Summarize the types of cash flow activities reported in the statement of cash flows.
Prepare a statement of cash flows, using the indirect method.
After studying this chapter, you should be able to: 0
Summarize the types of cash flow activities reported in the statement of cash flows. Objective 1 16-1 0
16-1 The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a firm’s ability to generate cash from operations, maintain and expand its operating capacity, meet its financial obligations, and pay dividends. 0
Reporting Cash Flows 16-1 The statement of cash flows reports cash flows from three types of activities: 1. Cash flows from operating activities are cash flows from transactions that affect net income. 2 . Cash flows from investing activities are cash flows from transactions that affect the investments in noncurrent assets. 3. Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the business. 0
7 Sources (increases) of Cash Uses (decreases) of Cash Exhibit 2 Cash Flows 16-1 0 (payments for treasury stock, dividends, and redemption of debt securities) Financing (payments for expenses) Operating (receipts from sales of noncurrent assets) Investing (receipts from issuing equity and debt securities) Financing (payments for acquiring noncurrent assets) Investing (receipts from revenues) Operating
16-1 The indirect method reports the operating cash flows by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash. 9 0
Cash inflows from operating activities normally arise when cash is received from customers.
Cash outflows from operating activities normally arise when cash is paid to suppliers for merchandise, supplies, services and to employees for salaries and wages.
16-1 A primary advantage of the indirect method is that it focuses on the differences between net income and cash flows from operations. Because the data are readily available, another advantage of the indirect method is that it is normally less costly to use than the direct method. 0
Cash Flows from Investing Activities 16-1
Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets.
Cash outflows from investing activities normally include payments to acquire fixed assets, investments, and intangible assets.
Cash Flows from Financing Activities 16-1
Cash inflows from financing activities normally arise from issuing debt or equity securities.
Cash outflows from financing activities normally include paying cash dividends, repaying debt, and acquiring treasury stock.
18 16-1 For each of the following, identify whether it would be disclosed as an operating, financing, or investing activity on the statement of cash flows under the indirect method.
Pay cash dividend
Purchase treasury stock
0 Example Exercise
For Practice: PE 16-1A, PE 16-1B 19 16-1
0 Follow My Example
Prepare a statement of cash flows, using the indirect method. Objective 2 16-2 0
16-2 An efficient approach to preparing the statement of cash flows is to analyze the changes in the noncash balance sheet accounts. The logic of this approach is that a change in any balance sheet account (including Cash ) can be analyzed in terms of changes in the other balance sheet accounts. 0
23 16-2 Comparative Balance Sheet (Continued) 0
16-2 Comparative Balance Sheet (Concluded) 24 0
18 27 Operating Activities— Rundell Inc. Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: This phrase is added to indicate that accrual basis net income is being adjusted to arrive at cash flows from operations. 16-2 0
Next, we need to consider depreciation expense for the year. 16-2 Depreciation 0
31 16-2 Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 7,000 Operating Activities—Rundell Inc. 0 Amortization is treated in the same manner as depreciation.
Next, select current assets and current liabilities that impact cash flows and determine their increases and decreases. Exhibit 5 in the next slide my prove to be helpful in determining how to treat increases and decreases in noncash current operating assets and current operating liabilities. 16-2 Changes in Current Operating Assets and Liabilities 0
16-2 Adjustments to Net Income (Loss) Using the Indirect Method 0
38 Changes in Current Accounts Accounts Accounts receivable (net) $ 74,000 $ 65,000 Inventories 172,000 180,000 Accounts payable (mdse.) 43,500 46,700 Accrued expenses payable 26,500 24,300 Income taxes payable 7,900 8,400 9,000 8,000* 3,200* 2,200 500* 2008 2007 December 31 Increase Decrease* 16-2 Note that Cash and Dividends Payable are not included in this analysis. 0
Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 7,000 Gain on sale of land (12,000) Changes in current operating assets and liabilities: Increase in accounts receivable (9,000) Decrease in inventory 8,000 Decrease in accounts payable (3,200) Increase in accrued expenses 2,200 Decrease in income taxes payable (500) 16-2 Operating Activities—Indirect Method 39 You will notice that increases actually decrease cash flows from operating activities, and decreases do just the opposite. 0
16-2 Statement of Cash (Operating Activities Section) 16-2 0
16-2 Victor Corporation’s comparative balance sheet for current assets and current liabilities was as follows: Dec. 31, 2009 Dec. 31, 2008 Accounts receivable $ 6,500 $ 4,900 Inventory 12,300 15,000 Accounts payable 4,800 5,200 Dividends payable 5,000 4,000 Adjust net income of $70,000 for changes in operating assets and liabilities. 0 Example Exercise
For Practice: PE 16-3A, PE 16-3B 16-2 Net income $70,000 Adjustments to reconcile net income to net cash from from operating activities: Increase in accounts receivable (1,600) Decrease in inventory 2,700 Decrease in accounts payable (400 ) Net cash flow from operating activities $70,700 0 Follow My Example