managerial accounting - 5.1 preparing and using the statement of cash flows chapter 17
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Managerial Accounting - 5.1
Preparing and Using the Statement of Cash FlowsPreparing and Using the Statement of Cash Flows
Chapter 17
Managerial Accounting - 5.2
W.T. Grant CompanyW.T. Grant Company W.T. Grant Company was once one of the
leading retailers in the United States.
Managerial Accounting - 5.3
W.T. Grant CompanyW.T. Grant Company
W.T. Grant’s income statement reported rising profits as the company slid into bankruptcy.
Managerial Accounting - 5.4
W.T. Grant CompanyW.T. Grant Company
What went wrong? Grant’s operations simply did not generate
enough cash to pay the bills. If anyone had analyzed Grant’s cash flows,
the cash shortage would have been apparent.
Managerial Accounting - 5.5
W.T. Grant CompanyW.T. Grant Company
Cash receipts from customers were not as high as cash payments to suppliers.
Prior to W. T. Grant’s bankruptcy, companies were not required to include a statement of cash flows in the annual report.
Managerial Accounting - 5.6
Chapter ObjectivesChapter Objectives
1 Identify the purposes of the statement of cash flows.
2 Distinguish among operating, investing and financing activities.
3 Prepare a statement of cash flows by the direct method.
Managerial Accounting - 5.7
Chapter ObjectivesChapter Objectives
4 Use the financial statements to compute the cash effects of a wide variety of business transactions.
5 Prepare a statement of cash flows by the indirect method.
Managerial Accounting - 5.8
Purpose of The Statement of Cash Flows: Basic ConceptsPurpose of The Statement of Cash Flows: Basic Concepts
The statement of cash flows reports the entity’s cash flows (cash receipts and cash payments) during the period.
Managerial Accounting - 5.9
Purpose of The Statement of Cash Flows: Basic ConceptsPurpose of The Statement of Cash Flows: Basic Concepts
The cash flow statement identifies what a company invested in during the period.
It shows how the investment was financed. It displays how cash can be generated
internally from profitable operations or from external sources.
Managerial Accounting - 5.10
Objective 1Objective 1
Identify the purposes of the statement of cash flows.
Managerial Accounting - 5.11
Purposes of the Statementof Cash FlowsPurposes of the Statementof Cash Flows
The statement of cash flows is designed to fulfill the following:
– predict future cash flows– evaluate management decisions– determine the ability to pay dividends plus
interest and principal– show the relationship of net income to
changes in the firm’s cash
Managerial Accounting - 5.12
Cash Balance Includes...Cash Balance Includes...
– cash on hand.– cash in the bank.– cash equivalents.
Managerial Accounting - 5.13
Cash Equivalents Are....Cash Equivalents Are....
– short-term, highly liquid investments convertible into cash with little delay.
– money market accounts.– U.S. Government Treasury bills.
Managerial Accounting - 5.14
Objective 2Objective 2
Distinguish among operating, investing and financing
activities.
Managerial Accounting - 5.15
Basic Organization of the Statement of Cash FlowsBasic Organization of the Statement of Cash Flows
A business may be evaluated in terms of three types of business activities:
1 Operating activities2 Investing activities3 Financing activities
Managerial Accounting - 5.16
Operating Activities Are...Operating Activities Are...– day to day business transactions, such as: receiving cash from customers paying cash to suppliers Operating activities are related to the
transactions that make up net income.
Managerial Accounting - 5.17
Operating ActivitiesOperating Activities
Interest and dividends received are related to investing activities.
However, the FASB has decided to classify the cash received from these items as operating activities.
The FASB feels that interest expense is a cost of doing business.
Managerial Accounting - 5.18
Investing Activities...Investing Activities...
– are those that support operations. Investing activities increase and decrease
the assets that are available to the business.
Managerial Accounting - 5.19
Investing Activities...Investing Activities...
– are related to the Long-Term Asset accounts.
Managerial Accounting - 5.20
Financing Activities Involve...Financing Activities Involve...
– external financing, such as: obtaining resources from the owners or
returning resources to them. providing owners with a return on their
investment. obtaining resources from creditors and
repaying the amounts borrowed.
