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# CHAPTER 4 Structure of the Balance Sheet and Statement of ...

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• Current assets are assets expected to be converted to cash within next 12 months or next operating cycle.
• Let’s say that you are going to issue stocks. Let’s say the par value is 1 dollar per share. Par value is the same as face value. Just like on this five dollar bills, it has five dollars on it. In most cases, the market valuation of a share of the company’s stock is different from the par value. For example, let’s say the par value of your stock is 1 dollar. However, investors are willing to pay 3 dollars for your stocks. Let’s say you issue 1 million shares. Then the par value of the 1 million stock is 1 million. That number goes to the account Capital Stock. As I said before, investors are willing to pay 3 dollars for a share. So, you actually get 3 million dollars. The 2 million that’s above and beyond the par value is put in additional paid-in capital.
• Let’s say that you are going to issue stocks. Let’s say the par value is 1 dollar per share. Par value is the same as face value. Just like on this five dollar bills, it has five dollars on it. In most cases, the market valuation of a share of the company’s stock is different from the par value. For example, let’s say the par value of your stock is 1 dollar. However, investors are willing to pay 3 dollars for your stocks. Let’s say you issue 1 million shares. Then the par value of the 1 million stock is 1 million. That number goes to the account Capital Stock. As I said before, investors are willing to pay 3 dollars for a share. So, you actually get 3 million dollars. The 2 million that’s above and beyond the par value is put in additional paid-in capital.
• In previous slide, we figured out that the cash revenue is 96,225. In the indirect method, we begin with net income and then we add back decrease in a/r of 4225. Why would we do that? What’s the underlying reason?
• The underlying reason is both treatments will get the same results. If there is no expense, let’s say net income is just equal to revenue. Will we get the same cash revenue in both ways?
• Instead of treating every revenue and expense separately, indirect method begins with the aggregate earnings number, which takes care of revenues and expenses. The rest is to deal with changes in balance sheet items, isn’t it?

## CHAPTER 4 Structure of the Balance Sheet and Statement of ...Presentation Transcript

• CHAPTER 4 Structure of the Balance Sheet and Statement of Cash Flow Adopted from Slides Authored by Brian Leventhal University of Illinois at Chicago
• Measurement conventions of Balance Sheet Items
• Cash Flow Statement
• Indirect approach
• Direct approach
• I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts
• A. A classified balance sheet groups similar items so that important relationships are revealed .
• 1. Assets: a. Current assets. b. Long-term investments. c. Property, plant, and equipment. d. Intangible assets. e. Other (long-term) assets.
Assets = Liabilities + Owners’ Equity
• I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts
• A. A classified balance sheet groups similar items so that important relationships are revealed .
• 2. Liabilities: a. Current liabilities. b. Long-term liabilities.
Assets = Liabilities + Owners’ Equity
• I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts
• A. A classified balance sheet groups similar items so that important relationships are revealed .
• 3. Owners’ equity: a. Capital stock. b. Additional paid-in capital. c. Retained earnings.
Assets = Liabilities + Owners’ Equity
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Current Assets
• Cash & Cash Equivalents \$3,345 \$ 1,453
• Short-Term Investments 699 171
• Accounts Receivable, net 5,125 5,057
• Inventories 3,422 3,745
• Deferred Income Taxes 3,162 2,362
• Other current assets 750 743
• Total Current Assets \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts If cash consists exclusively of U.S. dollar amounts , the balance sheet account reflects the historical amount , which is identical to the current market value of cash .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Current Assets
• Cash & cash Equivalents \$3,345 \$ 1,453
• Short-Term Investments 699 171
• Accounts Receivable, net 5,125 5,057
• Inventories 3,422 3,745
• Deferred Income Taxes 3,162 2,362
• Other current assets 750 743
• Total Current Assets \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Cash amounts denominated in foreign currency units is translated into U.S. dollar equivalents at the balance sheet date using the current rate of exchange . This portion of cash is carried at its current market price .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Current Assets
• Cash & cash Equivalents \$3,345 \$ 1,453
• Short-Term Investments 699 171
• Accounts Receivable, net 5,125 5,057
• Inventories 3,422 3,745
• Deferred Income Taxes 3,162 2,362
• Other current assets 750 743
• Total Current Assets \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts The intended holding period of the company that owns the securities determines how the debt and equity securities are measured on the balance sheet .
