balance sheetcash flow.ppt

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balance sheetcash flow.ppt

  1. 1. CHAPTER 4 STRUCTURE OF THE BALANCE SHEET & STATEMENT OF CASH FLOWS Slides Authored by Brian Leventhal University of Illinois at Chicago FINANCIAL REPORTING & ANALYSIS BY REVSINE – COLLINS – JOHNSON 2 nd Edition Copyright © Prentice Hall 2002
  2. 2. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>A. There are three basic elements of the balance sheet: </li></ul><ul><li>1. Assets are the probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. </li></ul>Assets = Liabilities + Owners’ Equity
  3. 3. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>A. There are three basic elements of the balance sheet: </li></ul>2. Liabilities are probable future sacrifices arising from present obligations to transfer assets or provide services to other entities as a result of past transactions or events . Assets = Liabilities + Owners’ Equity
  4. 4. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>A. There are three basic elements of the balance sheet: </li></ul>3. Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. Assets - Liabilities = Owners’ Equity
  5. 5. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>A. There are three basic elements of the balance sheet: </li></ul>Assets = Liabilities + Owners’ Equity 4. Generally accepted accounting principles ( GAAP ) balance sheet carrying amounts are a mixture of : - historical costs - current costs (also called fair value ) - net realizable value , and - discounted present values .
  6. 6. <ul><li>B. The balance sheet provides information for assessing: </li></ul><ul><li>- rates of return - capital structure - liquidity - solvency, and -financial flexibility. </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Assets = Liabilities + Owners’ Equity
  7. 7. <ul><li>B. The balance sheet provides information for assessing: </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>1. Rates of return measures are used to evaluate operating efficiency and profitability . </li></ul><ul><ul><li>a. Two common returns measures are return on assets (ROA) and return on common equity (ROCE). </li></ul></ul><ul><ul><li>b. By comparing ROA to ROCE , users can gain insight into whether leverage ( e.g., debt financing ) is enhancing the return earned by shareholders. </li></ul></ul>Assets = Liabilities + Owners’ Equity
  8. 8. <ul><li>B. The balance sheet provides information for assessing: </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Assets = Liabilities + Owners’ Equity 2. Capital structure is the relative proportion of financing for assets that comes from debt or equity sources. An important decision in corporate finance is determining the optimal capital structure .
  9. 9. <ul><li>B. The balance sheet provides information for assessing: </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Assets = Liabilities + Owners’ Equity 3. The related footnotes provide information for evaluating liquidity, solvency , and capital structure.
  10. 10. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>a. Liquidity measures how readily assets can be converted to cash relative to how soon liabilities will have to be paid in cash . </li></ul>Assets = Liabilities + Owners’ Equity 3. The related footnotes & Balance Sheet provide information for evaluating liquidity, solvency, and capital structure.
  11. 11. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>b. Solvency refers to the ability of a company to generate sufficient cash flows to maintain its productive capacity and still meet interest and principal payments on long-term debt . </li></ul>Assets = Liabilities + Owners’ Equity 3. The related footnotes & Balance Sheet provide information for evaluating liquidity, solvency, and capital structure.
  12. 12. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>c. Financial flexibility refers to a company’s ability to adjust to unexpected downturns in the economic environment in which it operates or to take advantage of investment opportunities as they arise. </li></ul>Assets = Liabilities + Owners’ Equity 3. The related footnotes & Balance Sheet provide information for evaluating liquidity, solvency, and capital structure.
  13. 13. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>C. A classified balance sheet groups similar items so that important relationships are revealed . </li></ul><ul><li> 1. Assets: a. Current assets. b. Long-term investments. c. Property, plant, and equipment. d. Intangible assets. e. Other (long-term) assets. </li></ul>Assets = Liabilities + Owners’ Equity
  14. 14. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>C. A classified balance sheet groups similar items so that important relationships are revealed . </li></ul><ul><li>2. Liabilities: a. Current liabilities. b. Long-term liabilities. </li></ul><ul><li> </li></ul>Assets = Liabilities + Owners’ Equity
  15. 15. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>C. A classified balance sheet groups similar items so that important relationships are revealed . </li></ul><ul><li>3. Owners’ equity: a. Capital stock. b. Additional paid-in capital. c. Retained earnings. </li></ul><ul><li> </li></ul>Assets = Liabilities + Owners’ Equity
  16. 16. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li> 2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & Cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts If cash consists exclusively of U.S. dollar amounts , the balance sheet account reflects the historical amount , which is identical to the current market value of cash .
