Chapter 12 The Statement of Cash Flows

Learning Objectives Identify the purposes of the statement of cash flows Distinguish among operating, investing, and financing cash flows Prepare a statement of cash flows by the indirect method Prepare a statement of cash flows by the direct method

Identify the purposes of the statement of cash flows

Distinguish among operating, investing, and financing cash flows

Prepare a statement of cash flows by the indirect method

Prepare a statement of cash flows by the direct method

Statement of Cash Flows Reports cash receipts and payments for the period Includes both cash and cash equivalents Serves several purposes: Predicts future cash flows Evaluates management decisions Determines ability to pay dividends and interest Shows the relationship of net income to cash flows

Reports cash receipts and payments for the period

Includes both cash and cash equivalents

Serves several purposes:

Predicts future cash flows

Evaluates management decisions

Determines ability to pay dividends and interest

Shows the relationship of net income to cash flows

Statement of Cash Flows Operating activities Cash receipts and payments from day-to-day operations, including interest payments Investing activities Cash receipts and payments for long-term assets Financing activities Cash receipts and payments from/to owners and creditors

Operating activities

Cash receipts and payments from day-to-day operations, including interest payments

Investing activities

Cash receipts and payments for long-term assets

Financing activities

Cash receipts and payments from/to owners and creditors

Operating Section Indirect method – reconciles net income to net cash provided by operating activities Direct method – reports cash receipts and cash payments from operating activities Either method produces the same result, net cash provided by operating activities

Indirect method – reconciles net income to net cash provided by operating activities

Direct method – reports cash receipts and cash payments from operating activities

Either method produces the same result, net cash provided by operating activities

Operating Section Comparison of Indirect and Direct methods of preparing the Operating Section of the Statement of Cash Flows

Comparison of Indirect and Direct methods of preparing the Operating Section of the Statement of Cash Flows

Indirect Method Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation/amortization expense + Loss on sale of long-term assets - Gain on sale of long-term assets - Increases in current assets other than cash + Decreases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities Net cash provided by operating activities

Indirect Method Operating activities are related to transactions that make up net income. Depreciation, depletion, amortization expenses – add back to net income Gains and losses on sale of assets – add losses and subtract gains

Operating activities are related to transactions that make up net income.

Depreciation, depletion, amortization expenses – add back to net income

Gains and losses on sale of assets – add losses and subtract gains

Indirect Method Changes in current assets and current liability accounts Increase in another current asset decreases cash Decrease in another current asset increases cash Decrease in a current liability decreases cash Increase in a current liability increases cash

Changes in current assets and current liability accounts

Increase in another current asset decreases cash

Decrease in another current asset increases cash

Decrease in a current liability decreases cash

Increase in a current liability increases cash

Investing Activities Computing purchases and sales of plant assets – review plant asset accounts and income statement Balance sheet reports beginning plant assets, net of accumulated depreciation, of $219,000. The ending balance is $453,000. Income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets. Beginning balance + Acquisitions - Depreciation - Book value of assets sold = Ending balance $219,000 + $306,000 - $18,000 - ? = $453,000 $453,000 - $219,000 + $18,000 - $306,000 = ? $54,000 = ? Book value of assets sold

Computing purchases and sales of plant assets – review plant asset accounts and income statement

Balance sheet reports beginning plant assets, net of accumulated depreciation, of $219,000. The ending balance is $453,000.

Income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets.

Investing Activities Sale Proceeds = Book value of assets sold + Gain - Loss = $54,000 + $8,000 - $ 0 = $62,000 A similar process is followed for computing purchases and sales of investments, and loans and collections.

Financing Activities Beginning and ending balances of an account are on the balance sheet. If either additions or reductions are known, the other value can be calculated. Anchor issued $94,000 in new debt. Beginning and ending long-term investments are $77,000 and $160,00 respectively. Beginning balance + Issuance of new debt - Payments of debt = Ending balance $77,000 + $94,000 - ? = $160,000 Payments of debt = $11,000

Beginning and ending balances of an account are on the balance sheet. If either additions or reductions are known, the other value can be calculated.

Anchor issued $94,000 in new debt. Beginning and ending long-term investments are $77,000 and $160,00 respectively.

Noncash Investing and Financing Activities Significant noncash activities must be disclosed These involve such activities as issuing debt or equity in exchange for assets or exchanging one noncash asset for another.

Significant noncash activities must be disclosed

These involve such activities as

issuing debt or equity in exchange for assets or

exchanging one noncash asset for another.

Direct Method Cash flows from operating activities: Receipts: Collections from customers Interest received on notes receivable Dividends received on investments in stock Total cash receipts Payments: To suppliers To employees For interest For income tax Total cash payments Net cash provided by operating activities

Direct Method Computing cash collections from customers Beginning balance + Sales - Collections = Ending balance $80,000 + $284,000 - ? = $93,000 Collections = $271,000 Accounts Receivable

Computing cash collections from customers

Direct Method Computing payments to suppliers Calculate Purchases using Cost of Goods Sold account Calculate Payments to Suppliers using Accounts Payable

Computing payments to suppliers

Calculate Purchases using Cost of Goods Sold account

Calculate Payments to Suppliers using Accounts Payable

Direct Method Computing payments for operating expenses Review the appropriate prepaid and payable accounts to identify payments. Payments for Prepaid Expenses Payments for Accrued Liabilities Payments for Other Operating Expenses Payments to Employers Payments for Interest and Income Taxes

Computing payments for operating expenses

Review the appropriate prepaid and payable accounts to identify payments.

Payments for Prepaid Expenses

Payments for Accrued Liabilities

Payments for Other Operating Expenses

Payments to Employers

Payments for Interest and Income Taxes

Direct Method For example, payments to employees is based on Salary and Wages Payable Beginning balance + Salary and Wage Expense - Payments = Ending balance $6,000 + $56,000 - ? = $4,000 Payments = $58,000 Salaries and Wages Payable

For example, payments to employees is based on Salary and Wages Payable

Free Cash Flow Amount of cash available from operations after paying for planned investments in plant assets. Free Cash Flow = Net cash provided by operating activities - Cash payments earmarked for investment in plant assets

Amount of cash available from operations after paying for planned investments in plant assets.

End of Chapter 12