• I. Measurement Conventions for Balance Sheet Accounts Short-term investments:
• 1. The intended holding period of the company that owns the securities determines how the debt and equity securities are measured on the balance sheet.
• a. Debt securities that the company intends to hold to maturity is carried at amortized cost.
• b. Debt and equity securities held for short-range investment purposes are carried at the market price.
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Current Assets
• Cash & cash Equivalents \$3,345 \$ 1,453
• Short-Term Investments 699 171
• Accounts Receivable, net 5,125 5,057
• Inventories 3,422 3,745
• Deferred Income Taxes 3,162 2,362
• Other current assets 750 743
• Total Current Assets \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Some investments will be carried at original (historical) cost , some at amortized cost , and others at current cost .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Current Assets
• Cash & cash Equivalents \$3,345 \$ 1,453
• Short-Term Investments 699 171
• Accounts Receivable, net 5,125 5,057
• Inventories 3,422 3,745
• Deferred Income Taxes 3,162 2,362
• Other current assets 750 743
• Total Current Assets \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Gross accounts receivable equal the face amounts arising from past transactions .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Current Assets
• Cash & cash Equivalents \$3,345 \$ 1,453
• Short-Term Investments 699 171
• Accounts Receivable, net 5,125 5,057
• Inventories 3,422 3,745
• Deferred Income Taxes 3,162 2,362
• Other current assets 750 743
• Total Current Assets \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Gross accounts receivable are reduced by an estimate of the accounts receivable that will ultimately not be collected . So,  Net Accounts Receivable are carried at net realizable value .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• ASSETS
• Total Current Assets \$16,503 \$13,531
• Property, Plant & Equipment,net 9,246 10,049
• Other Assets 11,578 5,148
• Total Assets \$ 37,327 \$ 28,728
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Historical Cost - Accum.Deprec. Book Value(Net) Property,Plant & Equipment are on the balance sheet at: When a long-lived asset becomes impaired —that is, when its carrying amount may no longer be recoverable —the fixed asset is reduced to its lower fair value .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• LIBILITIES
• Current Liabilities
• Notes payable & current portion of long-term debt \$2,504 \$ 2,909
• Accounts payable 3,015 2,305
• Accrued liabilities 6,897 6,226
• Total Current Liabilities 12,416 11,440
• Long-term debt 3,089 2,633
• Deferred Income Taxes 3,481 1,188
• Other liabilities 1,513 1,245
• Total Liabilities \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Accounts payable & accrued liabilities are on the balance sheet at the amount of the original liability ( historical cost ).
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• LIBILITIES
• Current Liabilities
• Notes payable & current portion of long-term debt \$2,504 \$ 2,909
• Accounts payable 3,015 2,305
• Accrued liabilities 6,897 6,226
• Total Current Liabilities 12,416 11,440
• Long-term debt 3,089 2,633
• Deferred Income Taxes 3,481 1,188
• Other liabilities 1,513 1,245
• Total Liabilities \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts The initial balance sheet carrying amount is the discounted present value of the sum of (1) the future principal repayment plus (2) the periodic interest payments .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• LIBILITIES
• Current Liabilities
• Notes payable & current portion of long-term debt \$2,504 \$ 2,909
• Accounts payable 3,015 2,305
• Accrued liabilities 6,897 6,226
• Total Current Liabilities 12,416 11,440
• Long-term debt 3,089 2,633
• Deferred Income Taxes 3,481 1,188
• Other liabilities 1,513 1,245
• Total Liabilities \$16,503 \$13,531
I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Deferred income taxes are reported at their undiscounted amount . (Original Amount)
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• STOCKHOLDERS’ EQUITY
• Preferred stock, \$100 PV
• Authorized shares:
• .5 (non issued) ---- ----
• Common Stock, \$3 PV
• Authorizes shares: 2001&2000, 1,400
• Issued & outstanding:
• 2001,612.8;2000;601.1 1,838 1,804
• Additional paid-in capital 2,572 1,894
• Retained earnings 8,780 8,254
• Non-owner changes to equity 3,154 270
• Total Stockholders’ Eq. \$16,344 \$12,222
Common Stock is reported at historical par value .