  17. 17. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li> 2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Cash amounts denominated in foreign currency units is translated into U.S. dollar equivalents at the balance sheet date using the current rate of exchange . This portion of cash is carried at its current market price .
  18. 18. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts The intended holding period of the company that owns the securities determines how the debt and equity securities are measured on the balance sheet .
  19. 19. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Some investments will be carried at original (historical) cost , some at amortized cost , and others at current cost .
  20. 20. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Gross accounts receivable equal the face amounts arising from past transactions .
  21. 21. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Gross accounts receivable are reduced by an estimate of the accounts receivable that will ultimately not be collected . So,  Net Accounts Receivable are carried at net realizable value .
  22. 22. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts The measurement of inventory depends on the relationship between historical costs and current market prices . When costs are lower than market price , the carrying amount for inventory is historical cost
  23. 23. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Current Assets </li></ul><ul><li>Cash & cash Equivalents $3,345 $ 1,453 </li></ul><ul><li>Short-Term Investments 699 171 </li></ul><ul><li>Accounts Receivable, net 5,125 5,057 </li></ul><ul><li>Inventories 3,422 3,745 </li></ul><ul><li>Deferred Income Taxes 3,162 2,362 </li></ul><ul><li>Other current assets 750 743 </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts The measurement of inventory depends on the relationship between historical costs and current market prices . When cost exceeds market , Inv . are carried at current market price , market price is defined as net realizable value .
  24. 24. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li> 2001 2000 </li></ul><ul><li>ASSETS </li></ul><ul><li>Total Current Assets $16,503 $13,531 </li></ul><ul><li>Property, Plant & Equipment,net 9,246 10,049 </li></ul><ul><li>Other Assets 11,578 5,148 </li></ul><ul><li>Total Assets $ 37,327 $ 28,728 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Historical Cost - Accum.Deprec. Book Value(Net) Property,Plant & Equipment are on the balance sheet at: When a long-lived asset becomes impaired —that is, when its carrying amount may no longer be recoverable —the fixed asset is reduced to its lower fair value .
  25. 25. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>LIBILITIES </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Notes payable & current portion of long-term debt $2,504 $ 2,909 </li></ul><ul><li>Accounts payable 3,015 2,305 </li></ul><ul><li>Accrued liabilities 6,897 6,226 </li></ul><ul><li>Total Current Liabilities 12,416 11,440 </li></ul><ul><li>Long-term debt 3,089 2,633 </li></ul><ul><li>Deferred Income Taxes 3,481 1,188 </li></ul><ul><li>Other liabilities 1,513 1,245 </li></ul><ul><li>Total Liabilities $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Accounts payable & accrued liabilities are on the balance sheet at the amount of the original liability ( historical cost ).
  26. 26. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>LIBILITIES </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Notes payable & current portion of long-term debt $2,504 $ 2,909 </li></ul><ul><li>Accounts payable 3,015 2,305 </li></ul><ul><li>Accrued liabilities 6,897 6,226 </li></ul><ul><li>Total Current Liabilities 12,416 11,440 </li></ul><ul><li>Long-term debt 3,089 2,633 </li></ul><ul><li>Deferred Income Taxes 3,481 1,188 </li></ul><ul><li>Other liabilities 1,513 1,245 </li></ul><ul><li>Total Liabilities $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts The initial balance sheet carrying amount is the discounted present value of the sum of (1) the future principal repayment plus (2) the periodic interest payments .
  27. 27. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>LIBILITIES </li></ul><ul><li>Current Liabilities </li></ul><ul><li>Notes payable & current portion of long-term debt $2,504 $ 2,909 </li></ul><ul><li>Accounts payable 3,015 2,305 </li></ul><ul><li>Accrued liabilities 6,897 6,226 </li></ul><ul><li>Total Current Liabilities 12,416 11,440 </li></ul><ul><li>Long-term debt 3,089 2,633 </li></ul><ul><li>Deferred Income Taxes 3,481 1,188 </li></ul><ul><li>Other liabilities 1,513 1,245 </li></ul><ul><li>Total Liabilities $16,503 $13,531 </li></ul>I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts Fixed Rate Debt , this carrying amount will differ from current market prices when interest rates have changed subsequent to issuance .
  28. 28. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>STOCKHOLDERS’ EQUITY </li></ul><ul><li>Preferred stock, $100 PV </li></ul><ul><li>Authorized shares: </li></ul><ul><li>.5 (non issued) ---- ---- </li></ul><ul><li>Common Stock, $3 PV </li></ul><ul><li>Authorizes shares: 2001&2000, 1,400 </li></ul><ul><li>Issued & outstanding: </li></ul><ul><li>2001,612.8;2000;601.1 1,838 1,804 </li></ul><ul><li>Additional paid-in capital 2,572 1,894 </li></ul><ul><li>Retained earnings 8,780 8,254 </li></ul><ul><li>Non-owner changes to equity 3,154 270 </li></ul><ul><li>Total Stockholders’ Eq. $16,344 $12,222 </li></ul>Common Stock is reported at historical par value .
