect ficationAssets Except Cash &Cash Equivalents               Accounts Receivable $ 76,000.00 $ 85,000.00

Inventories $ 189,000.00 $ 170,000.00

Land $ 100,000.00 $ 75,000.00

Equipment $ 200,000.00 $ 260,000.00

     

Contra Assets, Liabilities    

and Stockholder Equity    

Accumulated depreciation $ 32,000.00 $ 66,000.00

Accounts payable $ 47,000.00 $ 39,000.00

Bonds payable $ 200,000.00 $ 150,000.00

Common stock $ 174,000.00 $ 216,000.00

Retained earnings    

Net Income    

Dividends    

     

Additional Entries    

   

   

One more important thing to mention, we will break retained earnings into net income and dividends on this worksheet.

Chapter 13-17

Step 2: Subtract the figures in the 2007 row Step 2: Subtract the figures in the 2007 row from the figures in the 2008 row to get the from the figures in the 2008 row to get the

changechangeStatement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

 Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00)Land $ 100,000.00 $ 75,000.00

$ (25,000.00)Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00      

 Contra Assets, Liabilities    

 and Stockholder Equity    

 Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Retained earnings    

 

Net Income     $ 103,000.00

Dividends     $ (45,000.00)

       

Additional Entries      

     

     

This a good time to put in the net income and dividends paid during the year in lieu of retained earnings.

Chapter 13-18

Step 3: Now determine if each Step 3: Now determine if each transaction is a source or use of cashtransaction is a source or use of cash

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

          Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use      

   Contra Assets, Liabilities    

   and Stockholder Equity    

   Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source Retained earnings    

   

Net Income     $ 103,000.00 Source

Dividends     $ (45,000.00) Use

         

Additional Entries        

       

       

Rule: positive numbers using this format are uses of cash in the Cash Equivalents Section, negative numbers are sources of cash.

The opposite is true in the Contra Asset … section.

Chapter 13-19

Step 4: In column 3, make all Step 4: In column 3, make all sources of cash positive and all uses sources of cash positive and all uses

negativenegativeStatement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

Shortcut, change the sign of the numbers in column 1 in the Assets . . . section and leave them as is in the Contra Assets . . . section

Chapter 13-20

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

Now we are going to focus on the adjustments column. The easiest was to make these and get the sign (positive or negative) straight is to create an “Additional Entries” section at the bottom of the form.

Chapter 13-21

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

In the adjustments column, debits to the accounts being adjusted from 2007 to 2008 will be shown as positive numbers and credits will be shown as negative numbers.

What does this mean? Let’s wait until the next slide to find out!

Chapter 13-22

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

Where do we get the information for the adjustments? From the “Additional Information” given in the problem.

Chapter 13-23

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

The easiest way to enter this data is to pretend you are making a journal entry.

Chapter 13-24

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

If the account is shown above, debit or credit that account the same as you would in a journal entry for that transaction.

Chapter 13-25

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

If it is not shown, it probably relates to cash and is listed here.

Chapter 13-26

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

         

         

Remember, we did not list a row for cash using this methodology.

Chapter 13-27

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00)Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

Cash used to redeem bonds           ($50,000)

         

The first adjustment given is that bonds amounting to $50,000 were redeemed for cash of $50,000.

The journal entry would be to credit cash (that is the first entry under the Additional Entries section).

Chapter 13-28

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00) $50,000Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source $ 103,000.00

Dividends     $ (45,000.00) Use $ (45,000.00)

           

Additional Entries          

Cash used to redeem bonds           ($50,000)

         

Where does the debit go? To bonds payable.

Remember when we redeem a bond we debit the account.

Chapter 13-29

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00) $50,000Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 Retained earnings    

     

Net Income     $ 103,000.00 Source  

Dividends     $ (45,000.00) Use  

           

Additional Entries          

Cash used to redeem bonds           ($50,000)

         

Debit & Credit

Chapter 13-30

Step 5: Make AdjustmentsStep 5: Make Adjustments

Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

     Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)     

     Contra Assets, Liabilities    

     and Stockholder Equity    

     Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00) $50,000Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 ($42,000)Retained earnings    

     

Net Income     $ 103,000.00 Source  

Dividends     $ (45,000.00) Use  

           

Additional Entries          

Cash used to redeem bonds           ($50,000)

Common stock issued           $42,000

The next adjustment is common stock being sold for $42,000 in cash.

