The Statement of Cash        Flows                        17 -
Purpose of The Statement ofCash Flows: Basic Concepts    The statement of cash flows   reports the entity’s cash flows (ca...
Objective 1Identify the purposes of the statement of cash          flows.                           17 -
Purposes of the Statement              of Cash Flows    12/31/x1      For the Year Ended 12/31/x2     12/31/x2(a point in ...
Purposes of the Statement            of Cash Flows    The statement of cash flows is designed to    fulfill the following:...
Cash Balance Includes...–   cash on hand.–   cash in the bank.–   cash equivalents.                                   17 -
Cash Equivalents Are....–   short-term, highly liquid investments    convertible into cash with little delay.–   money mar...
Objective 2     Report cash flows from             operating,investing, and financing activities.                         ...
Basic Organization of the       Statement of Cash Flows    A business may be evaluated in terms of    three types of busin...
Operating Activities Operating activities are related to the  Operating activities are related to thetransactions that mak...
Investing Activities  Investing activities increase and decrease   Investing activities increase and decreasethe assets th...
Financing ActivitiesThese are transactions involving obtainingThese are transactions involving obtaining resources from th...
Format of the Statement            of Cash Flows    ICAI in Accounting Standard 3 has    approved two methods for reportin...
Format of the Statement        of Cash FlowsThe direct method lists cash receipts fromspecific operating activities and ca...
Objective 3   Prepare a statement of            cashflows by the direct method.                              17 - 1
The Direct Method       Statement of Cash Flows (Direct Method)     Year Ended December 31, 2002 (Thousands)Cash flows fro...
The Direct Method    Statement of Cash Flows (Direct Method)  Year Ended December 31, 2002 (Thousands)Payments:To supplier...
The Direct Method   Statement of Cash Flows (Direct Method)  Year Ended December 31, 2002 (Thousands)Cash flows from inves...
The Direct Method    Statement of Cash Flows (Direct Method)   Year Ended December 31, 2002 (Thousands)Cash flows from fin...
The Direct Method      Statement of Cash Flows (Direct Method)    Year Ended December 31, 2002 (Thousands)Net cash inflows...
Objective 4 Compute the cash        effects of a wide variety ofbusiness transactions.                         17 - 2
Computing Individual Amounts  for the Statement of Cash FlowsRevenues or expenses from the income statement               ...
Computing Individual Amountsfor the Statement of Cash Flows            Income StatementYear Ended December 31, 2002 (Thous...
Computing Individual Amountsfor the Statement of Cash Flows Expenses: Cost of goods sold        Rs. 150 Salary expense    ...
Computing Individual Amountsfor the Statement of Cash Flows            Income StatementYear Ended December 31, 2002 (Thous...
Comparative Balance Sheets     Assets                20x2   20x1   Inc./(Dec.) Current: Cash                Rs.    22     ...
Comparative Balance Sheets     Liabilities             20x2   20x1   Inc./(Dec.) Current: Accounts payable      Rs.    91 ...
Computing Cash Collections     from CustomersCollections can be computed by convertingsales revenue to the cash basis.Begi...
Computing Cash Collections     from CustomersRs.80,000 + Rs.284,000 – 93,000 =Rs.271,000Because Accounts Receivable increa...
Computing Payments         to SuppliersThis computation includes two parts,payments for inventory and payments forexpenses...
Payments for Inventory                  InventoryBeg. inventory 138,000 Cost of goods sold 150,000Purchases        xEnd. i...
Payments for InventoryHow much were the purchases?Rs.138,000 + x – Rs.150,000 = Rs.135,000x = Rs.135,000 – Rs.138,000 + Rs...
Payments for Inventory               Accounts PayablePayments for           Beg. balance    57,000inventory        x     P...
Payments for InventoryHow much did the business pay for thisinventory?Rs.57,000 + Rs.147,000 – x = Rs.91,000x = Rs.57,000 ...
Payments for Operating         ExpensesIncreases in prepaid expenses require cashpayments, and decreases indicate thatpaym...
Payments to EmployeesSalary Payable was Rs.6,000 at thebeginning of the year and Rs.4,000 at yearend.During the year Salar...
Acquisition and Sales        of Plant AssetsThe business had plant assets net ofdepreciation of Rs.219,000 at the beginnin...
Acquisition and Sales        of Plant AssetsThe income statement shows depreciationexpense of Rs.18,000 and a Rs.8,000 gai...
