chapter 13 statement of cash flows. © 2004 the mcgraw-hill companies mcgraw-hill/irwin 13-2...
TRANSCRIPT
Chapter 13
Statement of Cash Flows
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-2
Business Background
Positive cash flows permit a company to . . .
Expand its operations.Expand its operations.
Replace needed assets.
Replace needed assets.
Take advantage of market
opportunities.
Take advantage of market
opportunities.
Pay dividends to
owners.
Pay dividends to
owners.
Wall Street analysts consider cash flow an important indicator of a company’s financial
health.
Wall Street analysts consider cash flow an important indicator of a company’s financial
health.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-3
CashCashCurrency
Cash Equivalents
Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by
interest rate changes.
Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by
interest rate changes.
Classifications on the Statement of Cash Flows
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Classifications on the Statement of Cash Flows
The SCF must include the following three sections, as defined in FASB
Statement 95:Operating Activities Investing ActivitiesFinancing Activities
The SCF must include the following three sections, as defined in FASB
Statement 95:Operating Activities Investing ActivitiesFinancing Activities
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-5
Boston Beer uses the indirect
method.
Boston Beer uses the indirect
method.
The indirect method is used by 98.3% of
companies.
The indirect method is used by 98.3% of
companies.
Statement continued . . .
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This ending cash
balance should
agree with the balance
sheet.
This ending cash
balance should
agree with the balance
sheet.
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Cash Flows from Operating Activities
Cash inflows and outflows that directly
relate to income from normal
operations reported on the income
statement.
Cash inflows and outflows that directly
relate to income from normal
operations reported on the income
statement.
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13-8
Outflows to: Purchase of goods for resale
and services. Salaries and wages. Income taxes. Interest on liabilities.
Outflows to: Purchase of goods for resale
and services. Salaries and wages. Income taxes. Interest on liabilities.
Inflows from: Sales to customers. Interest and dividends
received.
Inflows from: Sales to customers. Interest and dividends
received.
Cash Flows from Operating Activities
Cash Flows from
Operating Activities
Cash Flows from
Operating Activities
+
_
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Cash Flows from Operating Activities - Indirect Method
Net Income
Net Income
Cash Flows from Operating
Activities - Indirect Method
Cash Flows from Operating
Activities - Indirect Method
Changes in current assets and current liabilities.
Changes in current assets and current liabilities.
+ Losses and - Gains
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization.
+ Noncash expenses such as depreciation and
amortization.
The indirect method adjusts net income by eliminating noncash items.
The indirect method adjusts net income by eliminating noncash items.
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Cash Flows from
Investing Activities
Cash Flows from
Investing Activities
+
_
Cash Flows from Investing Activities
Inflows from: Sale or disposal of property,
plant, and equipment. Sale or maturity of investments
in securities.
Inflows from: Sale or disposal of property,
plant, and equipment. Sale or maturity of investments
in securities.
Outflows to: Purchase property, plant, and
equipment. Purchase investments in
securities.
Outflows to: Purchase property, plant, and
equipment. Purchase investments in
securities.
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Cash Flows from
Financing Activities
Cash Flows from
Financing Activities
+
_
Cash Flows from Financing Activities
Inflows from: Borrowing on notes,
mortgages, bonds, etc. from creditors.
Issuing stock to owners.
Inflows from: Borrowing on notes,
mortgages, bonds, etc. from creditors.
Issuing stock to owners.
Outflows to: Repay principal to creditors
(excluding interest). Repurchase stock from owners. Dividends to owners.
Outflows to: Repay principal to creditors
(excluding interest). Repurchase stock from owners. Dividends to owners.
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Relationships to the Balance Sheet and the Income Statement
Information needed to prepare a statement of cash flows:
Comparative Balance Sheets.Income Statement.
Additional details concerning selected accounts.
Information needed to prepare a statement of cash flows:
Comparative Balance Sheets.Income Statement.
Additional details concerning selected accounts.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-13
Relationships to the Balance Sheet and the Income Statement
Cash = Liabilities Stockholders’ Equity Noncash Assets
Cash = Liabilities Stockholders’ Equity Noncash Assets
Derives from . . .