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• STOCKHOLDERS’ EQUITY
• Preferred stock, \$100 PV
• Authorized shares:
• .5 (non issued) ---- ----
• Common Stock, \$3 PV
• Authorizes shares: 2001&2000, 1,400
• Issued & outstanding:
• 2001,612.8;2000;601.1 1,838 1,804
• Additional paid-in capital 2,572 1,894
• Retained earnings 8,780 8,254
• Non-owner changes to equity 3,154 270
• Total Stockholders’ Eq. \$16,344 \$12,222
Additional paid-in capital is reported at historical cost as the excess of original issue price and par value.
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• STOCKHOLDERS’ EQUITY
• Preferred stock, \$100 PV
• Authorized shares:
• .5 (non issued) ---- ----
• Common Stock, \$3 PV
• Authorizes shares: 2001&2000, 1,400
• Issued & outstanding:
• 2001,612.8;2000;601.1 1,838 1,804
• Additional paid-in capital 2,572 1,894
• Retained earnings 8,780 8,254
• Non-owner changes to equity 3,154 270
• Total Stockholders’ Eq. \$16,344 \$12,222
This measures the net of the cumulative earnings less cumulative dividend distributions of the company since inception . This is reinvestment to grow!
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• STOCKHOLDERS’ EQUITY
• Preferred stock, \$100 PV
• Authorized shares:
• .5 (non issued) ---- ----
• Common Stock, \$3 PV
• Authorizes shares: 2001&2000, 1,400
• Issued & outstanding:
• 2001,612.8;2000;601.1 1,838 1,804
• Additional paid-in capital 2,572 1,894
• Retained earnings 8,780 8,254
• Non-owner changes to equity 3,154 270
• Total Stockholders’ Eq. \$16,344 \$12,222
Since different measurement bases pervade the balance sheet, & income statement so retained earnings is a mixture of historical costs, current values, and present values.
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• STOCKHOLDERS’ EQUITY
• Preferred stock, \$100 PV
• Authorized shares:
• .5 (non issued) ---- ----
• Common Stock, \$3 PV
• Authorizes shares: 2001&2000, 1,400
• Issued & outstanding:
• 2001,612.8;2000;601.1 1,838 1,804
• Additional paid-in capital 2,572 1,894
• Retained earnings 8,780 8,254
• Non-owner changes to equity 3,154 270
• Total Stockholders’ Eq. \$16,344 \$12,222
This measures the net of the cumulative unrealizable gains and losses from other comprehensive income components recognized in current and prior years
• Motorola Balance Sheet
• Dec 31
• 2001 2000
• STOCKHOLDERS’ EQUITY
• Preferred stock, \$100 PV
• Authorized shares:
• .5 (non issued) ---- ----
• Common Stock, \$3 PV
• Authorizes shares: 2001&2000, 1,400
• Issued & outstanding:
• 2001,612.8;2000;601.1 1,838 1,804
• Additional paid-in capital 2,572 1,894
• Retained earnings 8,780 8,254
• Non-owner changes to equity 3,154 270
• Total Stockholders’ Eq. \$16,344 \$12,222
This account is debited for unrealized losses and credited for unrealized gains . All amounts are shown net of tax effects .
• 2. The connection between successive balance sheet positions and the statement of cash flows can be shown:
II. Statement of Cash Flows: a. Assets = Liabilities  Owners’ equity b. Cash  Noncash assets = Liabilities  Owners’ equity c. Cash = Liabilities  Noncash assets  Owners’ equity d.  Cash =  Liab   Noncash assets   Owners’ equity
• 2. The connection between successive balance sheet positions and the statement of cash flows can be shown:
II. Statement of Cash Flows:  Cash =  Liab –  Noncash assets   Owners’ equity
• e. The cash flow statement simultaneously provides an explanation of why a firm’s cash position has changed between successive balance sheet dates
• and explains changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same time period.