  29. 29. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>STOCKHOLDERS’ EQUITY </li></ul><ul><li>Preferred stock, $100 PV </li></ul><ul><li>Authorized shares: </li></ul><ul><li>.5 (non issued) ---- ---- </li></ul><ul><li>Common Stock, $3 PV </li></ul><ul><li>Authorizes shares: 2001&2000, 1,400 </li></ul><ul><li>Issued & outstanding: </li></ul><ul><li>2001,612.8;2000;601.1 1,838 1,804 </li></ul><ul><li>Additional paid-in capital 2,572 1,894 </li></ul><ul><li>Retained earnings 8,780 8,254 </li></ul><ul><li>Non-owner changes to equity 3,154 270 </li></ul><ul><li>Total Stockholders’ Eq. $16,344 $12,222 </li></ul>Additional paid-in capital is reported at historical cost as the excess of original issue price and par value.
  30. 30. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>STOCKHOLDERS’ EQUITY </li></ul><ul><li>Preferred stock, $100 PV </li></ul><ul><li>Authorized shares: </li></ul><ul><li>.5 (non issued) ---- ---- </li></ul><ul><li>Common Stock, $3 PV </li></ul><ul><li>Authorizes shares: 2001&2000, 1,400 </li></ul><ul><li>Issued & outstanding: </li></ul><ul><li>2001,612.8;2000;601.1 1,838 1,804 </li></ul><ul><li>Additional paid-in capital 2,572 1,894 </li></ul><ul><li>Retained earnings 8,780 8,254 </li></ul><ul><li>Non-owner changes to equity 3,154 270 </li></ul><ul><li>Total Stockholders’ Eq. $16,344 $12,222 </li></ul>This measures the net of the cumulative earnings less cumulative dividend distributions of the company since inception . This is reinvestment to grow!
  31. 31. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>STOCKHOLDERS’ EQUITY </li></ul><ul><li>Preferred stock, $100 PV </li></ul><ul><li>Authorized shares: </li></ul><ul><li>.5 (non issued) ---- ---- </li></ul><ul><li>Common Stock, $3 PV </li></ul><ul><li>Authorizes shares: 2001&2000, 1,400 </li></ul><ul><li>Issued & outstanding: </li></ul><ul><li>2001,612.8;2000;601.1 1,838 1,804 </li></ul><ul><li>Additional paid-in capital 2,572 1,894 </li></ul><ul><li>Retained earnings 8,780 8,254 </li></ul><ul><li>Non-owner changes to equity 3,154 270 </li></ul><ul><li>Total Stockholders’ Eq. $16,344 $12,222 </li></ul>Since different measurement bases pervade the balance sheet, & income statement so retained earnings is a mixture of historical costs, current values, and present values.
  32. 32. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>STOCKHOLDERS’ EQUITY </li></ul><ul><li>Preferred stock, $100 PV </li></ul><ul><li>Authorized shares: </li></ul><ul><li>.5 (non issued) ---- ---- </li></ul><ul><li>Common Stock, $3 PV </li></ul><ul><li>Authorizes shares: 2001&2000, 1,400 </li></ul><ul><li>Issued & outstanding: </li></ul><ul><li>2001,612.8;2000;601.1 1,838 1,804 </li></ul><ul><li>Additional paid-in capital 2,572 1,894 </li></ul><ul><li>Retained earnings 8,780 8,254 </li></ul><ul><li>Non-owner changes to equity 3,154 270 </li></ul><ul><li>Total Stockholders’ Eq. $16,344 $12,222 </li></ul>This measures the net of the cumulative unrealizable gains and losses from other comprehensive income components recognized in current and prior years
  33. 33. <ul><li>Motorola Balance Sheet </li></ul><ul><li> Dec 31 </li></ul><ul><li>2001 2000 </li></ul><ul><li>STOCKHOLDERS’ EQUITY </li></ul><ul><li>Preferred stock, $100 PV </li></ul><ul><li>Authorized shares: </li></ul><ul><li>.5 (non issued) ---- ---- </li></ul><ul><li>Common Stock, $3 PV </li></ul><ul><li>Authorizes shares: 2001&2000, 1,400 </li></ul><ul><li>Issued & outstanding: </li></ul><ul><li>2001,612.8;2000;601.1 1,838 1,804 </li></ul><ul><li>Additional paid-in capital 2,572 1,894 </li></ul><ul><li>Retained earnings 8,780 8,254 </li></ul><ul><li>Non-owner changes to equity 3,154 270 </li></ul><ul><li>Total Stockholders’ Eq. $16,344 $12,222 </li></ul>This account is debited for unrealized losses and credited for unrealized gains . All amounts are shown net of tax effects .