Managerial Accounting - 5.21
Format of the Statementof Cash FlowsFormat of the Statementof Cash Flows
FASB Statement 95 approved two methods for reporting cash flows from operating activities.
1 Direct method2 Indirect method
Managerial Accounting - 5.22
Format of the Statementof Cash FlowsFormat of the Statementof Cash Flows
The direct method lists cash receipts from specific operating activities and cash payments for each major operating activity.
The indirect method is a short-cut method for accrual systems.
Managerial Accounting - 5.23
Objective 3Objective 3
Prepare a statement of cash flows by the direct method.
Managerial Accounting - 5.24
The Direct Method...The Direct Method...
– determines the amount of cash inflows and cash outflows.
– identifies the activities that increase or decrease cash.
Managerial Accounting - 5.25
Cash Flows fromOperating ActivitiesCash Flows fromOperating Activities
Cash collections from customers Cash receipts of interest Cash receipts of dividends
Managerial Accounting - 5.26
Cash Flows fromOperating ActivitiesCash Flows fromOperating Activities
Payments to suppliers Payments to employees Payment for interest expense Payment for tax expense
Managerial Accounting - 5.27
Cash Flows fromInvesting ActivitiesCash Flows fromInvesting Activities
Proceeds from the sale of plant assets Proceeds from the sale of investments Collections of loans
Managerial Accounting - 5.28
Cash Flows fromInvesting ActivitiesCash Flows fromInvesting Activities
Cash payments to acquire plant assets Cash payments to acquire investments Loans to other companies
Managerial Accounting - 5.29
Cash Flows fromFinancing ActivitiesCash Flows fromFinancing Activities
Increases in common stock, additional paid-in capital and long-term liabilities are sources of cash.
Decreases in common stock, paid-in capital and long-term liabilities are uses of cash.
Paying dividends is a use of cash.
Managerial Accounting - 5.30
Objective 4Objective 4
Use the financial statements to compute the cash effects of
a wide variety of business transactions.
Managerial Accounting - 5.31
Computing Cash Collections from CustomersComputing Cash Collections from Customers
Collections can be computed by converting sales revenue to the cash basis.
Beginning Accounts Receivable balance + Sales on account - Collections = Ending Accounts Receivable balance
Managerial Accounting - 5.32
Computing Cash Collections from CustomersComputing Cash Collections from Customers
Lloyd’s Sporting Store income statement reports sales on account of $884,000 for the year.
Accounts Receivable increased from $80,000 at the beginning of the year to $93,000 at year end.
How much cash did Lloyd collect ? $871,000
Managerial Accounting - 5.33
Computing Cash Collections from CustomersComputing Cash Collections from Customers
$80,000 + $884,000 - x = $93,000 x = $80,000 + $884,000 - $93,000 x = $871,000 Accounts Receivable
Beginning balance 80,000 Sales 884,000 Collections 871,000
Ending balance 93,000
Managerial Accounting - 5.34
Computing Cash Collections from CustomersComputing Cash Collections from Customers
Another explanation: Because Accounts Receivable increased by
$13,000, Lloyd’s Sporting Store received $13,000 less cash than its sales revenue for the period.
Managerial Accounting - 5.35
Computing Cash Collections from CustomersComputing Cash Collections from Customers
All collections of receivables are computed following the pattern illustrated for collections from customers.
Managerial Accounting - 5.36
Computing Paymentsto SuppliersComputing Paymentsto Suppliers
This computation includes two parts, payments for inventory and payments for expenses other than interest and income tax.
Managerial Accounting - 5.37
Payments for Inventory...Payments for Inventory...
– are computed by converting cost of goods sold to the cash basis.
This is accomplished by analyzing the Inventory and Accounts Payable accounts.
Managerial Accounting - 5.38
Payments for InventoryPayments for Inventory
Lloyd's Sporting Store had the following account balances:
Beginning inventory: $138,000 Ending inventory: $135,000 Accounts Payable:– Beginning balance: $57,000– Ending balance: $91,000
Managerial Accounting - 5.39
Payments for InventoryPayments for Inventory Cost of Goods Sold was $603,000. How much were the purchases? $600,000 How much did Lloyd pay for his purchases? $566,000 How did we get these numbers?