Chapter 13-31

Step 6: Add columns 3 and 4 to get Step 6: Add columns 3 and 4 to get the total adjusted affectthe total adjusted affect

Statement of Cash Flow Worksheet         (3+4) 

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

        Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)  $ (9,000.00)Inventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00   $ 19,000.00 Land $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00   $ 25,000.00 Equipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)  $ (60,000.00)     

        Contra Assets, Liabilities    

        and Stockholder Equity    

        Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00   $ 34,000.00 Accounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)  $ (8,000.00)Bonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00) $ 50,000.00 $ - Common stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 $ (42,000.00) $ - Retained earnings    

        

Net Income     $ 103,000.00 Source     

Dividends     $ (45,000.00) Use     

              

Additional Entries             

Cash used to redeem bonds           $ (50,000.00) $ (50,000.00)

Common stock issued           $ 42,000.00 $ 42,000.00

Chapter 13-32

Step 7: Classify each transaction on Step 7: Classify each transaction on where it will appear on the where it will appear on the

statement statement Statement of Cash Flow Worksheet        (3+4)  

      (1) (2) (3) (4) (5) (6)

        Source Cash Flow   Adjusted Classi-

 2007 2008

Change or Use Effect Adjustmts Effect ficationAssets Except Cash &

              

Cash Equivalents   

          Accounts Receivable $ 76,000.00 $ 85,000.00

$ 9,000.00 Use $ (9,000.00)  $ (9,000.00) OperatingInventories $ 189,000.00 $ 170,000.00

$ (19,000.00) Source $ 19,000.00   $ 19,000.00 OperatingLand $ 100,000.00 $ 75,000.00

$ (25,000.00) Source $ 25,000.00   $ 25,000.00 InvestingEquipment $ 200,000.00 $ 260,000.00

$ 60,000.00 Use $ (60,000.00)  $ (60,000.00) Investing     

          Contra Assets, Liabilities    

          and Stockholder Equity    

          Accumulated depreciation $ 32,000.00 $ 66,000.00

$ 34,000.00 Source $ 34,000.00   $ 34,000.00 OperatingAccounts payable $ 47,000.00 $ 39,000.00

$ (8,000.00) Use $ (8,000.00)  $ (8,000.00) OperatingBonds payable $ 200,000.00 $ 150,000.00

$ (50,000.00) Use $ (50,000.00) $ 50,000.00 $ - FinancingCommon stock $ 174,000.00 $ 216,000.00

$ 42,000.00 Source $ 42,000.00 $ (42,000.00) $ - FinancingRetained earnings    

          

Net Income     $ 103,000.00 Source      Operating

Dividends     $ (45,000.00) Use      Financing

                

Additional Entries               

Cash used to redeem bonds           $ (50,000.00) $ (50,000.00) Financing

Common stock issued           $ 42,000.00 $ 42,000.00 Financing

Chapter 13-33

Step 8: Take the information from Step 8: Take the information from the worksheet and begin the Cash the worksheet and begin the Cash

Flow StatementFlow Statement

Chapter 13-34

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00      

Remember there are three sections to the Statement of Cash Flows. We start with Cash flow from Operating Activities.

The first entry should be net income.

Chapter 13-35

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00  

We want to adjust income to cash flow. The first adjustment most authors like to see is to add back deprecation.

Remember depreciation is a non-cash expense. Add it to income to get cash flow. Let’s follow this format in this class.

Now we go to our worksheet, and start from the top, selecting each item listed as an “Operating” item.

Chapter 13-36

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00   Increase in AR $ (9,000.00)  

The first item on the worksheet is Accounts Receivables. We have already:

•Classified it as operating•Shown that it was an increase in amount.•Figured out that an increase in this accounts is a use rather than source of cash.

See! All of our thinking has already been done. We concentrate on one thing at a time, less chance to make stupid mistakes on an exam.

