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    Whbm13 Whbm13 Presentation Transcript

    • Slide 3-1 Chapter 13 McGraw-Hill/Irwin STATEMENT OF CASH FLOWS © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-2 Purpose of the Statement of Cash Purpose of the Statement of Cash Flows Flows Provides information about the cash receipts Provides information about the cash receipts and cash payments of a business entity and cash payments of a business entity during the accounting period. during the accounting period. Helps investors with questions about the Helps investors with questions about the company’s: company’s: Ability to generate positive cash flows. Ability to generate positive cash flows. Ability to meet its obligations and to pay Ability to meet its obligations and to pay dividends. dividends. Need for external financing. Need for external financing. Investing and financing transactions for the Investing and financing transactions for the period. period. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-3 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-4 Classification of Cash Flows Classification of Cash Flows The Statement of Cash Flows must The Statement of Cash Flows must include the following three sections: include the following three sections: Cash Flows from Operating Cash Flows from Operating Activities Activities Cash Flows from Investing Activities Cash Flows from Investing Activities Cash Flows from Financing Cash Flows from Financing Activities Activities McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-5 Operating Activities Operating Activities Inflows from: Inflows from: Sales to customers. Sales to customers. Interest and dividends Interest and dividends received. received. + Outflows to: Outflows to: Suppliers of merchandise Suppliers of merchandise and services. and services. Employees. Employees. Lenders for interest. Lenders for interest. Governments for taxes. Governments for taxes. McGraw-Hill/Irwin _ Cash Cash Flows Flows from from Operating Operating Activities Activities © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-6 Investing Activities Investing Activities Inflows from: Inflows from: Selling investments and plant Selling investments and plant assets. assets. Collecting of principal on loans. Collecting of principal on loans. + Outflows to: Outflows to: Payments to acquire Payments to acquire investments and plant assets. investments and plant assets. Purchase debt or equity Purchase debt or equity investments. investments. Make loans. Make loans. McGraw-Hill/Irwin _ Cash Cash Flows Flows from from Investing Investing Activities Activities © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-7 Financing Activities Financing Activities Inflows from: Inflows from: Short-term and long-term Short-term and long-term borrowing. borrowing. Owners (for example, from Owners (for example, from issuing stock). issuing stock). + Outflows to: Outflows to: Repayments of borrowed Repayments of borrowed funds. funds. Owners for dividends. Owners for dividends. Purchase treasury stock. Purchase treasury stock. McGraw-Hill/Irwin _ Cash Cash Flows Flows from from Financing Financing Activities Activities © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-8 Cash and Cash Equivalents Cash and Cash Equivalents Cash Equivalents Cash Cash Currency Short-term, highly liquid investments. Short-term, highly liquid investments. Readily convertible into cash. Readily convertible into cash. So near maturity that market value is unaffected by So near maturity that market value is unaffected by interest rate changes. interest rate changes. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-9 The operating The operating cash flows section cash flows section can be prepared can be prepared using either the using either the direct method or direct method or the indirect the indirect method. method. McGraw-Hill/Irwin Let’s look at the Direct Method for preparing the Statement of Cash Flows. © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-10 Direct Method Direct Method Cash Received from Customers Cash Received from Customers  Accrual basis revenue includes sales that did not result in cash inflows.  Can be computed as: + Decrease in Decrease in receivables receivables = Cash Received from Cash Received from Customers Customers Net Sales Net Sales – McGraw-Hill/Irwin Increase in Increase in receivables receivables = © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-11 Direct Method Direct Method Cash Received from Customers Cash Received from Customers The A/R balance was $80,000 on 12/31/02 and The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis for 2003 was $900,000, what was cash basis revenue? revenue? + Decrease in Decrease in receivables receivables = Net Sales Net Sales $900,000 $900,000 Cash Received from Cash Received from Customers Customers – McGraw-Hill/Irwin Increase in Increase in receivables receivables = © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-12 Direct Method Direct Method Cash Received from Customers Cash Received from Customers The A/R balance was $80,000 on 12/31/02 and The A/R balance was $80,000 on 12/31/02 and $110,000 on 12/31/03. If accrual sales revenue $110,000 on 12/31/03. If accrual sales revenue for 2003 was $900,000, what was cash basis for 2003 was $900,000, what was cash basis revenue? revenue? Decrease in Decrease in receivables receivables Net Sales Net Sales $900,000 $900,000 – McGraw-Hill/Irwin $30,000 $30,000 Increase in Increase in receivables receivables Cash Received from Cash Received from Customers = $870,000 Customers = $870,000 = © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-13 Now that we understand the process, let’s look at some simplified formulas for computing direct method cash flows. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-14 Direct Method Direct Method Interest and Dividends Received Interest and Dividends Received McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-15 Direct Method Direct Method Cash Paid for Merchandise Cash Paid for Merchandise Step 1 Step 2 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-16 Direct Method Direct Method Cash Paid for Merchandise Cash Paid for Merchandise How much did Lug Lite pay for inventory in 2003? Inventory, 1/1/03 Inventory, 12/31/03 COGS, 12/31/03 a. b. c. d. $900,000 $923,000 $947,000 $877,000 McGraw-Hill/Irwin $ 130,000 $ 165,000 $ 900,000 A/P, 1/1/03 A/P, 12/31/03 $ 23,000 $ 35,000 Purchases for 2003 were $935,000. Purchases for 2003 were $935,000. Purchases = $900,000 + $35,000 Purchases = $900,000 + $35,000 Cash Paid for Merchandise in 2003 Cash Paid for Merchandise in 2003 was $923,000. was $923,000. Cash Paid = $935,000 --$12,000 Cash Paid = $935,000 $12,000 © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-17 Direct Method Direct Method Cash Payments for Expenses Cash Payments for Expenses After deducting depreciation and other After deducting depreciation and other noncash expenses, the cash paid for expenses noncash expenses, the cash paid for expenses is affected by is affected by (1) whether the expense was prepaid, and (1) whether the expense was prepaid, and (2) whether the expense was accrued. (2) whether the expense was accrued. Cash Paid for Expenses McGraw-Hill/Irwin = Expenses { + Increase in prepaid expenses - Decrease in prepaid expenses { + Decrease in accrued liabilities - Increase in accrued liabilities © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-18 Now, let’s prepare a direct method Statement of Cash Flows for Grate Big Company. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-19 Direct Method -- Example Direct Method Example Grate Big Company Comparative Balance Sheets - Assets December 31, 2002 2003 Cash Accounts Receivable, net Inventory Trading Securities Equipment, net Investment in Tiny Co. $ 60,000 27,000 230,000 500,000 100,000 $ 70,370 35,000 200,000 25,000 425,000 130,000 Total Assets $ 917,000 $ 885,370 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-20 Direct Method -- Example Direct Method Example Grate Big Company Comparative Balance Sheets - Liabilities and Equity Accounts Payable Salaries Payable Interest Payable Income Tax Payable Notes Payable, Bob's Bank Bonds Payable Premium on Bonds Payable Common Stock Retained Earnings T otal Liabilities and Equity McGraw-Hill/Irwin December 31, 2002 2003 $ 15,000 $ 12,000 7,000 5,000 11,950 7,350 20,000 17,000 70,000 60,000 250,000 150,000 5,000 4,000 450,000 88,050 500,000 130,020 $ 917,000 $ 885,370 © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-21 Direct Method -- Example Direct Method Example Grate Big Company Income Statement Amounts For the Year Ending December 31, 2003 Sales Revenues Cost of Goods Sold Depreciation Expense Interest Expense Income Tax Expense Salary Expense Other Expenses Amortization of Bond Premium Gain on Sale of Equipment Extraordinary Loss Equity in Investee Income $ 800,000 560,000 5,000 28,050 27,980 80,000 71,000 1,000 3,000 30,000 40,000 Net Income $ McGraw-Hill/Irwin 41,970 © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-22 Direct Method -- Example Direct Method Example Additional Information  Trading Securities were purchased during 2003 at a cost of $25,000.  Equipment with a book value of $40,000 was sold during the year for $43,000.  Equipment with a book value of $30,000 was destroyed during a freak flood in 2003. There was no insurance.  Grate Big holds a 25% investment in Tiny Co. and accounts for it using the Equity Method. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-23 Direct Method -- Example Direct Method Example Additional Information  Grate Big’s tax rate is 40%.  The Notes Payable to Bob’s Bank carry a 12% rate. The payments are due on the first day of each month.  The Bonds Payable carry a 9% rate. Interest is payable semiannually on July 1 & Jan. 1.  Grate Big sold stock during 2001 for $50,000.  Grate Big received $10,000 dividends from Tiny Co. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-24 Direct Method -- Example Direct Method Example Cash Received from Customers Sales Revenues Less: Increase in A/R $ 800,000 (8,000) Cash Received from Customers $ 792,000 Cash Paid to Employees Salary Expense Add: Decrease in Salary Payable $ 80,000 2000 2,000 Cash Paid to Employees $ 82,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-25 Direct Method -- Example Direct Method Example Cash Paid for Inventory Cost of Goods Sold Add : Decrease in A/P Less: Decrease in Inventory $ 560,000 3,000 (30,000) Cash Paid for Inventory $ 533,000 Cash Paid for Interest Interest Expense Add: Decrease in Interest Payable $ 28,050 2000 4,600 Cash Paid for Interest $ 32,650 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-26 Direct Method -- Example Direct Method Example Cash Paid for Taxes Income Tax Expense Add: Decrease in Taxes Payable $ 27,980 2000 3,000 Cash Paid for Taxes $ 30,980 Other Operating Cash Flows McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-27 Direct Method -- Example Direct Method Example Cash Flows From Operating Activities McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-28 Grate Big Company Statement value Flows Equipment with a bookof Cashof Equipment with a bookvalue of For the Period for $43,000. $40,000 was sold Ending December 31, 2003 $40,000 was sold for $43,000. I. Operating Cash Flows $ 27,370 II. Investing Cash Flows Bonds Payable decreased from Bonds Payable decreased from Proceeds from sale of Equipment $250,000 to $150,000 during 2003. $250,000 to $150,000 during 2003. 43,000 III. Financing Cash Flows Proceeds from sale of Stock Principal paid on Bonds Principal paid on Notes Net Cash Flows for the Period $ 50,000 (100,000) (10,000) Notes Payable decreased from Notes Payable decreased from Add: Beginning Cash Balance $70,000 to $60,000 during 2003. $70,000 to $60,000 during 2003. Ending Cash Balance McGraw-Hill/Irwin (60,000) $ 10,370 60,000 $ 70,370 © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-29 Grate Big Company Statement of Cash Flows For the Period Ending December 31, 2003 Notice that the Ending $ 27,370 that the Ending Cash Balance per the Cash Balance per the II. Investing Cash Flows Statement of Cash Flows Statement of Cash Flows Proceeds from sale of Equipment agrees with the 12/31/03 43,000 agrees with the 12/31/03 III. Financing Cash Cash balance on the Flows Cash balance on the Proceeds from saleBalance Sheet. of Stock $ 50,000 Balance Sheet. Principal paid on Bonds (100,000) I. Operating Cash Notice Flows Principal paid on Notes Net Cash Flows for the Period Add: Beginning Cash Balance Ending Cash Balance McGraw-Hill/Irwin (10,000) (60,000) $ 10,370 60,000 $ 70,370 © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-30 Let’s look at the Indirect Method that is used by over 97% of all companies. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-31 Indirect Method Indirect Method Changes in current assets and current Changes in current assets and current liabilities as shown on the following table. liabilities as shown on the following table. Cash Flows Cash Flows from Operating from Operating Activities Activities Net Net Income Income + Losses and + Losses and --Gains Gains McGraw-Hill/Irwin + Noncash + Noncash expenses such as expenses such as depreciation and depreciation and amortization. amortization. © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-32 Indirect Method Indirect Method Use this table when adjusting Net Income to Operating Cash Flows. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-33 Let’s prepare a complete Statement of Cash Flows using the Indirect Method. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-34 Indirect Method -- Example Indirect Method Example Joe’s Place has prepared the Balance Sheet Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended The Income Statement for the year ended 3/31/03 has also been prepared. Joe 3/31/03 has also been prepared. Joe needs help preparing the Statement of needs help preparing the Statement of Cash Flows. Cash Flows. Joe’s Place McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-35 Indirect Method -- Example Indirect Method Example The $8,000 gain was the The $8,000 gain wasPlace Joe's the result of selling land result of selling land Income Statement costing $32,000 for $40,000 3/31/03 costing $32,000 for $40,000 For the Year Ending during the period. during the period. Revenues Operating Expenses Depreciation Expense Gain on Sale of Land Net Loss McGraw-Hill/Irwin $ 727,000 (748,000) (6,000) 8,000 $ (19,000) © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-36 Indirect Method -- Example Indirect Method Example McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-37 Indirect Method -- Example Indirect Method Example Joe’s Place issued $50,000 Joe’s Place issued $50,000 of no par common stock to of no par common stock to settle the $50,000 note settle the $50,000 note payable. payable. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-38 Indirect Method -- Example Indirect Method Example McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-39 Indirect Method -- Example Indirect Method Example With the indirect method, always With the indirect method, always start with the net income or net start with the net income or net loss for the period. loss for the period. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-40 Indirect Method -- Example Indirect Method Example McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-41 Indirect Method -- Example Indirect Method Example Accounts receivable decreased. Accounts receivable decreased. 3/31/03 3/31/02 3/31/03 3/31/02 $23,000 --$40,000 = $(17,000) $23,000 $40,000 = $(17,000) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-42 Indirect Method -- Example Indirect Method Example Accounts payable increased. Accounts payable increased. 3/31/03 3/31/02 3/31/03 3/31/02 $38,000 -- $27,000 = $11,000 $38,000 $27,000 = $11,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-43 Indirect Method -- Example Indirect Method Example Inventory increased. Inventory increased. 