Managerial Accounting - 5.40
PurchasesPurchases
$138,000 + x - $603,000 = $135,000 x = $135,000 - $138,000 + $603,000 x = $600,000 Inventory
Beg. inventory 138,000 Cost of goods sold 603,000 Purchases 600,000 End. inventory 135,000
Managerial Accounting - 5.41
Payments for InventoryPayments for Inventory $57,000 + $600,000 - x = $91,000 x = $57,000 + $600,000 - $91,000 x = $566,000 Accounts Payable
Beg. bal. 57,000 Payments 566,000 Purchases600,000 End. bal. 91,000
Managerial Accounting - 5.42
Payments for Operating Expenses...Payments for Operating Expenses...
– can be computed as plug-in figures by analyzing Prepaid Expenses and Accrued Liabilities.
Managerial Accounting - 5.43
Payments for Operating ExpensesPayments for Operating Expenses
Increases in prepaid expenses require cash payments, and decreases indicate that payments were less than expenses.
Decreases in accrued liabilities can occur only from cash payments, and increases mean that cash was not paid.
Managerial Accounting - 5.44
Payments to EmployeesPayments to Employees
Lloyd’s Sporting Store had a Salary and Wage Payable balance of $20,000 at the beginning of the year and $15,000 at year end.
During the year Lloyd had Salary and Wages expense of $60,000.
How much did Lloyd pay? $65,000
Managerial Accounting - 5.45
Payments to EmployeesPayments to Employees
$20,000 + $60,000 - $15,000 = $65,000 Lloyd’s Sporting Store paid for the $60,000
expense plus the $5,000 decrease in liability.
Managerial Accounting - 5.46
Acquisition and Salesof Plant AssetsAcquisition and Salesof Plant Assets
Lloyd’s Sporting Store had plant assets net of depreciation of $300,000 at the beginning of the year and $500,000 at year end.
Further, the acquisition of plant assets amounted to $306,000 during the year.
Managerial Accounting - 5.47
Acquisition and Salesof Plant AssetsAcquisition and Salesof Plant Assets
The income statement shows depreciation expense of $18,000 and a $10,000 gain on sale of plant assets.
What is the book value of the assets sold? $88,000
Managerial Accounting - 5.48
Acquisition and Salesof Plant AssetsAcquisition and Salesof Plant Assets
Beginning net balance + Acquisitions - Depreciation - Book value of assets sold = Ending balance
$300,000 + $306,000 - $18,000 - x = $500,000 x = $300,000 + $306,000 -$18,000 - $500,000 x = $88,000 (book value)
Managerial Accounting - 5.49
Acquisition and Salesof Plant AssetsAcquisition and Salesof Plant Assets
Plant Assets (net) Beg. balance 300,000 Depreciation 18,000 Acquisitions 306,000 Book value of assets
sold 88,000 End. balance 500,000
Managerial Accounting - 5.50
Acquisition and Salesof Plant AssetsAcquisition and Salesof Plant Assets
How much are the proceeds from the sale of plant assets?
Book value + Gain - Loss = Proceeds $88,000 + $10,000 - 0 = $98,000
Managerial Accounting - 5.51
Acquisition and Salesof Plant AssetsAcquisition and Salesof Plant Assets
To determine the amounts paid for the acquisition of plant assets one must solve for acquisitions first.
Beginning net balance + Acquisitions - Depreciation - Book value of assets sold = Ending balance
Managerial Accounting - 5.52
Computing the Cash Amounts of Financing ActivitiesComputing the Cash Amounts of Financing Activities
Financing activities affect liability and stockholders’ equity accounts.
– Notes Payable– Bonds Payable– Long-Term Debt– Common Stock– Paid-in Capital– Retained Earnings
Managerial Accounting - 5.53
Issuance and Payments of Long-Term Notes PayableIssuance and Payments of Long-Term Notes Payable
Debt payment is computed by analyzing the Long-Term Notes Payable account.
Managerial Accounting - 5.54
Issuance and Payments of Long-Term Notes PayableIssuance and Payments of Long-Term Notes Payable
Assume that the beginning balance was $77,000.
New debt amounting to $94,000 was incurred during the year.
The ending balance for the Long-Term Notes Payable account was $160,000.