• 3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period.
II. Statement of Cash Flows:
• 3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period.
II. Statement of Cash Flows: a. Reported net income will not equal cash flow from operating activities because of differences between accrual-based and cash-based accounting.
• 3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period.
II. Statement of Cash Flows:
• Changes in cash may be caused by nonoperating investing activities like the purchase or sale of property, plant,
• and equipment .
• 3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period.
II. Statement of Cash Flows: c. Changes in cash may be caused by nonoperating financing activities like the issuance of stock or bonds or the repayment of a bank loan.
• B. The cash flow statement summarizes the cash inflows and outflows of a company broken down into three activities :
II. Statement of Cash Flows:
• 1. Cash flows from operating activities result from the cash effects of transactions and events that affect operating income.
• 2. Cash flows from investing activities result from the cash effects of transactions and events that affect long-term assets.
• 3. Cash flows from financing activities result from the cash effects of transactions and events that affect long-term liabilities and owners’ equity (other than net income).
• II. Statement of Cash Flows: Let’s Look at an Example of Cash & Accrual Accounting
• HRB Advertising Company HRB Advertising opened on April 1, 2001 . The corp.’s for the remainder of 2001 are as follows: 1. Each of the 3 partners contributed \$3500 cash on April 1 for shares of the company’s stock. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500
• HRB Advertising Company HRB Advertising opened on April 1, 2001 . The corp.’s for the remainder of 2001 are as follows: 2. HRB rented office space Beg. April 1 , and paid the full year’s rental of \$2000 per month or \$24,000 in advance. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000)
• HRB Advertising Company 3. The Company borrowed \$10,000 from a bank on April 1 . The loan and accrued interest is payable Jan. 1, 2002 w/ interest at 12% per year. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000
• HRB Advertising Company 4. HRB purchased office eq. With a 5 year life for \$15,000 cash on April 1 . Equipment is depreciated straight-line no salvage value. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000 Equipment purchase (\$15,000)
• HRB Advertising Company 5. HRB sold and billed customer for \$65,000 of advertising services rendered between April 1 and Dec 31 . Of this amount, \$20,000 was still uncollected by year-end . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000 Equipment purchase (\$15,000) Adverting Rev.(Accrual Actg.) = Revenue Earned Services Performed = \$65,000 Advertising Revenue \$45,000 Advertising Revenue \$65,000
• HRB Advertising Company 6. By year-end, the company used and paid the following operating costs: (a) utilities \$650 , (b) salaries, \$36,250 and (c) supplies \$800 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000 Equipment purchase (\$15,000) Advertising Revenue \$45,000 Advertising Revenue \$65,000 Salary Expense (\$36,250) Utilities Expense (650) Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) Supplies Expense (800)
• HRB Advertising Company 7. The company had accrued (unpaid) expenses at year-end as follows: (a) utilities \$75 ; (b) salaries \$2,400 ; and (c) interest \$900 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000 Equipment purchase (\$15,000) Advertising Revenue \$45,000 Advertising Revenue \$65,000 Salary Expense (\$36,250) Utilities Expense (650) Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) Supplies Expense (800) Utilities Expense(Used) = \$650 + \$75 =\$725 (725) Salary Expense(Used) = \$36,250 + \$2,400 =\$ 38,650 (38,650) Interest Expense(Used) = \$10,000*.12*9/12= \$900 Interest Expense (900)