Acquisition and Sales       of Plant AssetsRs.219,000 + Rs.306,000 – Rs.18,000 – x =Rs.453,000x = Rs.219,000 + Rs.306,000 ...
Acquisition and Sales        of Plant AssetsBook value + Gain or – Loss = ProceedsRs.54,000 + Rs.8,000 = Rs.62,000How do w...
Computing the Cash Amounts      of Financing Activities    Financing activities affect liability and    stockholders’ equi...
Issuance and Payments of  Long-Term Notes PayableBeginning balance was Rs.77,000.New debt amounting to Rs.94,000 wasincurr...
Computing Dividend PaymentsDividend payments are computed byanalyzing the Dividends Payable account.Beginning balance + Di...
Noncash Investing and         Financing Activities...–   are not reported in the statement of cash    flows.    The Accoun...
Reconciling Net Income       to Net Cash FlowThe Accounting Standard requirescompanies that format operating activitiesby ...
Objective 5Prepare a statement of cash            flows  by the indirect method.                              17 - 4
The Indirect Method                  Current Assets  Add to Net Income if this account has decreasedDeduct from Net Income...
The Indirect Method                 Current Liabilities  Add to Net Income if this account has increasedDeduct from Net In...
The Indirect Method   Statement of Cash Flows (Indirect Method)  Year Ended December 31, 2002 (Thousands)Cash flows from o...
The Indirect Method   Statement of Cash Flows (Indirect Method)  Year Ended December 31, 2002 (Thousands)Add (deduct) item...
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Cash flow

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Cash flow

  1. 1. The Statement of Cash Flows 17 -
  2. 2. Purpose of The Statement ofCash Flows: Basic Concepts The statement of cash flows reports the entity’s cash flows (cash receipts and cash payments) during the period. 17 -
  3. 3. Objective 1Identify the purposes of the statement of cash flows. 17 -
  4. 4. Purposes of the Statement of Cash Flows 12/31/x1 For the Year Ended 12/31/x2 12/31/x2(a point in time) (a period of time) (a point in time) Income Statement Balance Statement Balance Sheet of Retained Sheet Earnings Statement of Cash Flows 17 -
  5. 5. Purposes of the Statement of Cash Flows The statement of cash flows is designed to fulfill the following:– predict future cash flows– evaluate management decisions– determine the ability to pay dividends plus interest and principal– show the relationship of net income to changes in the firm’s cash 17 -
  6. 6. Cash Balance Includes...– cash on hand.– cash in the bank.– cash equivalents. 17 -
  7. 7. Cash Equivalents Are....– short-term, highly liquid investments convertible into cash with little delay.– money market accounts.– Government Treasury bills. 17 -
  8. 8. Objective 2 Report cash flows from operating,investing, and financing activities. 17 -
  9. 9. Basic Organization of the Statement of Cash Flows A business may be evaluated in terms of three types of business activities:1 Operating activities2 Investing activities3 Financing activities 17 -
  10. 10. Operating Activities Operating activities are related to the Operating activities are related to thetransactions that make up net income. transactions that make up net income. Interest and dividends received are Interest and dividends received are related to investing activities. related to investing activities. 17 - 1
  11. 11. Investing Activities Investing activities increase and decrease Investing activities increase and decreasethe assets that are available to the business. the assets that are available to the business. Investing activities are related to the Investing activities are related to the Long-Term Asset accounts. Long-Term Asset accounts. 17 - 1
  12. 12. Financing ActivitiesThese are transactions involving obtainingThese are transactions involving obtaining resources from the owners or returning resources from the owners or returning resources to them. resources to them. It also involves obtaining resources It also involves obtaining resources from creditors and repaying the from creditors and repaying the amount borrowed. amount borrowed. 17 - 1
  13. 13. Format of the Statement of Cash Flows ICAI in Accounting Standard 3 has approved two methods for reporting cash flows from operating activities.1 Direct method2 Indirect method 17 - 1
