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14 Statement Of Cash Flows

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  • 1. Statement of Cash Flows
    • Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
    Chapter 14
  • 2. The Statement of Cash Flows
    • … shows how a company’s operating , investing , and financing activities affected cash during an accounting period
    • Explains the net increase (or decrease ) in cash during the accounting period
  • 3. Cash and Cash Equivalents
    • Cash includes cash and cash equivalents
      • Cash
        • Money on hand
        • Deposits in company checking accounts
      • Cash equivalents
        • Short-term, highly liquid investments including
          • Money market accounts
          • Commercial paper
          • U.S. Treasury bills
        • Combined with the Cash account on the statement of cash flows
  • 4. Purposes of the Statement of Cash Flows
    • … is to provide information about a company’s cash receipts and cash payments during an accounting period
    • Other financial statements may also provide some of this information
  • 5. Internal Uses of the Statement of Cash Flows
    • Management uses the statement of cash flows to
      • Assess liquidity
        • Determine if short-term financing is necessary
      • Determine dividend policy
        • Decide whether to raise or lower dividends
      • Evaluate the effects of investment and financing decisions
        • Plan for investing and financing needs
  • 6. External Uses of the Statement of Cash Flows
    • Investors and creditors use the statement of cash flows to assess a company’s ability to
      • Manage cash flows
      • Generate positive future cash flows
      • Pay its liabilities
      • Pay dividends and interest
      • Anticipate its need for additional financing
  • 7. Classification of Cash Flows
    • The statement of cash flows classifies cash receipts and cash payments into categories
      • Operating activities
      • Investing activities
      • Financing activities
  • 8. Operating Activities
    • … include the cash effects of transactions and other events that affect the income statement
    • In effect, items on the income statement are changed from an accrual to a cash basis
  • 9. Operating Activities
    • Cash inflows
      • Cash receipts from customers for goods and services
      • Interest and dividends received on loans and investments
      • Sales of trading securities
    • Cash outflows
      • Cash payments for
        • Wages
        • Goods and services
        • Expenses
        • Interest
        • Taxes
        • Purchases of trading securities
  • 10. Investing Activities
    • … include the cash effects of transactions that affect long-term assets
    • Acquiring and selling long-term assets
    • Acquiring and selling marketable securities other than trading securities or cash equivalents
    • Making and collecting loans
  • 11. Investing Activities
    • Cash inflows
      • Cash receipts from selling long-term assets and marketable securities
      • Collecting loans
    • Cash outflows
      • Cash expended for purchases of long-term assets and marketable securities
      • Cash loaned to borrowers
  • 12. Financing Activities
    • … include the cash effects of transactions that affect long-term liabilities and stockholders’ equity
    • Obtaining resources from stockholders
    • Returning resources to stockholders and providing them with a return on their investment
    • Obtaining resources from creditors
    • Repaying amounts borrowed from creditors or otherwise settling obligations
      • Repayments of accounts payable or accrued liabilities are classified under operating activities
  • 13. Financing Activities
    • Cash inflows
      • Proceeds from issues of stock
      • Proceeds from short-term and long-term borrowing
    • Cash outflows
      • Repayment of loans
      • Payments to owners (cash dividends)
      • Treasury stock transactions
  • 14. Classification of Cash Inflows and Cash Outflows
  • 15. Noncash Investing and Financing Transactions
    • Involve only long-term assets long-term liabilities stockholders’ equity
    • in significant investing and financing activities
    • Not reflected on the statement of cash flows because they do not involve either cash inflows or cash outflows
    • Disclosed in a separate schedule as part of the statement of cash flows
  • 16. Format of the Statement of Cash Flows
    • Divided into three sections
      • Cash flows from operating activities
      • Cash flows from investing activities
      • Cash flows from financing activities
    • A reconciliation of beginning and ending Cash balances appears near the bottom of the statement
    • Schedule of noncash investing and financing transactions