• HRB Advertising Company 8. Supplies purchased on account and unpaid at year-end is \$50 . Supplies on hand at year-end is \$100 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000 Interest Expense (900) Equipment purchase (\$15,000) Advertising Revenue \$45,000 Advertising Revenue \$65,000 Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) Supplies Expense (800) Supplies Expense(Used) = \$\$ Purchased – End. Supplies \$750 = (\$800 + \$50) - \$100 (750) Utilities Expense (650) (725) Salary Expense (\$36,250) (38,650)
• HRB Advertising Company 9. Annual Depr. Exp. On office Eq. Is \$3000. Since the Eq. Was acquired on April 1, the Dep Exp for 2001 is \$3,000 * 9/12 = \$2,250 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Bank borrowing \$10,000 Interest Expense (900) Equipment purchase (\$15,000) Depreciation Exp. (2,250) Advertising Revenue \$45,000 Advertising Revenue \$65,000 Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) Utilities Expense (650) (725) Salary Expense (\$36,250) (38,650) Supplies Expense (800) (750)
• HRB Advertising Company 10. The office space was used for 9 months \$18,000 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Rent Expense (\$18,000) Bank borrowing \$10,000 Interest Expense (900) Equipment purchase (\$15,000) Depreciation Exp. (2,250) Advertising Revenue \$45,000 Advertising Revenue \$65,000 Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) Rent Used(Accrual Actg.) = Cost per Month * Months Used \$18,000 = \$2,000 * 9 Utilities Expense (650) (725) Salary Expense (\$36,250) (38,650) Supplies Expense (800) (750)
• HRB Advertising Company LET’S GET THE FINAL RESULTS !!!! Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance \$10,500 Rent Expense (\$24,000) Rent Expense (\$18,000) Bank borrowing \$10,000 Equipment purchase (\$15,000) Depreciation Exp. (2,250) Advertising Revenue \$45,000 Advertising Revenue \$65,000 Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) Interest Expense (900) \$ 3725 (\$16,700) \$20,500 (\$11,200) Utilities Expense (650) (725) Salary Expense (\$36,250) (38,650) Supplies Expense (800) (750)
• HRB Advertising Company Direct approach shows the individua l operating cash inflows and outflows directly . Cash Flow Statement Operating Activities Total Operating Cash Flow Rent Expense (\$24,000) Advertising Revenue \$45,000 Salary Expense (\$36,250) Utilities Expense (650) Supplies Expense (800) (\$16,700)
• HRB Advertising Company Cash Flow Statement Operating Activities Net Income \$ 3,725 Plus: Depreciation \$2,250 Increase in S/P 2,400 Increase in A/P 50 Increase in Util/P 75 Increase in Int/P 900 5,675 Minus: Increase in A/R (20,000) Increase in Prpd Rent (6,000) Increase in Supplies (100) (26,100) Cash Flow from operations (\$16,700) Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
• Cash Flow Statement
• Operating Activities
• Net Income \$ 3,725
• Plus:
• Add noncash expenses (i.e., depreciation; amortization; bond discount; losses on sales of property, plant, and equipment.) to net income .
• Cash Flow from operations (\$16,700)
Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
• Cash Flow Statement
• Operating Activities
• Net Income \$ 3,725
• Plus:
• Add net decreases in current assets .
• Add net increases in current liabilities .
• Cash Flow from operations (\$16,700)
Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
• Cash Flow Statement
• Operating Activities
• Net Income \$ 3,725
• Plus:
• Minus:
• Subtract net decreases in current liabilities.
• Subtract net increases in current assets.
• Subtract noncash gains (amortization; bond premium; gains on sales of property, plant, and equipment.) to net income .