  14. 14. Format of the Statement of Cash FlowsThe direct method lists cash receipts fromspecific operating activities and cashpayments for each major operating activity.The indirect method is a short-cut methodfor accrual systems. 17 - 1
  15. 15. Objective 3 Prepare a statement of cashflows by the direct method. 17 - 1
  16. 16. The Direct Method Statement of Cash Flows (Direct Method) Year Ended December 31, 2002 (Thousands)Cash flows from operating activities:Receipts:Collections from customers Rs. 271Interest received on notes receivable 10Dividends received on investments in stock 9Total receipts Rs. 290 17 - 1
  17. 17. The Direct Method Statement of Cash Flows (Direct Method) Year Ended December 31, 2002 (Thousands)Payments:To suppliers Rs. 133To employees 58For interest 16For income tax 15Total payments 222Net cash inflows from operating activities Rs. 68 17 - 1
  18. 18. The Direct Method Statement of Cash Flows (Direct Method) Year Ended December 31, 2002 (Thousands)Cash flows from investing activities:Acquisition of plant assets Rs. (306)Loan to another company (11)Proceeds from sale of plant assets 62Net cash outflow frominvesting activities Rs. (255) 17 - 1
  19. 19. The Direct Method Statement of Cash Flows (Direct Method) Year Ended December 31, 2002 (Thousands)Cash flows from financing activities:Proceeds from issuance of common stock Rs. 101Proceeds from issuance of long-term notes payable 94Payment of long-term notes payable (11)Payment of dividends (17)Net cash inflow from financing activities Rs. 167 17 - 1
  20. 20. The Direct Method Statement of Cash Flows (Direct Method) Year Ended December 31, 2002 (Thousands)Net cash inflows from operating activities Rs. 68Net Cash outflow from investing activities (255)Net Cash inflow from financing activities 167Net (decrease in cash) Rs. (20)Cash balance, December 31, 2001 42Cash balance, December 31, 2002 Rs. 22 17 - 2
  21. 21. Objective 4 Compute the cash effects of a wide variety ofbusiness transactions. 17 - 2
  22. 22. Computing Individual Amounts for the Statement of Cash FlowsRevenues or expenses from the income statement + – Adjusted for the change in the related balance sheet account(s) = Amount for the statement of cash flows 17 - 2
  23. 23. Computing Individual Amountsfor the Statement of Cash Flows Income StatementYear Ended December 31, 2002 (Thousands) Revenues and gains: Sales revenue Rs. 284 Interest revenue 12 Dividend revenue 9 Gain on sale of plant assets 8 Total revenues and gains Rs. 313 17 - 2
  24. 24. Computing Individual Amountsfor the Statement of Cash Flows Expenses: Cost of goods sold Rs. 150 Salary expense 56 Depreciation expense 18 Other operating expense 17 Interest expense 16 Income tax expense 15 Total expenses Rs. 272 17 - 2
  25. 25. Computing Individual Amountsfor the Statement of Cash Flows Income StatementYear Ended December 31, 2002 (Thousands) Total revenues and gains Rs. 313 Total expenses 272 Net income Rs. 41 17 - 2
  26. 26. Comparative Balance Sheets Assets 20x2 20x1 Inc./(Dec.) Current: Cash Rs. 22 42 (20) Accounts receivable 93 80 13 Interest receivable 3 1 2 Inventory 135 138 (3) Prepaid expenses 8 7 1 Long-term receivable 11 – 11 Plant assets, net 453 219 234 Total assets Rs. 725 487 238 17 - 2
  27. 27. Comparative Balance Sheets Liabilities 20x2 20x1 Inc./(Dec.) Current: Accounts payable Rs. 91 57 34 Salary payable 4 6 (2) Accrued liabilities 1 3 (2) Long-term notes payable 160 77 83 Stockholders’ equity: Common stock 359 258 101 Retained earnings 110 86 24 Total liabilities and shareholders’ equity Rs. 725 487 238 17 - 2
  28. 28. Computing Cash Collections from CustomersCollections can be computed by convertingsales revenue to the cash basis.Beginning Accounts Receivable balance +Sales on account – Collections = EndingAccounts Receivable balance 17 - 2
  29. 29. Computing Cash Collections from CustomersRs.80,000 + Rs.284,000 – 93,000 =Rs.271,000Because Accounts Receivable increased byRs.13,000, the business received Rs.13,000less cash than its sales revenue for theperiod.All collections of receivables are computedfollowing the pattern illustrated forcollections from customers. 17 - 2
  30. 30. Computing Payments to SuppliersThis computation includes two parts,payments for inventory and payments forexpenses other than interest and income tax.Payments for inventory are computed byconverting cost of goods sold to the cashbasis.This is accomplished by analyzing theInventory and Accounts Payable accounts. 17 - 3