  • 17. Cash-Generating Efficiency (CGE)
    • … shows the company’s ability to generate cash from its current or continuing operations
    • There are three measures of CGE
    1. Cash Flow Yield Shows how much of net income actually results in operating cash inflows
  • 18. Cash-Generating Efficiency (CGE) (cont’d) 2. Cash Flows to Sales 3. Cash Flows to Assets Shows how much of net sales actually results in cash inflows Shows how much cash is being generated by operations for each dollar of assets
  • 19. Free Cash Flow (FCF)
    • … is the amount of cash that remains after paying for continuing operations at the current level, interest, income taxes, dividends, and net capital expenditures
    • Shows how much cash a company has available to reduce debt or expand
  • 20. Free Cash Flow (cont’d)
    • If free cash flow is positive, the company
      • Has met all of its planned cash commitments
      • Has cash available to reduce debt or expand
    • If free cash flow is negative, the company will have to
      • Sell investments
      • Borrow money
      • Issue stock in the short term
    • to continue at its planned level of operation
  • 21. Determining Cash Flows from Operating Activities
    • There are two methods of converting the income statement from an accrual basis to a cash basis
      • The direct method
        • Adjusts each item in the income statement to its cash equivalent
        • More easily understood by the average reader
      • The indirect method
        • Lists only necessary adjustments to convert net income to net cash flows
        • Superior from an analyst’s perspective
        • Used by most companies
    • Both methods produce the same net figure
  • 22. Indirect Method of Determining Net Cash Flows from Operating Activities
  • 23. Depreciation
    • Depreciation, amortization, and depletion expense are allocations of expense and do not involve cash flows
    • An adjustment is needed to increase net income by the amount recorded
  • 24. Adjustments to Depreciation 37,000 37,000 Depreciation Expense Income Taxes Payable Cash
  • 25. Adjustments to Depreciation 37,000 37,000 Depreciation Expense Accumulated Depreciation Cash
  • 26. Gains and Losses
    • Gains and losses do not affect cash flows from operating activities and need to be removed from this section
    • The cash receipts that resulted in the gains or losses are shown with investing activities
  • 27. Adjustments to Gains and Losses 90,000 -0- 90,000 12,000 102,000 Gain on Sale - Investments Investments Cash
  • 28. Adjustments to Gains and Losses 90,000 -0- 90,000 12,000 102,000 Gain on Sale - Investments Investments Cash
  • 29. Adjustments to Gains and Losses 10,000 -0- 10,000 3,000 2,000 -0- 2,000 5,000 Loss on Sale of Plant Assets Accum. Dep. Plant Assets Plant Assets Cash
  • 30. Adjustments to Gains and Losses 10,000 -0- 10,000 3,000 2,000 -0- 2,000 5,000 Loss on Sale of Plant Assets Accum. Dep. Plant Assets Plant Assets Cash
  • 31. Changes in Current Assets
    • Decreases are added to net income
    • Increases are deducted from net income
  • 32. Adjustments to Changes in Current Assets
      • Add $8,000 to net income because cash received from sales was $8,000 more than sales ($706,000 - $698,000)
    Cash Receipts from Customers Sales to Customers 706,000 698,000
    • Example
      • Accounts Receivable balance decreased by $8,000 ($47,000 - $55,000)
    Accounts Receivable Beg. Bal. 55,000 End. Bal. 47,000
  • 33. Adjustments to Changes in Current Assets 706,000 47,000 55,000 698,000 706,000 698,000 Sales Accounts Receivable Cash
  • 34. Adjustments to Changes in Current Assets 706,000 47,000 55,000 698,000 706,000 698,000 Sales Accounts Receivable Cash
  • 35. Adjustments to Changes in Current Assets 144,000 110,000 34,000 34,000 Inventory Cash
  • 36. Adjustments to Changes in Current Assets 144,000 110,000 34,000 34,000 Inventory Cash
  • 37. Adjustments to Changes in Current Assets 2,000 1,000 5,000 6,000 2,000 6,000 Insurance Expense Prepaid Expenses Cash
  • 38. Adjustments to Changes in Current Assets 2,000 1,000 5,000 6,000 2,000 6,000 Insurance Expense Prepaid Expenses Cash
  • 39. Changes in Current Liabilities
    • Increases are added to net income
    • Decreases are deducted from net income
  • 40. Adjustments to Changes in Current Liabilities
      • Add $7,000 to net income because cash paid for purchases was $7,000 less than what appears on the income statement ($554,000 - $547,000)
    Purchases Cash Paid to Suppliers 554,000 547,000
    • Example
      • Accounts Payable balance increased by $7,000 ($50,000 - $43,000)
    Accounts Payable Beg. Bal. 43,000 End. Bal. 50,000
  • 41. Adjustments to Changes in Current Liabilities 50,000 43,000 513,000 513,000 520,000 520,000 Accounts Payable Cash Cost of Goods Sold