• Cash Flow from operations (\$16,700)
Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
• Let’s Look at an Example of Making a Statement of Cash Flows II. Statement of Cash Flows:
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Assets
• Cash (\$11,200) \$ 500 + \$ 11,700
• A/R 20,000 15,775 - 4225
• Supplies Inventory 100 225 + 125
• Prepaid Rent 6,000 6,000 ---
• Office Equipment 15,000 16,500 + 1,500
• Less: A/D (2,250 (5,500) - 3,250
• Total Assets \$ 27,650 \$ 33,500 + \$ 5,850
Putting together a Statement of Cash Flows #1 Calculate Change in Balance Sheet Accounts
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Assets
• Cash (\$11,200) \$ 500 + \$ 11,700
• A/R 20,000 15,775 - 4225
• Supplies Inventory 100 225 + 125
• Prepaid Rent 6,000 6,000 ---
• Office Equipment 15,000 16,500 + 1,500
• Less: A/D (2,250) (5,500) - 3,250
• Total Assets \$ 27,650 \$ 33,500 + \$ 5,850
Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting OP OP OP INV OP (Dep. Exp) and/or INV(Asset Sales)
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Assets
• Cash (\$11,200) \$ 500 + \$ 11,700
• A/R 20,000 15,775 - 4225
• Supplies Inventory 100 225 + 125
• Prepaid Rent 6,000 6,000 ---
• Office Equipment 15,000 16,500 + 1,500
• Less: A/D (2,250 (5,500) - 3,250
• Total Assets \$ 27,650 \$ 33,500 + \$ 5,850
Putting together a Statement of Cash Flows Answer to: Increase in Cash for the period on Statement
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Assets
• Cash (\$11,200) \$ 500 + \$ 11,700
• A/R 20,000 15,775 - 4225
• Supplies Inventory 100 225 + 125
• Prepaid Rent 6,000 6,000 ---
• Office Equipment 15,000 16,500 + 1,500
• Less: A/D (2,250) (5,500) - 3,250
• Total Assets \$ 27,650 \$ 33,500 + \$ 5,850
Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting OP OP OP INV OP (Dep. Exp) and/or INV(Asset Sales)
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Assets
• Cash (\$11,200) \$ 500 + \$ 11,700
• A/R 20,000 15,775 - 4225
• Supplies Inventory 100 225 + 125
• Prepaid Rent 6,000 6,000 ---
• Office Equipment 15,000 16,500 + 1,500
• Less: A/D (2,250 (5,500) - 3,250
• Total Assets \$ 27,650 \$ 33,500 + \$ 5,850
Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Balance Sheet A/R 20,000 15,775 -4225
• Income St .
Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed A/R relates to what Income Statement item? Revenues \$92,000 Beg. Bal \$20,000 End. Bal \$15,775 \$92,000 ???? Credit Sales ???? Cash Collections \$92,000 96,225 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Revenues A/R
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Balance Sheet A/R 20,000 15,775 - 4225
• Cash Collections \$96,225
• Income St . Revenues \$92,000
• Net Income (\$1,725)
Putting together a Statement of Cash Flows Operating activity SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Plus: Cash Revenues \$96,225 Decrease in A/R 4225
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Balance Sheet A/R 20,000 15,775 - 4225
• Cash Collections \$96,225
• Income St . Revenues \$92,000
• Net Income (\$1,725)
Putting together a Statement of Cash Flows Operating activity SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Plus: Cash Revenues \$96,225 Decrease in A/R 4225
• Revenues \$ 92,000
• Expenses ( 93,725)
• Net Loss (\$1,725)
• Revenues \$92,000
• + dec. in A/R 4,225
• Cash Revenues \$96,225
• It’s there but it’s hidden!
• HRB Comparative Balance Sheets
• Balance Sheet 2001 2002 Change
• Supplies Inv. 100 225 + 125
• A/P (Supplies) 50 75 + 25
• Income St .