  34. 34. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>1. One tool for gaining insights into the company’s operations and for analyzing its assets and financial structures is to prepare a common-size balance sheet. </li></ul>Q. Extracting Analytical Insights
  35. 35. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>2. The account titles and formats for balance sheets prepared in other countries can sometimes differ from those prepared in the U.S. </li></ul><ul><li>In the U.S. assets are presented in decreasing order of liquidity . </li></ul><ul><li>In the U.K., Germany, Netherlands, and other European countries, fixed assets are presented first followed by current assets displayed in an increasing order of liquidity . </li></ul>Q. Extracting Analytical Insights
  36. 36. I. Classification Criteria and Measurement Conventions for Balance Sheet Accounts <ul><li>3. Analysts must pay attention to the differences in accounts and valuation techniques that are allowed by different countries’ GAAP procedures . </li></ul>Q. Extracting Analytical Insights
  37. 37. II. Statement of Cash Flows: <ul><li>A. The statement of cash flows shows the user why a firm’s investments and financial structure have changed between two periods . </li></ul><ul><li>1. The critical issue then becomes the timing of income recognition . </li></ul>
  38. 38. <ul><li>2. The connection between successive balance sheet positions and the statement of cash flows can be shown: </li></ul>II. Statement of Cash Flows: a. Assets = Liabilities  Owners’ equity b. Cash  Noncash assets = Liabilities  Owners’ equity c. Cash = Liabilities  Noncash assets  Owners’ equity d.  Cash =  Liab   Noncash assets   Owners’ equity
  39. 39. <ul><li>2. The connection between successive balance sheet positions and the statement of cash flows can be shown: </li></ul>II. Statement of Cash Flows:  Cash =  Liab –  Noncash assets   Owners’ equity <ul><li>e. The cash flow statement simultaneously provides an explanation of why a firm’s cash position has changed between successive balance sheet dates and explains changes that have taken place in the firm’s noncash asset, liability, and stockholders’ equity accounts over the same time period. </li></ul>
  40. 40. <ul><li>3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period. </li></ul>II. Statement of Cash Flows:
  41. 41. <ul><li>3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period. </li></ul>II. Statement of Cash Flows: a. Reported net income will not equal cash flow from operating activities because of differences between accrual-based and cash-based accounting.
  42. 42. <ul><li>3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period. </li></ul>II. Statement of Cash Flows: <ul><li>Changes in cash may be caused by nonoperating investing activities like the purchase or sale of property, plant, </li></ul><ul><li>and equipment . </li></ul>
  43. 43. <ul><li>3. The change in a firm’s cash position between successive balance sheet dates will not equal the reported earnings for that period. </li></ul>II. Statement of Cash Flows: c. Changes in cash may be caused by nonoperating financing activities like the issuance of stock or bonds or the repayment of a bank loan.
