statement of cash flows - uwcentre the statement of cash flows mcgraw-hill /irwin copyright © 2009...

13-1

McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Management Accounting Lecture 2 (Chapter 13)

Statement of Cash Flows

Bangor University Transfer Abroad Programme


Today’s Agenda

n Cash Flow Statements

n What Cash Flow Statements show us

n Building a Cash Flow Statement



Income Statement

Balance Sheet


The statement of cash flows highlights the major activities that impact cash flows and ,hence, affect the overall cash

balance. McGraw-Hill /Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Cash Flow Statements

n Cash Flow Statements present a company’s n  Changes in cash over a period of time n  Sources and uses of its cash n  Cash position

n  Is the company generating sufficient cash? n  To maintain operations? n  To re-pay its debts? n  Pay dividends

n Cash flows and net income differ



Are cash flows sufficient to

support ongoing operations?

Will the company be

able to repay its debts?

Why do net income and net

cash flow differ?

To what extent will the company have

to borrow money to make needed investments?

Will the company be

able to pay its usual

dividend?


A Fundamental Principle

Δ Cash Balance = Δ Noncash Balance Sheet Accounts

This principle ensures that properly analyzing the changes in all noncash

balance sheet accounts always quantifies the cash inflows and

outflows that explain the change in the cash balance.

13-2


Constructing the Statement of Cash Flows

Net Cash Flows for a

Period

Net Income

Dividends Paid to

Stockholders

Changes in Noncash Assets

Changes in Liabilities

Changes in Capital Stock


SourcesNet Income AlwaysNet LossChanges in noncash assets DecreasesChanges in liabilities* IncreasesChanges in capital stock accounts IncreasesDividends paid to stockholders

Total sources - Total uses = Net cash flow

Uses

AlwaysIncreases

* Contra asset accounts, such as the Accumulated Depreciation and Amortization account, follow the rules for liabilities.

Decreases

DecreasesAlways

Constructing the Statement of Cash Flows


Organization of the Full-Fledged Statement of Cash Flows

Operating Activities

Investing Activities

Financing Activities

The beginning cash balance is reconciled with the ending cash

balance.



Includes those activities that enter into the determination of net income.

Net Income (Loss) $ XXX

Add: Decr. in Current Noncash Assets XXX Incr. in Current Liabilities XXX Depreciation Charges XXX Losses XXX

Less: Incr. in Current Noncash Assets (XXX)Decr. in Current Liabilities (XXX)Gains (XXX)

Net Cash Flows from Operating Activities $ XXX



Sources of cash are added to net income and uses of cash are subtracted from net income.

Impact on Net IncomeSources Uses

CurrentNoncash Assets

CurrentLiabilities

Decreases

Increases

Increases

Decreases









CurrentLiabilities

Decreases

Increases

Increases

Decreases

13-3









CurrentLiabilities

Decreases

Increases

Increases

Decreases






Depreciation and Amortization charges are added back to net income because they are

decreases in noncash assets.







Losses are added back to net income.


Gains are subtracted from net

income. McGraw-Hill /Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Add: Proceeds from sale of land, buildings, equipment, or other noncurrent assets $ XXX Receipt of principal from investments XXX

Less: Payments to acquire land, buildings, equipment, or other noncurrent assets (XXX)Payments to acquire investments (XXX)

Net Cash Flows from Investing Activities $ XXX

Includes transactions that involve the acquisition or disposal of noncurrent assets.

Investing Activities


Add: Proceeds from borrowings $ XXX Proceeds from issuing capital stock XXX Proceeds from sale of bonds XXX

Less: Principal payments on borrowed funds (XXX)Payments related to bond maturities (XXX)Dividend payments (XXX)

Net Cash Flows from Financing Activities $ XXX

Includes transactions involving receipts from or payments to creditors and owners.

Financing Activities


Other Issues: Gross or Net?

For financing investing and

activities, items on the statement

of cash flows should be

presented in gross amounts

rather than in net amounts.

Example:   Assume Macy’s

purchases $50 million in property during the year and sells other property for $30 million.

  Instead of showing the net change of $20 million, the company must report the gross amounts of both transactions.

13-4


Operating Activities: Direct or Indirect Method?

Two Formats for Reporting Operating Activities

Reports the cash effects of each operating

activity

Direct Method

Starts with accrual net income and converts to cash basis

Indirect Method

Note that no matter which format is used, the same amount of net cash flows from operating activities is generated.


ChangeSource or Use?

