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Management Accounting Tutorial 2 (Chapter 13)

Statement of Cash Flows Bangor University Transfer Abroad Programme

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Review of today’s lecture TM 13-1

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AGENDA: STATEMENT OF CASH FLOWS

A. Purpose of the statement; definition of cash.

B. Basis of the statement of cash flows: analysis of balance sheet accounts.

C. Sources and uses of funds.

D. Organization of the statement of cash flows.

E. Cash provided by operations—the direct and indirect methods.

F. Steps in preparing a statement of cash flows.

G. Example of statement of cash flows.

I. T-account approach

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Preparing the statement of Cash Flow TM 13-7

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PREPARING A STATEMENT OF CASH FLOWS

Preparing a statement of cash flows involves eight basic steps:

1. Copy the title of each balance sheet account onto a worksheet, except for cash and cash equivalents. Contra-asset accounts should be listed with the liabilities.

2. Compute the change in each balance sheet account. Break the change in retained earnings down into net income and dividends.

3. Classify each change as either a source or a use.

4. Write the sources as positive numbers and the uses as negative numbers.

5. Make necessary adjustments (for example, in gains and losses) to reflect gross, rather than net, changes in noncurrent accounts due to financing and investing activities.

6. Categorize each entry on the worksheet as an operating, investing, or financing activity.

7. Copy the data from the worksheet to the statement of cash flows.

8. Prepare a reconciliation of the cash account. McGraw-Hill /Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

T – Account Approach

TM 13-16

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T-ACCOUNT APPROACH

Cash

Provided Used

Net income is the starting point. Adjustments convert net income to a cash basis and remove gains and losses from net income in the upper portion of the T-account.

Net cash provided by operating activities

The cash effects of financing and investing activities are reflected in the lower portion of the T-account.

Net increase in cash and cash equivalents

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Exercise 13-3

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Solutions Manual, Chapter 12 7

Exercise 12-2 (15 minutes)

The guidelines from Exhibit 12-2 can be used to analyze the changes in noncash balance sheet accounts that impact net income as follows:

Increase in Account Balance

Decrease in Account Balance

Current Assets Accounts receivable .......... - 60,000 Inventory ......................... – 77,000 Prepaid expenses .............. + 2,000 Current Liabilities Accounts payable .............. +130,000 Accrued liabilities .............. – 4,000 Income taxes payable ....... + 6,000

The net cash provided by operating activities is computed as follows:

Net income ............................................................. $84,000 Adjustments to convert net income to a cash basis:

Depreciation ......................................................... $50,000 Increase in accounts receivable ............................. (60,000) Increase in inventory ............................................ (77,000) Decrease in prepaid expenses ................................ 2,000 Increase in accounts payable ................................. 130,000 Decrease in accrued liabilities ................................ (4,000) Increase in income taxes payable .......................... 6,000 47,000

Net cash provided by operating activities .................. $131,00

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Exercise 13-7

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16 Introduction to Managerial Accounting, 6th Edition

Exercise 12-6 (10 minutes)

Item Amount Add Subtract Accounts Receivable .................. $70,000 decrease X Accrued Interest Receivable ....... $6,000 increase X Prepaid Expenses ...................... $3,000 decrease X Accounts Payable ...................... $40,000 decrease X Accrued Liabilities ...................... $9,000 increase X Income Taxes Payable ............... $15,000 increase X Sale of equipment ..................... $8,000 gain X Sale of long-term investments .... $12,000 loss X

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Exercise 13-6 (part 1)

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Solutions Manual, Chapter 12 13

Exercise 12-5 (continued)

The net cash provided by operating activities is computed as follows:

Net income ........................................................... $75 Adjustments to convert net income to a cash basis: Depreciation ...................................................... $40 Decrease in accounts receivable .......................... 10 Increase in inventory .......................................... (30) Decrease in prepaid expenses ............................. 5 Increase in accounts payable .............................. 20 Decrease in accrued liabilities .............................. (10) Increase in income taxes payable ........................ 15 Loss on sale of long-term investments ................. 5 Gain on sale of land ............................................ (40) 15 Net cash provided by operating activities ................ $90 2. Prepare a statement of cash flows for the year

Investing and Financing activities:

The guidelines from Exhibit 12-3 can be used to analyze the changes in noncash balance sheet accounts that impact investing and financing cash flows as follows: Increase

in Account Balance

Decrease in Account Balance

Noncurrent Assets Property, plant, and equipment .................. – 120 Long-term investments .............................. + 30 Liabilities and Stockholders’ Equity Bonds payable .......................................... – 20 Common stock .......................................... + 40

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Exercise 13-6 (part 2)

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14 Introduction to Managerial Accounting, 6th Edition

Exercise 12-5 (continued)

Because Herald did not issue any bonds or repurchase any of its own stock during the year, the corresponding amounts in the table on the prior page represent the gross cash flows that are included in the statement of cash flows. Property, plant, and equipment, long-term investments, and retained earnings require further analysis as follows:

Property, Plant, and Equipment Additions 150 Sale of land 30 Change 120

The statement of cash flows must report the gross cash outflow of $150 and the gross cash inflow related to the sale of land of $70.

Long-Term Investments Additions 20 Sale 50 Change 30

The statement of cash flows must report the gross cash outflow of $20 and the gross cash inflow related to the sale of the investment of $45.

Retained Earnings Dividends 35 Net income 75 Change 40

The statement of cash flows must report the dividend payment of $35.

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Exercise 13-6 (part 3)

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Solutions Manual, Chapter 12 15

Exercise 12-5 (continued)

Herald Company Statement of Cash Flows

Operating activities: Net cash provided by operating activities ...................... $ 90

Investing activities: Proceeds from sale of long-term investments ................ $ 45 Proceeds from sale of land .......................................... 70 Additions to long-term investments .............................. (20) Additions to property, plant & equipment ..................... (150) Net cash used in investing activities ............................. (55)

Financing activities: Retirement of bonds payable ....................................... (20) Issuance of common stock .......................................... 40 Cash dividends ........................................................... (35) Net cash used in financing activities ............................. (15)

Net increase in cash (net cash flow) ............................. 20 Cash balance, beginning .............................................. 100 Cash balance, ending .................................................. $120