  44. 44. <ul><li>B. The cash flow statement summarizes the cash inflows and outflows of a company broken down into three activities : </li></ul>II. Statement of Cash Flows: <ul><li>1. Cash flows from operating activities result from the cash effects of transactions and events that affect operating income. </li></ul><ul><li>2. Cash flows from investing activities result from the cash effects of transactions and events that affect long-term assets. </li></ul><ul><li>3. Cash flows from financing activities result from the cash effects of transactions and events that affect long-term liabilities and owners’ equity (other than net income). </li></ul>
  45. 45. II. Statement of Cash Flows: Let’s Look at an Example of Cash & Accrual Accounting
  46. 46. HRB Advertising Company HRB Advertising opened on April 1, 2001 . The corp.’s for the remainder of 2001 are as follows: 1. Each of the 3 partners contributed $3500 cash on April 1 for shares of the company’s stock. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500
  47. 47. HRB Advertising Company HRB Advertising opened on April 1, 2001 . The corp.’s for the remainder of 2001 are as follows: 2. HRB rented office space Beg. April 1 , and paid the full year’s rental of $2000 per month or $24,000 in advance. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000)
  48. 48. HRB Advertising Company 3. The Company borrowed $10,000 from a bank on April 1 . The loan and accrued interest is payable Jan. 1, 2002 w/ interest at 12% per year. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000
  49. 49. HRB Advertising Company 4. HRB purchased office eq. With a 5 year life for $15,000 cash on April 1 . Equipment is depreciated straight-line no salvage value. Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000 Equipment purchase ($15,000)
  50. 50. HRB Advertising Company 5. HRB sold and billed customer for $65,000 of advertising services rendered between April 1 and Dec 31 . Of this amount, $20,000 was still uncollected by year-end . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000 Equipment purchase ($15,000) Adverting Rev.(Accrual Actg.) = Revenue Earned Services Performed = $65,000 Advertising Revenue $45,000 Advertising Revenue $65,000
  51. 51. HRB Advertising Company 6. By year-end, the company used and paid the following operating costs: (a) utilities $650 , (b) salaries, $36,250 and (c) supplies $800 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000 Equipment purchase ($15,000) Advertising Revenue $45,000 Advertising Revenue $65,000 Salary Expense ($36,250) Utilities Expense (650) Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) Supplies Expense (800)
  52. 52. HRB Advertising Company 7. The company had accrued (unpaid) expenses at year-end as follows: (a) utilities $75 ; (b) salaries $2,400 ; and (c) interest $900 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000 Equipment purchase ($15,000) Advertising Revenue $45,000 Advertising Revenue $65,000 Salary Expense ($36,250) Utilities Expense (650) Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) Supplies Expense (800) Utilities Expense(Used) = $650 + $75 =$725 (725) Salary Expense(Used) = $36,250 + $2,400 =$ 38,650 (38,650) Interest Expense(Used) = $10,000*.12*9/12= $900 Interest Expense (900)
  53. 53. HRB Advertising Company 8. Supplies purchased on account and unpaid at year-end is $50 . Supplies on hand at year-end is $100 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000 Interest Expense (900) Equipment purchase ($15,000) Advertising Revenue $45,000 Advertising Revenue $65,000 Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) Supplies Expense Supplies Expense(Used) = $$ Purchased – End. Supplies $750 = ($800 + $50) - $100 (750) Utilities Expense (725) Salary Expense (38,650)
  54. 54. HRB Advertising Company 9. Annual Depr. Exp. On office Eq. Is $3000. Since the Eq. Was acquired on April 1, the Dep Exp for 2001 is $3,000 * 9/12 = $2,250 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Bank borrowing $10,000 Interest Expense (900) Equipment purchase ($15,000) Depreciation Exp. (2,250) Advertising Revenue $45,000 Advertising Revenue $65,000 Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) Utilities Expense (725) Salary Expense) (38,650) Supplies (750)
  55. 55. HRB Advertising Company 10. The office space was used for 9 months $18,000 . Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Rent Expense ($18,000) Bank borrowing $10,000 Interest Expense (900) Equipment purchase ($15,000) Depreciation Exp. (2,250) Advertising Revenue $45,000 Advertising Revenue $65,000 Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) Rent Used(Accrual Actg.) = Cost per Month * Months Used $18,000 = $2,000 * 9 Utilities Expense (725) Salary Expense ($36,250) (38,650) Supplies Expense (800) (750)