Cash Flow Effect

Adjust-ments

Adjusted Effect

Classifi- cation

Accounts receivableInventory

LandEquipment

Accumulated depreciation

Accounts payableSalaries payable

Note payable

Common stock

Net lossDividends

Contra Assets, Liabilities, Contra assets

Total (net cash flow)

Retained earnings

Ed's Pizza HutStatement of Cash Flows Worksheet

Noncurrent liabilities

Stockholders' equity

Current liabilities

Assets (except cash and Current assets

Noncurrent assets

Preparing the Statement of Cash Flows: Step 1

List each account appearing on the

comparative balance sheets except for

cash and cash equivalents and

retained earnings.



Cash Flow Effect

Adjust-ments

Adjusted Effect

Classifi- cation

Accounts receivable (17,000)$ Inventory 50,000

Land (32,000) Equipment -

Accumulated depreciation 6,000

Accounts payable 11,000 Salaries payable (5,000)

Note payable (50,000)

Common stock 50,000

Net loss (27,000) Dividends 3,000


Retained earnings




Current liabilities


Noncurrent assets



Compute the change from the

beginning balance to the ending

balance for each account.



Cash Flow Effect

Adjust-ments

Adjusted Effect

Classifi- cation

Accounts receivable (17,000)$ SourceInventory 50,000 Use

Land (32,000) SourceEquipment -

Accumulated depreciation 6,000 Source

Accounts payable 11,000 SourceSalaries payable (5,000) Use

Note payable (50,000) Use

Common stock 50,000 Source

Net loss (27,000) UseDividends 3,000 Use




Current liabilities


Noncurrent assets



Retained earnings


Code each entry on the worksheet as a

source or use of cash.

Recall that the transaction involving the Note Payable and Common Stock was noncash. {



Cash Flow Effect

Adjust-ments

Adjusted Effect

Classifi- cation

Accounts receivable (17,000)$ Source 17,000$ Inventory 50,000 Use (50,000)

Land (32,000) Source 32,000 Equipment - -

Accumulated depreciation 6,000 Source 6,000

Accounts payable 11,000 Source 11,000 Salaries payable (5,000) Use (5,000)

Note payable (50,000) Use (50,000)

Common stock 50,000 Source 50,000

Net loss (27,000) Use (27,000) Dividends 3,000 Use (3,000)

(19,000)$



Retained earnings




Current liabilities


Noncurrent assets


Code sources of cash as positive

numbers and uses of cash as negative

numbers.



Cash Flow Effect

Adjust-ments

Adjusted Effect

Classifi- cation

Accounts receivable (17,000)$ Source 17,000$ - 17,000$ Inventory 50,000 Use (50,000) - (50,000)

Land (32,000) Source 32,000 - 32,000 Equipment - - - -

Accumulated depreciation 6,000 Source 6,000 - 6,000

Accounts payable 11,000 Source 11,000 - 11,000 Salaries payable (5,000) Use (5,000) - (5,000)

Note payable (50,000) Use (50,000) 50,000 -

Common stock 50,000 Source 50,000 (50,000) -

Net loss (27,000) Use (27,000) - (27,000) Dividends 3,000 Use (3,000) - (3,000)

(19,000)$ -$ (19,000)$ Total (net cash flow)

Retained earnings




Current liabilities


Noncurrent assets



Make any necessary

adjustments, including

adjustments for gains and losses. The net effect of these should

equal zero. We need to make an adjustment

for the noncash transaction.

{

13-5




Cash Flow Effect

Adjust-ments

Adjusted Effect

Classifi- cation

Accounts receivable (17,000)$ Source 17,000$ - 17,000$ OperatingInventory 50,000 Use (50,000) - (50,000) Operating

Land (32,000) Source 32,000 - 32,000 InvestingEquipment - - - -

Accumulated depreciation 6,000 Source 6,000 - 6,000 Operating

Accounts payable 11,000 Source 11,000 - 11,000 OperatingSalaries payable (5,000) Use (5,000) - (5,000) Operating

Note payable (50,000) Use (50,000) 50,000 -

Common stock 50,000 Source 50,000 (50,000) -

Net loss (27,000) Use (27,000) - (27,000) OperatingDividends 3,000 Use (3,000) - (3,000) Financing

(19,000)$ -$ (19,000)$




Current liabilities


Noncurrent assets



Retained earnings

Classify each

entry as operating, investing

or financing activity.


Operating ActivitiesNet loss (27,000)$ Add: Decrease in accounts receivable 17,000

Increase in accounts payable 11,000 Increase in depreciation charges 6,000

Less: Increase in inventory (50,000) Decrease in salaries payable (5,000)

Net cash flow from operations (48,000) Investing Activities

Proceeds from sale of land 32,000 Financing Activities

Dividends paid (3,000) Net change in cash (19,000)

Ed's Pizza HutStatement of Cash Flows

For the Period Ending 3/31/2007


Copy the data from the

worksheet into the Statement of Cash Flows

section by section.







Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending 71,000$




Prepare a cash reconciliation at

the bottom of the statement.