Chapter 13-37

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00   Increase in AR $ (9,000.00)   Decrease in Inventory $ 19,000.00   Decrease in AP $ (8,000.00)   Total change   $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00

We will continue down the worksheet, doing essentially the same thing. Selecting Operating items and looking to see if they are uses or sources of cash.

We will then sum all changes ($36,000) and add that to income to get Net Cash Provided by Operating Activities.

Chapter 13-38

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00   Increase in AR $ (9,000.00)   Decrease in Inventory $ 19,000.00   Decrease in AP $ (8,000.00)   Total change   $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00       Cash Flow Investing     Sale of land   $ 25,000.00 Purchase of Equipment   $ (60,000.00) Cash Used Investing   $ (35,000.00)      Cash Flow Financing     Purchase of Bonds   $ (50,000.00) Issuance of Stock   $ 42,000.00 Payment of Dividends   $ (45,000.00) Cash Used Financing   $ (53,000.00)     

Lets use the worksheet to identify items for Investing and Financing. Total cash source or use from each section.

Chapter 13-39

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00   Increase in AR $ (9,000.00)   Decrease in Inventory $ 19,000.00   Decrease in AP $ (8,000.00)   Total change   $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00       Cash Flow Investing     Sale of land   $ 25,000.00 Purchase of Equipment   $ (60,000.00) Cash Used Investing   $ (35,000.00)      Cash Flow Financing     Purchase of Bonds   $ (50,000.00) Issuance of Stock   $ 42,000.00 Payment of Dividends   $ (45,000.00) Cash Used Financing   $ (53,000.00)      Net Increase in Cash   $ 51,000.00

The last thing we do is total the three sections to get “Net Increase in Cash”

Chapter 13-40

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00   Increase in AR $ (9,000.00)   Decrease in Inventory $ 19,000.00   Decrease in AP $ (8,000.00)   Total change   $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00       Cash Flow Investing     Sale of land   $ 25,000.00 Purchase of Equipment   $ (60,000.00) Cash Used Investing   $ (35,000.00)      Cash Flow Financing     Purchase of Bonds   $ (50,000.00) Issuance of Stock   $ 42,000.00 Payment of Dividends   $ (45,000.00) Cash Used Financing   $ (53,000.00)      Net Increase in Cash   $ 51,000.00 Cash at beginning of period   $ 22,000.00

 

To the increase in cash add the beginning cash balance taken for the balance sheet (2007).

Chapter 13-41

Statement of Cash Flows        Cash flow from Operating Activities   Net Income   $ 103,000.00       Adjustments to Net Income     Depreciation $ 34,000.00   Increase in AR $ (9,000.00)   Decrease in Inventory $ 19,000.00   Decrease in AP $ (8,000.00)   Total change   $ 36,000.00 Net Cash Provided Op Activities $ 139,000.00       Cash Flow Investing     Sale of land   $ 25,000.00 Purchase of Equipment   $ (60,000.00) Cash Used Investing   $ (35,000.00)      Cash Flow Financing     Purchase of Bonds   $ (50,000.00) Issuance of Stock   $ 42,000.00 Payment of Dividends   $ (45,000.00) Cash Used Financing   $ (53,000.00)      Net Increase in Cash   $ 51,000.00 Cash at beginning of period   $ 22,000.00 Cash at end of period   $ 73,000.00

Add Increase in Cash to Cash at Beginning of Period and it should given you Cash at End of Period taken from the 2008 balance sheet.

Chapter 13-42

Simple – Right?Simple – Right?

So how do I get an “A” on the exam?So how do I get an “A” on the exam? Memorize the columns in the worksheet.Memorize the columns in the worksheet. Enter numbers one column at a time.Enter numbers one column at a time.

Concentrate on one concept at a time.Concentrate on one concept at a time.

Use the worksheet as the format for the Use the worksheet as the format for the Statement of Cash Flows which you will also Statement of Cash Flows which you will also have memorized.have memorized.

Recheck your work!Recheck your work!

Chapter 13-43

E13-9E13-9

We will work in class on the board.We will work in class on the board. Download Excel file from hyperlink on Acc Download Excel file from hyperlink on Acc

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