  56. 56. HRB Advertising Company LET’S GET THE FINAL RESULTS !!!! Accrual Basis Income Statement Operating Activities Net Income Cash Flow Statement Operating Activities Total Operating Cash Flow Investing Activities Financing Activities Change in Cash Stock Issuance $10,500 Rent Expense ($24,000) Rent Expense ($18,000) Bank borrowing $10,000 Equipment purchase ($15,000) Depreciation Exp. (2,250) Advertising Revenue $45,000 Advertising Revenue $65,000 Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) Interest Expense (900) $ 3725 ($16,700) $20,500 ($11,200) Utilities Expense (725) Salary Expense (38,650) Supplies Expense (750)
  57. 57. HRB Advertising Company Direct approach shows the individua l operating cash inflows and outflows directly . Cash Flow Statement Operating Activities Total Operating Cash Flow Rent Expense ($24,000) Advertising Revenue $45,000 Salary Expense ($36,250) Utilities Expense (650) Supplies Expense (800) ($16,700)
  58. 58. HRB Advertising Company Cash Flow Statement Operating Activities Net Income $ 3,725 Plus: Depreciation $2,250 Increase in S/P 2,400 Increase in A/P 50 Increase in Util/P 75 Increase in Int/P 900 5,675 Minus: Increase in A/R (20,000) Increase in Prpd Rent (6,000) Increase in Supplies (100) (26,100) Cash Flow from operations ($16,700) Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
  59. 59. HRB Advertising Company <ul><li>Cash Flow Statement </li></ul><ul><li>Operating Activities </li></ul><ul><li>Net Income $ 3,725 </li></ul><ul><li>Plus: </li></ul><ul><li>Add noncash expenses (i.e., depreciation; amortization; bond discount; losses on sales of property, plant, and equipment.) to net income. </li></ul><ul><li>Cash Flow from operations ($16,700) </li></ul>Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
  60. 60. HRB Advertising Company <ul><li>Cash Flow Statement </li></ul><ul><li>Operating Activities </li></ul><ul><li>Net Income $ 3,725 </li></ul><ul><li>Plus: </li></ul><ul><li>Add net decreases in current assets . </li></ul><ul><li>Add net increases in current liabilities . </li></ul><ul><li>Cash Flow from operations ($16,700) </li></ul>Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
  61. 61. HRB Advertising Company <ul><li>Cash Flow Statement </li></ul><ul><li>Operating Activities </li></ul><ul><li>Net Income $ 3,725 </li></ul><ul><li>Plus: </li></ul><ul><li>Minus: </li></ul><ul><li>Subtract net decreases in current liabilities. </li></ul><ul><li>Subtract net increases in current assets. </li></ul><ul><li>Subtract noncash gains (amortization; bond premium; gains on sales of property, plant, and equipment.) to net income. </li></ul><ul><li>Cash Flow from operations ($16,700) </li></ul>Indirect approach arrives at net cash flows from operations by adjusting net income for the differences between accrual-basis earnings and cash-basis earnings .
  62. 62. Let’s Look at an Example of Making a Statement of Cash Flows II. Statement of Cash Flows:
  63. 63. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li>2001 2002 Change </li></ul><ul><li>Assets </li></ul><ul><li>Cash ($11,200) $ 500 + $ 11,700 </li></ul><ul><li>A/R 20,000 15,775 - 4225 </li></ul><ul><li>Supplies Inventory 100 225 + 125 </li></ul><ul><li>Prepaid Rent 6,000 6,000 --- </li></ul><ul><li>Office Equipment 15,000 16,500 + 1,500 </li></ul><ul><li>Less: A/D (2,250 (5,500) - 3,250 </li></ul><ul><li>Total Assets $ 27,650 $ 33,500 + $ 5,850 </li></ul>Putting together a Statement of Cash Flows #1 Calculate Change in Balance Sheet Accounts
  64. 64. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li>2001 2002 Change </li></ul><ul><li>Assets </li></ul><ul><li>Cash ($11,200) $ 500 + $ 11,700 </li></ul><ul><li>A/R 20,000 15,775 - 4225 </li></ul><ul><li>Supplies Inventory 100 225 + 125 </li></ul><ul><li>Prepaid Rent 6,000 6,000 --- </li></ul><ul><li>Office Equipment 15,000 16,500 + 1,500 </li></ul><ul><li>Less: A/D (2,250 (5,500) - 3,250 </li></ul><ul><li>Total Assets $ 27,650 $ 33,500 + $ 5,850 </li></ul>Putting together a Statement of Cash Flows Answer to: Increase in Cash for the period on Statement
  65. 65. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Assets </li></ul><ul><li>Cash ($11,200) $ 500 + $ 11,700 </li></ul><ul><li>A/R 20,000 15,775 - 4225 </li></ul><ul><li>Supplies Inventory 100 225 + 125 </li></ul><ul><li>Prepaid Rent 6,000 6,000 --- </li></ul><ul><li>Office Equipment 15,000 16,500 + 1,500 </li></ul><ul><li>Less: A/D (2,250) (5,500) - 3,250 </li></ul><ul><li>Total Assets $ 27,650 $ 33,500 + $ 5,850 </li></ul>Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting OP OP OP INV OP (Dep. Exp) and/or INV(Asset Sales)