For the Period Ending 3/31/2007 In addition, on the face of the

statement or in a supplemental

schedule, disclose the issuance of

$50,000 of stock to a creditor, a

noncash financing activity.

Preparing the Statement of Cash Flows


Interpretation of the Statement of Cash Flows

Examine the operating activities section carefully.

n Ed’s Pizza Hut generated a net cash flow from operations of ($48,000). This is usually a sign of fundamental difficulties.

n Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities.


T-Account Approach

Ed's Pizza HutComparative Balance Sheet Account Balances

3/31/2007 3/31/2006 ChangeDR (CR) DR (CR) Incr. (Decr.)

Cash 71,000$ 90,000$ (19,000)$ Accounts Receivable 23,000 40,000 (17,000) Inventory 350,000 300,000 50,000 Land 68,000 100,000 (32,000) Equipment 84,000 84,000 - Accumulated Depr. (45,000) (39,000) 6,000 Accounts Payable (38,000) (27,000) 11,000 Salaries Payable (9,000) (14,000) (5,000) Note Payable - Joe Doe - (50,000) (50,000) Common Stock (500,000) (450,000) 50,000 Retained Earnings (4,000) (34,000) (30,000)

-$ -$

13-6


T-Account Approach

Additional Information: n There was a net loss for the year of $27,000. n Depreciation charges for the year were

$6,000. n During the year, Ed sold land originally

costing $32,000 for $32,000. n During the year, Ed paid dividends of $3,000

to the stockholders. n Ed issued $50,000 of common stock to settle

the note due to Joe Doe. McGraw-Hill /Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

T-Account Approach

Decrease in A/R 17,000$ Decrease in Land 32,000 Increase in A/P 11,000 Depreciation charges 6,000 Total sources of cash 66,000$

Ed's Pizza HutSources of Cash

Here is a summary of the sources of cash for Ed’s Pizza Hut.


T-Account Approach

Here is a summary of the uses of cash for Ed’s Pizza Hut.

Net loss 27,000$ Increase in Inventory 50,000 Decrease in Salaries Payable 5,000 Dividends paid 3,000 Total uses of cash 85,000$

Ed's Pizza HutUses of Cash

The net cash flow for Ed’s Pizza Hut is ($19,000): $66,000 in sources minus $85,000 in uses.


The Journal Entries

Description Debit CreditRetained Earnings - Net Loss 27,000 Cash - Used 27,000

Retained Earnings - Dividends 3,000 Cash - Used 3,000

27,000 Net loss

3,000 Cash dividends paid

CashProvided Used


T-Account Approach

Description Debit CreditCash - Provided 17,000 Accounts Receivable 17,000

Inventory 50,000 Cash - Used 50,000

Decrease in accounts receivable 17,000 27,000 Net loss50,000 Increase in inventory

3,000 Cash dividends paid

CashProvided Used


T-Account Approach

Description Debit CreditCash - Provided 32,000 Land 32,000

Cash - Provided 6,000 Accumulated Depreciation 6,000

Decrease in accounts receivable 17,000 27,000 Net lossDepreciation charges 6,000 50,000 Increase in inventory

Proceeds from sale of land 32,000 3,000 Cash dividends paid

CashProvided Used

13-7


T-Account Approach

Description Debit CreditCash - Provided 11,000 Accounts Payable 11,000

Salaries Payable 5,000 Cash - Used 5,000

Decrease in accounts receivable 17,000 27,000 Net lossDepreciation charges 6,000 50,000 Increase in inventoryIncrease in accounts payable 11,000 5,000 Decrease in salaries payable

48,000 Net cash used by operating activitiesProceeds from sale of land 32,000 3,000 Cash dividends paid

CashProvided Used


T-Account Approach

Description Debit Credit

No Effect in the Cash account.


48,000 Net cash used by operating activitiesProceeds from sale of land 32,000 3,000 Cash dividends paid

CashProvided Used

What about the $50,000 issuance of common stock?


T-Account Approach


48,000 Net cash used by operating activitiesProceeds from sale of land 32,000 3,000 Cash dividends paidTotal sources 66,000 85,000 Total uses

19,000 Net decrease in cash and cash equivalents

CashProvided Used

The net effect of these transactions on the cash account is as shown.

Notice, the net decrease in cash is $19,000.


The technique used to gather and organize data does not affect the format of the statement of cash

flows. The final statement of cash flows prepared

using the T-account method would appear as shown. Each transaction

has been properly disclosed in the

operating, investing, and financing sections of the

statement.

Preparing the Statement of Cash Flows










Tutorial

n  Review of today’s lecture n  Complete Problems

n  13-3 n  13-7 n  13-6

statement of cash flows - uwcentre the statement of cash flows mcgraw-hill /irwin copyright © 2009...

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