3/31/03 3/31/03 3/31/02 3/31/02 $350,000 -- $300,000 = $50,000 $350,000 $300,000 = $50,000 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-44 Indirect Method -- Example Indirect Method Example Salaries payable decreased. Salaries payable decreased. 3/31/03 3/31/02 3/31/03 3/31/02 $ 9,000 -- $14,000 = $(5,000) $ 9,000 $14,000 = $(5,000) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-45 Indirect Method -- Example Indirect Method Example Add back non-cash expenses. Add back non-cash expenses. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-46 Indirect Method -- Example Indirect Method Example Subtract gains. Subtract gains. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-47 Indirect Method -- Example Indirect Method Example The operating cash The operating cash flows amount comes flows amount comes from the schedule from the schedule just prepared. just prepared. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-48 Indirect Method -- Example Indirect Method Example Land originally costing $32,000 Land originally costing $32,000 was sold for $40,000. was sold for $40,000. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-49 Indirect Method -- Example Indirect Method Example Dividends of $20,000 were paid to Dividends of $20,000 were paid to owners during the year. owners during the year. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-50 Indirect Method -- Example Indirect Method Example Compute the net change in cash Compute the net change in cash for the period. for the period. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-51 Indirect Method -- Example Indirect Method Example Complete the Statement of Cash Complete the Statement of Cash Flows by reconciling beginning Flows by reconciling beginning cash to ending cash. cash to ending cash. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-52 Indirect Method -- Example Indirect Method Example Note that the ending Note that the ending cash amount ties cash amount ties back to the Joe’s back to the Joe’s Place Balance Sheet Place Balance Sheet at 3/31/03. at 3/31/03. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-53 Indirect Method -- Example Indirect Method Example In addition, on the face In addition, on the face of the statement or in a of the statement or in a supplemental supplemental schedule, disclose the schedule, disclose the $50,000 noncash $50,000 noncash financing activity. financing activity. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-54 Indirect Method -- Example Indirect Method Example In addition, cash In addition, cash interest payments and interest payments and cash tax payments cash tax payments must also be disclosed must also be disclosed separately. separately. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-55 Managing Cash Flows Managing Cash Flows Cash Budgets are used by management to plan and Cash Budgets are used by management to plan and forecast future cash flows. forecast future cash flows. A C a s h B u d g e t c a n b e u s e d to : F o r c e m a n a g e m e n t to c o o r d in a te a c tiv itie s . P r o v id e m a n a g e r s w ith a d v a n c e n o tic e o f a v a ila b le r e s o u r c e s . P r o v id e ta r g e ts u s e fu l in e v a lu a tin g p e r fo r m a n c e . P r o v id e a d v a n c e w a r n in g s o f p o te n tia l c a s h s h o r ta g e s . McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-56 Managing Cash Flows Managing Cash Flows  Increase collection of accounts  Increase collection of accounts receivables. receivables.  Keep inventory low.  Keep inventory low.  Delay payment of liabilities.  Delay payment of liabilities.  Plan timing of major expenditures.  Plan timing of major expenditures.  Invest idle cash.  Invest idle cash. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-57 Cash Budgeting Beginning cash balance Add: Cash receipts Total available cash Cash Budget May June $ 27,500 $ 15,000 3,500 $ 31,000 Less: Cash disbursements Excess (deficiency) of available cash over cash disbursements $ Financing needed Financing repayments Ending cash balance $ July $ - August $ - 16,000 15,000 15,000 The ending cash balance of one month becomes the The ending cash balance of one month becomes the beginning cash balance of the next month. beginning cash balance of the next month. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-58 Cash Budgeting Cash Budgeting Beginning cash balance Add: Cash receipts Total available cash Cash Budget May June $ 27,500 $ 15,000 3,500 2,000 $ 31,000 $ 17,000 Less: Cash disbursements Excess (deficiency) of available cash over cash disbursements $ Financing needed Financing repayments Ending cash balance $ 16,000 July $ 10,000 9,000 $ 19,000 August $ 10,000 14,000 $ 24,000 6,000 8,000 18,000 15,000 $ 15,000 $ (1,000) $ 11,000 10,000 $ 13,000 3,000 10,000 $ $ 16,000 6,000 10,000 Financing is needed in June because the company Financing is needed in June because the company must maintain a minimum cash balance of $10,000. must maintain a minimum cash balance of $10,000. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    • Slide 3-59 End of Chapter 13 End of Chapter 13 Chester, ol’ buddy, I wonder if you could help me with a little cash flow problem I’m having? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002