  66. 66. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li>2001 2002 Change </li></ul><ul><li>Assets </li></ul><ul><li>Cash ($11,200) $ 500 + $ 11,700 </li></ul><ul><li>A/R 20,000 15,775 - 4225 </li></ul><ul><li>Supplies Inventory 100 225 + 125 </li></ul><ul><li>Prepaid Rent 6,000 6,000 --- </li></ul><ul><li>Office Equipment 15,000 16,500 + 1,500 </li></ul><ul><li>Less: A/D (2,250 (5,500) - 3,250 </li></ul><ul><li>Total Assets $ 27,650 $ 33,500 + $ 5,850 </li></ul>Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed
  67. 67. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Balance Sheet A/R 20,000 15,775 -4225 </li></ul><ul><li>Income St . </li></ul>Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed A/R relates to what Income Statement item? Revenues $92,000 Beg. Bal $20,000 End. Bal $15,775 $92,000 ???? Credit Sales ???? Cash Collections $92,000 96,225 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Revenues A/R
  68. 68. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Balance Sheet A/R 20,000 15,775 - 4225 </li></ul><ul><li>Cash Collections $96,225 </li></ul><ul><li>Income St . Revenues $92,000 </li></ul><ul><li>Net Income ($1,725) </li></ul>Putting together a Statement of Cash Flows Operating activity SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Cash Revenues $96,225 Decrease in A/R 4225
  69. 69. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Balance Sheet A/R 20,000 15,775 - 4225 </li></ul><ul><li>Cash Collections $96,225 </li></ul><ul><li>Income St . Revenues $92,000 </li></ul><ul><li>Net Income ($1,725) </li></ul>Putting together a Statement of Cash Flows Operating activity SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Cash Revenues $96,225 Decrease in A/R 4225 <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Revenues $92,000 </li></ul><ul><li>+ dec. in A/R 4,225 </li></ul><ul><li>Cash Revenues $96,225 </li></ul><ul><li>It’s there but it’s hidden! </li></ul>
  70. 70. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li>Balance Sheet 2001 2002 Change </li></ul><ul><li>Supplies Inv. 100 225 + 125 </li></ul><ul><li>A/P (Supplies) 50 75 + 25 </li></ul><ul><li>Income St . </li></ul>???? ???? End. Bal $75 Purchases on Account Putting together a Statement of Cash Flows Supplies relates to what Income Statement item? Supplies Exp. $1,200 Beg. Bal $100 End. Bal $225 $1,200 ???? ???? Supplies Used $1,200 1,325 Operating activity Beg. Bal $50 1,325 1,300 Supplies Paid Cash Effect!! Pur on Acc Supplies Exp. Supplies Inv. A/P (Supplies)
  71. 71. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li>Balance Sheet 2001 2002 Change </li></ul><ul><li>Supplies Inv. 100 225 + 125 </li></ul><ul><li>A/P (Supplies) 50 75 + 25 </li></ul><ul><li>Cash Paid (Supplies) 1,300 </li></ul><ul><li>Income St . Supplies Exp. $1,200 </li></ul>SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Minus: Putting together a Statement of Cash Flows Operating activity Supplies ( $1,300) Increase in Supplies (125) Increase in A/P Sup. 25
  72. 72. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li>Balance Sheet 2001 2002 Change </li></ul><ul><li>Supplies Inv. 100 225 + 125 </li></ul><ul><li>A/P (Supplies) 50 75 + 25 </li></ul><ul><li>Cash Paid (Supplies) 1,300 </li></ul><ul><li>Income St . Supplies Exp. $1,200 </li></ul>SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Minus: Putting together a Statement of Cash Flows Operating activity Supplies ( $1,300) Increase in Supplies (125) Increase in A/P Sup. 25 <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Supplies Exp. ($1,200) </li></ul><ul><li>+ inc. in Sup. (125) </li></ul><ul><li>- dec.in A/P 25 </li></ul><ul><li>Cash Supplies ( $1,300) </li></ul><ul><li>It’s there but it’s hidden! </li></ul>
  73. 73. ???? Rent Paid in Advance this yr. HRB Comparative Balance Sheets Balance Sheet 2001 2002 Change Prepaid Rent 6,000 6,000 + 0 Income St . Putting together a Statement of Cash Flows Rent relates to what Income Statement item? Rent Exp. $24,000 Beg. Bal $6,000 End. Bal $6,000 $24,000 ???? ???? Rent Used 4/1-12/31 18,000 24,000 Operating activity Rent Used 1/1-3/31 6,000 Cash Effect!! Rent Exp. Prepaid Rent
  74. 74. SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Minus: Rent ( $24,000) Prepaid Rent +/- 0 HRB Comparative Balance Sheets Balance Sheet 2001 2002 Change Prepaid Rent 6,000 6,000 + 0 Cash Paid Rent $24,000 Income St . Rent Exp. $24,000 Putting together a Statement of Cash Flows <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Rent Exp. ($24,000) </li></ul><ul><li>+/- Prepaid </li></ul><ul><li>Rent. 0 </li></ul><ul><li>Cash Rent ( $24,000) </li></ul><ul><li>Cash & Accrual are equal , no adj. needed </li></ul>
  75. 75. ???? Deprecation Exp. HRB Comparative Balance Sheets - No Sales of Equipment Balance Sheet 2001 2002 Change Acc. Depr. (2,250) (5,500) ($3,250) Income St . Putting together a Statement of Cash Flows Depreciation relates to what Income Statement item? Depr. Exp. $3,250 $2,250 Beg. Bal $5,500 End. Bal $ 3,250 ???? Assets Sold 0 Operating activity 3,250 NO Cash Effect!! Depr. Exp. Acc Depr.
