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Managerial Accounting ed 15 Chapter 14

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Managerial Accounting ed 15 Chapter 14

Managerial Accounting ed 15 Chapter 14

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  • 1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Statement of Cash Flows Chapter 14
  • 2. 14-2 External Reports IncomeIncome StatementStatement BalanceBalance SheetSheet Statement ofStatement of Cash FlowsCash Flows The statement of cash flows highlights the major activities that impact cash flows and hence, affect the overall cash balance.
  • 3. 14-3 Purpose of the Statement of Cash Flows Are cash flows sufficient to support ongoing operations? Are cash flows sufficient to support ongoing operations? Can we pay debts? Can we pay debts? Can we pay dividends? Can we pay dividends? Why is there a difference between net income and net cash flow? Why is there a difference between net income and net cash flow? Will the company have to borrow money to make needed investments? Will the company have to borrow money to make needed investments?
  • 4. 14-4 A Fundamental Principle ∆ Cash Balance = ∆ 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.
  • 5. 14-5 A Review of Basic Equations Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance
  • 6. 14-6 Statement of Cash Flows: Key Concepts The term cash on the statement of cash flows refers broadly to both currency and cash equivalents. Currency and Bank Accounts Cash Treasury Bills Money Market Funds Commercial Paper Cash Equivalents
  • 7. 14-7 Learning Objective 1 Classify cash inflows and outflows as relating to operating, investing, or financing activities.
  • 8. 14-8 Organizing a Statement of Cash Flows OperatingOperating ActivitiesActivities Revenue and expenseRevenue and expense transactions that affecttransactions that affect net income.net income. Investing Activities Acquiring or disposing of noncurrent assets. Financing Activities Borrowing from and repaying principal to creditors and transactions with stockholders.
  • 9. 14-9 Organizing a Statement of Cash Flows
  • 10. 14-10 Operating Activities: Direct or Indirect Method? Reconstructs the income statement on a cash basis from top to bottom Direct Method Accrual net income is adjusted to a cash basis; Used by 99% Indirect Method Both methods result in the exact same amount of cash provided by operating activities.
  • 11. 14-11 The Indirect Method: A Three-Step Process Step 1 Step 2 Step 3
  • 12. 14-12 Step 1: Add Depreciation Charges Accumulated Depreciation is a noncash balance sheet account and we must adjust net income for all of the changes in the noncash balance sheet accounts that have occurred during the period. Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance
  • 13. 14-13 Step 1: Add Depreciation Charges Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $300 – $70 + Credits = $500 Credits = $500 – $300 + $70 Credits = $270 Account Activity for Accumulated Depreciation Beginning balance $300 Ending balance $500 Accumulated depreciation of equipment sold $70
  • 14. 14-14 Step 2: Analyze Net Changes in Noncash Balance Sheet Accounts
  • 15. 14-15 Step 3: Adjust for Gains and Losses Under U.S. GAAP and IFRS rules, gains and losses must be included in the investing activities section of the statement of cash flows. Gains and losses must be removed from net income in the operating activities section before they can be shown in the investing activities section: – Gains + Losses
  • 16. 14-16 Investing and Financing Activities: Gross Cash Flows U.S. GAAP and IFRS require that the investing and financing sections of the statement of cash flows disclose gross cash flows.
  • 17. 14-17 Property, Plant, and Equipment Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance $1,000 + Debits – $100 = $1,800 Debits = $1,800 – $1,000 + $100 Debits = $900 (cash outflow) Report $40Report $40 cash inflow.cash inflow. Report $900Report $900 cash outflow.cash outflow. Account Activity for Property, Plant, and Equipment Beginning balance $1,000 Original cost of equipment sold $100 Ending balance $1,800 Accumulated depreciation of equipment sold $70 Cash proceeds from sale of equipment $40 Gain on the sale of equipment (included in net income) $10
  • 18. 14-18 Retained Earnings Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $2,000 – Debits + $1,200 = $3,000 $3,200 = $3,000 + Debits Debits = $200 (cash outflow) Report $1,200 netReport $1,200 net income in Operatingincome in Operating Activities.Activities. Report $200Report $200 dividends paid individends paid in Financing Activities.Financing Activities. Account Activity for Retained Earnings Beginning balance $2,000 Ending balance $3,000 Net income $1,200
  • 19. 14-19 Summary of Key Concepts
  • 20. 14-20 Summary of Key Concepts
  • 21. 14-21 Learning Objective 2 Prepare a statement of cash flows using the indirect method to determine the net cash provided by operating activities.
  • 22. 14-22 Apparel, Inc. Financial Statements
  • 23. 14-23 Apparel, Inc. Financial Statements
  • 24. 14-24 An Example of a Statement of Cash Flows In addition to the financial statements provided, assume the following: 1.The company sold a store that had an original cost of $15 million and accumulated depreciation of $10 million. The cash proceeds from the sale were $8 million. The gain on the sale was $3 million. 2.The company did not issue any new bonds during the year. 3.The company did not repurchase any of its own common stock during the year. 4.The company paid a cash dividend during the year.
  • 25. 14-25 Operating Activities: Step 1 Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $561 million – $10 million + Credits = $654 million Credits = $654 million – $561 million + $10 million Credits = $103 million The first step in computing Apparel’s net cash provided by operating activities is to add depreciation to net income.
  • 26. 14-26 Operating Activities: Step 2 The second step in computing Apparel’s net cash provided by operating activities is to analyze net changes in noncash balance sheet accounts that impact net income.
  • 27. 14-27 Operating Activities: Step 3 The third step in computing Apparel’s net cash provided by operating activities is to adjust for gains and losses included in net income.
  • 28. 14-28 Operating Activities
  • 29. 14-29 Investing Activities Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance $1,394 million + Debits – $15 million = $1,517 million Debits = $1,517 million – $1,394 million + $15 million Debits = $138 million (cash outflow) ReportReport $8 million$8 million cash inflow.cash inflow. ReportReport $138 million$138 million cash outflow.cash outflow.
  • 30. 14-30 Financing Activities Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $897 million – Debits + $140 million = $1,009 million $1,037 million = $1,009 million + Debits Debits = $28 million (cash outflow)
  • 31. 14-31 Statement of Cash Flows
  • 32. 14-32 Seeing the Big Picture
  • 33. 14-33 Interpreting the Statement of Cash Flows A statement of cash flowsA statement of cash flows should be evaluated in theshould be evaluated in the context of a company’scontext of a company’s specific circumstances.specific circumstances. Useful information can also beUseful information can also be derived by examining thederived by examining the relationships among numbers.relationships among numbers.
  • 34. 14-34 Learning Objective 3 Compute free cash flow.
  • 35. 14-35 Free Cash Flows Free Cash Flow = Net Cash Provided by Operating Activities - Capital Expenditures - Dividends Free cash flow measures a company’s ability to fund its capital expenditures and dividends from its net cash provided by operating activities.
  • 36. 14-36 Free Cash Flows Free cash flow measures a company’s ability to fund its capital expenditures and dividends from its net cash provided by operating activities. Free Cash Flow = Net Cash Provided by Operating Activities - Capital Expenditures - Dividends 93$ = 259$ - 138$ - 28$
  • 37. 14-37 Earnings Quality Managers generally perceive that earnings are of higher quality when the earnings: 1.are not unduly influenced by inflation, 2.are computed using conservative accounting principles and estimates, and 3.are correlated with net cash provided by operating activities.
  • 38. 14-38 End of Chapter 14