  • 42. Adjustments to Changes in Current Liabilities 50,000 43,000 513,000 513,000 520,000 520,000 Accounts Payable Cash Cost of Goods Sold
  • 43. Relationship of Inventory and Accounts Payable Accounts 520,000 144,000 110,000 520,000 554,000 50,000 43,000 547,000 554,000 547,000 Cost of Goods Sold Accounts Payable Inventory Cash
  • 44. Relationship of Inventory and Accounts Payable Accounts 520,000 144,000 110,000 520,000 554,000 50,000 43,000 647,000 554,000 647,000 Cost of Goods Sold Accounts Payable Inventory Cash
  • 45. Adjustments to Changes in Current Liabilities 12,000 9,000 3,000 3,000 Accrued Expenses Accrued Liabilities
  • 46. Adjustments to Changes in Current Liabilities 12,000 9,000 3,000 3,000 Accrued Expenses Accrued Liabilities
  • 47. Current Liabilities 3,000 5,000 2,000 2,000 Income Taxes Payable Cash
  • 48. Adjustments to Changes in Current Liabilities 3,000 5,000 2,000 2,000 Income Taxes Payable Cash
  • 49. Schedule of Cash Flows from Operating Activities: Indirect Method
  • 50. Effects of Items on the Income Statement That Do Not Affect Cash Flows
  • 51. Adjustments for Increases and Decreases in Current Assets
  • 52. Preparing the Statement of Cash Flows: Investing Activities
    • Objective 4
      • Determine cash flows from investing activities
  • 53. Cash Flows from Investing Activities
    • Analyze increases and decreases in the Investments account to determine effects on Cash account
    • Objective
      • Explain the change in each account balance from one year to the next
    • Focus
      • Long-term assets (balance sheet)
      • Short-term investments (current asset section of the balance sheet)
      • Investment gains and losses (income statement)
  • 54. Accounting for Investments 78,000 115,000 127,000 90,000 102,000 78,000 12,000 Gain on Sale - Investments Investments Cash
  • 55. Plant Assets
    • Explain changes in both the asset and related accumulated depreciation accounts
      • Purchases increase plant assets
      • Sales decrease plant assets
    • Accumulated depreciation is
      • Increased by the amount of depreciation expense
      • Decreased by the removal of accumulated depreciation associated with plant assets that are sold
  • 56. Accounting for Plant Assets 120,000 715,000 505,000 120,000 10,000 103,000 68,000 2,000 5,000 8,000 37,000 Loss on Sale Plant Assets Accum. Dep. Plant Assets Plant Assets Cash
  • 57. Accounting for Plant Assets 120,000 505,000 120,000 10,000 68,000 2,000 5,000 ??? 8,000 All items affecting the Plant Assets account have not been accounted for 715,000 103,000 37,000 Loss on Sale Plant Assets Accum. Dep. Plant Assets Plant Assets Cash
  • 58. Accounting for Noncash Investing and Financing Transactions ??? 100,000 715,000 505,000 120,000 10,000 100,000 Cash Bonds Payable Plant Assets
  • 59. Accounting for Cash Flows from Investing Activities
  • 60. Accounting for Noncash Investing and Financing Transactions
  • 61. Cash Flows from Financing Activities
    • Analysis similar to investing activities, including treatment of related gains or losses
    • Focus
      • Short-term borrowings
      • Long-term liabilities
      • Stockholders’ equity accounts
    • Cash dividends from the statement of stockholders’ equity must also be considered
  • 62. Accounting for Cash Flows from Financing Activities 295,000 245,000 50,000 50,000 100,000 Income Taxes Payable Cash
  • 63. Accounting for Cash Flows from Financing Activities 189,000 115,000 99,000 175,000 76,000 295,000 245,000 Common Stock Paid-in Capital - Common Cash
  • 64. Accounting for Cash Flows from Financing Activities 8,000 140,000 132,000 16,000 8,000 16,000 Income Summary Retained Earnings Cash
  • 65. Accounting for Cash Flows from Financing Activities 25,000 25,000 Treasury Stock Cash
  • 66. Accounting for Cash Flows from Financing Activities
  • 67. Statement of Cash Flows: Indirect Method
  • 68. Discussion
    • Using the indirect method to prepare the statement of cash flows, tell whether each of the following items would appear
    • As cash flows from operating activities
    • As cash flows from investing activities
    • As cash flows from financing activities
    • In the schedule of noncash investing and financing transactions
    • Not at all
  • 69. Discussion (cont’d)
    • As cash flows from operating activities
    • As cash flows from investing activities
    • As cash flows from financing activities
    • In the schedule of noncash investing and financing transactions
    • Not at all
    • Dividends paid
    • Cash receipts from sales
    • Decrease in accounts receivable
    • Sale of plant assets
    • Gain on sale of investment
    • Issue of stock for plant assets
    • Issue of common stock
    • Net income
    • c
    • e
    • a
    • b
    • a
    • d
    • c
    • a