???? ???? End. Bal \$75 Purchases on Account Putting together a Statement of Cash Flows Supplies relates to what Income Statement item? Supplies Exp. \$1,200 Beg. Bal \$100 End. Bal \$225 \$1,200 ???? ???? Supplies Used \$1,200 1,325 Operating activity Beg. Bal \$50 1,325 1,300 Supplies Paid Cash Effect!! Pur on Acc Supplies Exp. Supplies Inv. A/P (Supplies)
• HRB Comparative Balance Sheets
• Balance Sheet 2001 2002 Change
• Supplies Inv. 100 225 + 125
• A/P (Supplies) 50 75 + 25
• Cash Paid (Supplies) 1,300
• Income St . Supplies Exp. \$1,200
SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Plus: Minus: Putting together a Statement of Cash Flows Operating activity Supplies ( \$1,300) Increase in Supplies (125) Increase in A/P Sup. 25
• HRB Comparative Balance Sheets
• Balance Sheet 2001 2002 Change
• Supplies Inv. 100 225 + 125
• A/P (Supplies) 50 75 + 25
• Cash Paid (Supplies) 1,300
• Income St . Supplies Exp. \$1,200
SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Plus: Minus: Putting together a Statement of Cash Flows Operating activity Supplies ( \$1,300) Increase in Supplies (125) Increase in A/P Sup. 25
• Revenues \$ 92,000
• Expenses ( 93,725)
• Net Loss (\$1,725)
• Supplies Exp. (\$1,200)
• + inc. in Sup. (125)
• - dec.in A/P 25
• Cash Supplies ( \$1,300)
• It’s there but it’s hidden!
• ???? Rent Paid in Advance this yr. HRB Comparative Balance Sheets Balance Sheet 2001 2002 Change Prepaid Rent 6,000 6,000 + 0 Income St . Putting together a Statement of Cash Flows Rent relates to what Income Statement item? Rent Exp. \$24,000 Beg. Bal \$6,000 End. Bal \$6,000 \$24,000 ???? ???? Rent Used 4/1-12/31 18,000 24,000 Operating activity Rent Used 1/1-3/31 6,000 Cash Effect!! Rent Exp. Prepaid Rent
• SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Plus: Minus: Rent ( \$24,000) Prepaid Rent +/- 0 HRB Comparative Balance Sheets Balance Sheet 2001 2002 Change Prepaid Rent 6,000 6,000 + 0 Cash Paid Rent \$24,000 Income St . Rent Exp. \$24,000 Putting together a Statement of Cash Flows
• Revenues \$ 92,000
• Expenses ( 93,725)
• Net Loss (\$1,725)
• Rent Exp. (\$24,000)
• +/- Prepaid
• Rent. 0
• Cash Rent ( \$24,000)
• Cash & Accrual are equal , no adj. needed
• HRB Comparative Balance Sheets
• 2001 2002 Change
• Liabilities
• Utilities Payable \$75 \$ 50 - 25
• Interest Payable 900 675 - 225
• A/P (Supplies) 50 75 + 25
• Salaries Payable 2,400 4,200 + 1,800
• Bank Loan Payable 10,000 0 - 10,000
• Note Payable 0 10,000 +10,000
• Total Liabilities \$ 13,425 \$15,000 + \$ 1,575
Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting OP FIN OP OP OP FIN
• HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Util/Pay 75 50 -25 Income St . Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Utilities relates to what Income Statement item? Utilities Exp. \$1,050 \$75 Beg. Bal \$50 End. Bal \$1,050 ???? Utilities Paid ???? Utilities Used \$1,075 1,050 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Utility Exp. Utility Pay.
• SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Minus: Utilities ( \$1,075) Decrease in Util/Pay (25) HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Util/Pay 75 50 -25 Utilities Paid 1,075 Income St . Utilities Exp. \$1,050 Putting together a Statement of Cash Flows Operating activity
• Revenues \$ 92,000
• Expenses ( 93,725)
• Net Loss (\$1,725)
• Utilities Exp. (\$1,050)
• +decr.in Util/Pay (25)
• Cash Utilities ( \$1,075)
• It’s there but it’s hidden!
• HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Int/Pay 900 675 -225 Income St . Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Interest relates to what Income Statement item? Interest Exp. \$1,350 \$900 Beg. Bal \$675 End. Bal \$1,350 ???? Interest Paid ???? Interest Used \$1,575 1,350 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Interest Exp. Interest Pay.
• SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income (\$1,725) Minus: Interest ( \$1,575) Decrease in Intl/Pay (225) Putting together a Statement of Cash Flows HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Int/Pay 900 675 -225 Cash Interest Paid 1,575 Income St . Interest Exp. \$1,350
• Revenues \$ 92,000
• Expenses ( 93,725)
• Net Loss (\$1,725)
• Int. Exp. (\$1,350)
• +decr.in Int/Pay (225)
• Cash Interest ( \$1,575)
• It’s there but it’s hidden!