  31. 31. Payments for Inventory InventoryBeg. inventory 138,000 Cost of goods sold 150,000Purchases xEnd. inventory 135,000 17 - 3
  32. 32. Payments for InventoryHow much were the purchases?Rs.138,000 + x – Rs.150,000 = Rs.135,000x = Rs.135,000 – Rs.138,000 + Rs.150,000Rs.147,000 17 - 3
  33. 33. Payments for Inventory Accounts PayablePayments for Beg. balance 57,000inventory x Purchases 147,000 End. balance 91,000 17 - 3
  34. 34. Payments for InventoryHow much did the business pay for thisinventory?Rs.57,000 + Rs.147,000 – x = Rs.91,000x = Rs.57,000 + Rs.147,000 – Rs.91,000x = Rs.113,000 17 - 3
  35. 35. Payments for Operating ExpensesIncreases in prepaid expenses require cashpayments, and decreases indicate thatpayments were less than expenses.Decreases in accrued liabilities can occuronly from cash payments, and increasesmean that cash was not paid. 17 - 3
  36. 36. Payments to EmployeesSalary Payable was Rs.6,000 at thebeginning of the year and Rs.4,000 at yearend.During the year Salary and Wages Expensewas Rs.56,000.How much did the business pay?Rs.58,000 17 - 3
  37. 37. Acquisition and Sales of Plant AssetsThe business had plant assets net ofdepreciation of Rs.219,000 at the beginning of the year and Rs.453,000 at year end.Further, the acquisition of plant assetsamounted to Rs.306,000 during the year. 17 - 3
  38. 38. Acquisition and Sales of Plant AssetsThe income statement shows depreciationexpense of Rs.18,000 and a Rs.8,000 gainon sale of plant assets.What is the book value of the assets sold?Beginning net balance + Acquisitions –Depreciation – Book value of assets sold =Ending balance 17 - 3
  39. 39. Acquisition and Sales of Plant AssetsRs.219,000 + Rs.306,000 – Rs.18,000 – x =Rs.453,000x = Rs.219,000 + Rs.306,000 – Rs.18,000 –Rs.453,000x = Rs.54,000 (book value)How much are the proceeds from the saleof plant assets? 17 - 3
  40. 40. Acquisition and Sales of Plant AssetsBook value + Gain or – Loss = ProceedsRs.54,000 + Rs.8,000 = Rs.62,000How do we determine acquisitions?Beginning net balance + Acquisitions– Depreciation – Book value of assets sold= Ending balance 17 - 4
  41. 41. Computing the Cash Amounts of Financing Activities Financing activities affect liability and stockholders’ equity accounts.– Notes Payable– Bonds Payable– Long-Term Debt– Common Stock– Paid-in Capital– Retained Earnings 17 - 4
  42. 42. Issuance and Payments of Long-Term Notes PayableBeginning balance was Rs.77,000.New debt amounting to Rs.94,000 wasincurred during the year.The ending balance for the Long-TermNotes Payable account was Rs.160,000.How much was the payment?Rs.11,000 17 - 4
  43. 43. Computing Dividend PaymentsDividend payments are computed byanalyzing the Dividends Payable account.Beginning balance + Dividends declared– Dividend payments = Ending balance 17 - 4
  44. 44. Noncash Investing and Financing Activities...– are not reported in the statement of cash flows. The Accounting Standard 3 requires that significant non-cash investing and financing activities be shown in a separate schedule at the bottom of the statement. 17 - 4
  45. 45. Reconciling Net Income to Net Cash FlowThe Accounting Standard requirescompanies that format operating activitiesby the direct method to report areconciliation from net income to net cashinflow (or outflow). 17 - 4
  46. 46. Objective 5Prepare a statement of cash flows by the indirect method. 17 - 4
  47. 47. The Indirect Method Current Assets Add to Net Income if this account has decreasedDeduct from Net Income if this account has increased 17 - 4
  48. 48. The Indirect Method Current Liabilities Add to Net Income if this account has increasedDeduct from Net Income if this account has decreased 17 - 4
  49. 49. The Indirect Method Statement of Cash Flows (Indirect Method) Year Ended December 31, 2002 (Thousands)Cash flows from operating activities:Net Income 41Add (deduct) items that affect net incomeand cash flows differently:Depreciation 18Gain on sale of plant 8Increase in accounts receivable (13)Increase in interest receivable (2)Decrease in inventory 3 17 - 4
  50. 50. The Indirect Method Statement of Cash Flows (Indirect Method) Year Ended December 31, 2002 (Thousands)Add (deduct) items that affect net incomeand cash flows differently:Increase in prepaid expenses (1)Increase in accounts payable 34Decrease is salary payable (2)Decrease in accrued liabilities (2)Net cash inflow from operating activities 68 17 - 5

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