Assets = Liabilities Stockholders’ Equity
Assets = Liabilities Stockholders’ Equity
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Use this table when adjusting Net Income Use this table when adjusting Net Income to Operating Cash Flows using the to Operating Cash Flows using the
indirect methodindirect method..
Relationships to the Balance Sheet and the Income Statement
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Use the following financial
statements for The Boston Beer
Company and prepare the
Statement of Cash Flows for the
quarter ended on March 25, 2000.
Use the following financial
statements for The Boston Beer
Company and prepare the
Statement of Cash Flows for the
quarter ended on March 25, 2000.
Statement of Cash Flows Indirect Method Example
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© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-17
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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The Statement of Cash Flows will begin with Boston Beer’s
Net income from the Income
Statement.
The Statement of Cash Flows will begin with Boston Beer’s
Net income from the Income
Statement.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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Next, adjust for the non-cash items included in net income.
For Boston Beer, the only non-cash adjustment is for depreciation expense ($1,408).
Since this number is not obvious in the Income Statement provided, it must be derived from other
sources, such as the Notes to the Financial Statements or the General Ledger Trial Balance.
Next, adjust for the non-cash items included in net income.
For Boston Beer, the only non-cash adjustment is for depreciation expense ($1,408).
Since this number is not obvious in the Income Statement provided, it must be derived from other
sources, such as the Notes to the Financial Statements or the General Ledger Trial Balance.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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To complete the Cash flows from operating activities section, you must examine comparative balance
sheets to determine the changes in current assets and current liabilities from the beginning of the period to
the end of the period.
To complete the Cash flows from operating activities section, you must examine comparative balance
sheets to determine the changes in current assets and current liabilities from the beginning of the period to
the end of the period.
(Remember, we showed the balance sheets a few slides earlier.)
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© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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Statement continued . . .
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13-23
The balance sheet indicates that Equipment decreased by $115 during the quarter.
If you had access to additional company information, you would discover that the
company sold equipment with a book value of $222 and purchased $1,515 of new equipment. This is offset by $1,408 in
depreciation expense (see the Cash Flows from Operating Activities).
The balance sheet indicates that Equipment decreased by $115 during the quarter.
If you had access to additional company information, you would discover that the
company sold equipment with a book value of $222 and purchased $1,515 of new equipment. This is offset by $1,408 in
depreciation expense (see the Cash Flows from Operating Activities).
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Short-term investments decreased by a net $3,169 during the quarter.
Further investigation of the accounting records reveals that Boston Beer sold short-term investments for $16,500 and purchased
short-term investments for $13,331.
Short-term investments decreased by a net $3,169 during the quarter.
Further investigation of the accounting records reveals that Boston Beer sold short-term investments for $16,500 and purchased
short-term investments for $13,331.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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Contributed Capital decreased by a net $5,786. Boston Beer repurchased $5,801 of outstanding stock, which is a cash outflow. The company also issued capital stock
to employees for $15, which is a cash inflow.
Contributed Capital decreased by a net $5,786. Boston Beer repurchased $5,801 of outstanding stock, which is a cash outflow. The company also issued capital stock
to employees for $15, which is a cash inflow.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.
Now we can reconcile the change in cash to the ending cash balance that appears on the Balance Sheet.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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Required Supplemental Information:
1. Cash paid for taxes and interest.
2. Significant non-cash investing and financing activities.
Required Supplemental Information:
1. Cash paid for taxes and interest.
2. Significant non-cash investing and financing activities.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
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A Comparison of the Direct and Indirect Methods
• Net cash flow is the same for both methods. • The direct method provides more detail
about cash from operating activities.• The investing and financing sections for the
two methods are identical.
• Net cash flow is the same for both methods. • The direct method provides more detail
about cash from operating activities.• The investing and financing sections for the
two methods are identical.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-29
Direct Method Operating Activities
Remember that when we prepared the operating section using the indirect method, we also arrived at net cash inflow
of $2,922.
© 2004 The McGraw-Hill CompaniesMcGraw-Hill/Irwin
13-30
Chester, ol’ Chester, ol’ buddy, I buddy, I
wonder if you wonder if you could help me could help me
with a little with a little cash flow cash flow
problem I’m problem I’m having?having?
End of Chapter 13