• HRB Comparative Balance Sheets 2001 2002 Change Stockholders’ Equity Common Stock \$10,500 \$16,500 + 6,000 Retained Earnings 3,725 2,000 - 1,725 Total Stockholders’ Equity \$ 13,425 \$15,000 + \$ 1,575 Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting FIN FIN OP &
• HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Common Stock 10,500 16,500 +6,000 Company issued a Common Stock for cash \$6,000. Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Beg. Bal \$ 10,500 End. Bal \$ 16,500 \$6,000 ???? Stock Retired ???? Stock Issued \$6,000 0 Financing activity Now, let’s see how it looks on the SCF ! Cash Effect!! Cash Common Stk
• SCF Direct Method Financing Activities SCF Indirect Method Financiang Activities Putting together a Statement of Cash Flows Common Stock Issued \$6,000 Common Stock Issued \$6,000 HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Common Stock 10,500 16,500 +6,000 Company issued a Common Stock for cash \$6,000. Financing activity
• Statement of Cash Flows
• 2001 2002
• Operating Activities
• Salaries (36,250) (61,075)
• Rent (24,000) (24,000)
• Utilities (650) (1,075)
• Supplies (800) (1,300)
• Interest –- (1,575)
• Total Op. Cash Flow (\$16,700) \$7,200
• Investing Activities
• Equipment Purchase (\$15,000) (\$ 1,500)
• Total Inv. Cash Flow(\$15,000) (\$1,500 )
• Financing Activities
• Bank borrowing \$10,000 (\$10,000)
• Note issuance – 10,000
• Stock issuance 10,500 6,000
• Total Fin. Cash Flow \$20,500 \$6000
• Change in Cash (\$11,200) \$11,700
• The statement of cash flows is useful because it:
• Shows the entity’s ability to
• generate future cash flows .
• Statement of Cash Flows
• 2001 2002
• Operating Activities
• Salaries (36,250) (61,075)
• Rent (24,000) (24,000)
• Utilities (650) (1,075)
• Supplies (800) (1,300)
• Interest –- (1,575)
• Total Op. Cash Flow (\$16,700) \$7,200
• Investing Activities
• Equipment Purchase (\$15,000) (\$ 1,500)
• Total Inv. Cash Flow(\$15,000) (\$1,500 )
• Financing Activities
• Bank borrowing \$10,000 (\$10,000)
• Note issuance – 10,000
• Stock issuance 10,500 6,000
• Total Fin. Cash Flow \$20,500 \$6000
• Change in Cash (\$11,200) \$11,700
The statement of cash flows is useful because it: 2. Shows the entity’s ability to pay dividends and meet obligations .
• Statement of Cash Flows
• 2001 2002
• Operating Activities
• Net Income \$3,725 (\$1,725)
• Depreciation 2,250 3,250
• A/R dec (inc) (20,000) 4,225
• Supplies dec (inc) (100) ( 125)
• Prepaid Rent dec (inc) (6,000) --
• Utilities Pay inc (dec) 75 (25)
• A/P Supplies inc (dec) 50 25
• Int/Pay inc (dec) 900 (225)
• Sal/Pay inc (dec) 2,400 1,800
• Total Op. Cash Flow (\$16,700) \$7,200
The statement of cash flows is useful because it: 3. Details differences between net income and cash provided by operations .
• HRB Advertising Statement of Cash Flows 2001 2002 Operating Activities Total Op. Cash Flow (\$16,700) \$7,200 Investing Activities Total Inv. Cash Flow (\$15,000) (\$1,500 ) Financing Activities Total Fin. Cash Flow \$20,500 \$6000 Change in Cash (\$11,200) \$11,700 Significant Non-Cash Investing & Financing Activities Exchanged Land \$15,000 -- for Stock Purchased Building -- \$25,000 with Note Payable The statement of cash flows is useful because it: 4. Details cash and noncash investing and financing activities .