How much was the payment? $11,000
Managerial Accounting - 5.55
Issuance and Payments of Long-Term Notes PayableIssuance and Payments of Long-Term Notes Payable
Long-Term Notes Payable Beg. balance 77,000
Paid 11,000 Issued 94,000 Balance 160,000
Managerial Accounting - 5.56
Issuance and Retirementof StockIssuance and Retirementof Stock
The cash effect of these activities is determined by analyzing the stock account.
Common Stock Beginning balance
- Retirement + Issuance of new stock = Ending balance
Managerial Accounting - 5.57
Purchases and Salesof Treasury StockPurchases and Salesof Treasury Stock
Treasury Stock Beginning balance + Purchases of - Cost of treasury
treasury stock stock sold
Ending balance
Managerial Accounting - 5.58
Computing Dividend PaymentsComputing Dividend Payments Dividend payments are computed by analyzing
the Dividends Payable account. Beginning balance + Dividends declared -
Dividend payments = Ending balance
Managerial Accounting - 5.59
Noncash Investing and Financing Activities...Noncash Investing and Financing Activities...
– are not reported in the statement of cash flows.
The FASB requires that significant non-cash investing and financing activities be shown in a separate schedule at the bottom of the statement.
Managerial Accounting - 5.60
Reconciling Net Incometo Net Cash FlowReconciling Net Incometo Net Cash Flow
The FASB requires companies that format operating activities by the direct method to report a reconciliation from net income to net cash inflow (or outflow).
Managerial Accounting - 5.61
Objective 5Objective 5
Prepare a statement of cash flows by the indirect method.
Managerial Accounting - 5.62
The Indirect Method...The Indirect Method...
– begins with accrual based net income. Adjustments are made to income for
revenues that did not generate cash and expenses that did not use cash.
Managerial Accounting - 5.63
The Indirect MethodThe Indirect Method
Depreciation, depletion and amortization expenses must be added back to the net income figure.
Gains and losses on the sale of assets are also adjustments to income.
Managerial Accounting - 5.64
The Indirect MethodThe Indirect Method
Remember when Lloyd’s Sporting Store sold assets for $98,000 that had a book value of $88,000, realizing a gain of $10,000?
Managerial Accounting - 5.65
The Indirect MethodThe Indirect Method
The $10,000 gain is reported on the income statement and is included in net income.
The cash received from the sale is $98,000, which includes the gain.
To avoid counting the gain twice, it is subtracted from net income.
Managerial Accounting - 5.66
The Indirect MethodThe Indirect Method
A loss on the sale of plant assets is also an adjustment to net income on the statement of cash flows.
A loss is added back to income to compute cash flow from operations.
The proceeds from selling the plant assets are reported under investing activities.
Managerial Accounting - 5.67
Changes in the Current Asset and Current Liability AccountsChanges in the Current Asset and Current Liability Accounts
An increase in a current asset other than cash is subtracted from net income.
Suppose a company makes a sale of $100,000.
Income is increased by the sale amount. What if $20,000 were not collected? Collections of less than the full amount
increases Accounts Receivable.
Managerial Accounting - 5.68
Changes in the Current Asset and Current Liability AccountsChanges in the Current Asset and Current Liability Accounts
The $20,000 increase in Accounts Receivable must be subtracted from net income.
Why? $20,000 was included in net income but was
not collected.
Managerial Accounting - 5.69
Changes in the Current Asset and Current Liability AccountsChanges in the Current Asset and Current Liability Accounts
A decrease in a current asset other than cash is added to net income.
Cash collections cause the Accounts Receivable balance to decrease.
Managerial Accounting - 5.70
Changes in the Current Asset and Current Liability AccountsChanges in the Current Asset and Current Liability Accounts
A decrease in a current liability is subtracted from net income.
The payment of a current liability causes both cash and the current liability to decrease.
Managerial Accounting - 5.71
Changes in the Current Asset and Current Liability AccountsChanges in the Current Asset and Current Liability Accounts
An increase in a current liability is added to net income.
The Accounts Payable account increases only if cash is not spent to pay the liability.
This means that cash payments are less than the related expense.
Managerial Accounting - 5.72
Computers and theIndirect MethodComputers and theIndirect Method
Computers can easily generate the statement of cash flows.
After the income statement is prepared, the computer picks up net income, depreciation and other noncash expenses.