  76. 76. HRB Comparative Balance Sheets Balance Sheet 2001 2002 Change Acc. Depr. (2,250) (5,500) ($3,250) Income St . Depr. Exp. $3,250 (Non-Cash Item) SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Minus: Depreciation 0 Depr. Expense 3,250 Putting together a Statement of Cash Flows <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Depr. Exp. ($3,250) </li></ul><ul><li>+non cash exp $3,250 </li></ul><ul><li>Cash Depr. 0 </li></ul>
  77. 77. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Balance Sheet Off.Eq. 15,000 16,500 +1,500 </li></ul><ul><li>Purchased Office Equipment for Cash. - No Sales of Equipment </li></ul>Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Beg. Bal $15,000 End. Bal $16,500 $1,500 ???? Purchases ???? Eqip. Sold $1,500 0 Investing activity Now, let’s see how it looks on the SCF ! Cash Effect!! Cash Office Equip.
  78. 78. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Balance Sheet Off.Eq. 15,000 16,500 +1,500 </li></ul><ul><li>Cash Paid for Office Eq. ($1,500) </li></ul><ul><li>Purchased Office Equipment for Cash. - No Sales of Equipment </li></ul>SCF Direct Method Investing Activities SCF Indirect Method Investing Activities Investing activity Putting together a Statement of Cash Flows Equipment Purchase ($1,500) Equipment Purchase ($1,500)
  79. 79. <ul><li>HRB Comparative Balance Sheets </li></ul><ul><li> 2001 2002 Change </li></ul><ul><li>Liabilities </li></ul><ul><li>Utilities Payable $75 $ 50 - 25 </li></ul><ul><li>Interest Payable 900 675 - 225 </li></ul><ul><li>A/P (Supplies) 50 75 + 25 </li></ul><ul><li>Salaries Payable 2,400 4,200 + 1,800 </li></ul><ul><li>Bank Loan Payable 10,000 0 - 10,000 </li></ul><ul><li>Note Payable 0 10,000 +10,000 </li></ul><ul><li>Total Liabilities $ 13,425 $15,000 + $ 1,575 </li></ul>Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting OP FIN OP OP OP FIN
  80. 80. HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Util/Pay 75 50 -25 Income St . Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Utilities relates to what Income Statement item? Utilities Exp. $1,050 $75 Beg. Bal $50 End. Bal $1,050 ???? Utilities Paid ???? Utilities Used $1,075 1,050 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Utility Exp. Utility Pay.
  81. 81. SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Minus: Utilities ( $1,075) Decrease in Util/Pay (25) HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Util/Pay 75 50 -25 Utilities Paid 1,075 Income St . Utilities Exp. $1,050 Putting together a Statement of Cash Flows Operating activity <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Utilities Exp. ($1,050) </li></ul><ul><li>+decr.in Util/Pay (25) </li></ul><ul><li>Cash Utilities ( $1,075) </li></ul><ul><li>It’s there but it’s hidden! </li></ul>
  82. 82. HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Int/Pay 900 675 -225 Income St . Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Interest relates to what Income Statement item? Interest Exp. $1,350 $900 Beg. Bal $675 End. Bal $1,350 ???? Interest Paid ???? Interest Used $1,575 1,350 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Interest Exp. Interest Pay.
  83. 83. SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Minus: Interest ( $1,575) Decrease in Intl/Pay (225) Putting together a Statement of Cash Flows HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Int/Pay 900 675 -225 Cash Interest Paid 1,575 Income St . Interest Exp. $1,350 <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Int. Exp. ($1,350) </li></ul><ul><li>+decr.in Int/Pay (225) </li></ul><ul><li>Cash Interest ( $1,575) </li></ul><ul><li>It’s there but it’s hidden! </li></ul>
  84. 84. HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Sal/Pay 2,400 4,200 +1,800 Income St . Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Salary relates to what Income Statement item? Salary Exp. $62,875 $2,400 Beg. Bal $4,200 End. Bal $ 62,875 ???? Salary Paid ???? Salary Used $61,075 62,875 Operating activity Now, let’s see how it looks on the SCF ! Cash Effect!! Salary Exp. Salary Pay.
  85. 85. SCF Direct Method Operating Activities SCF Indirect Method Operating Activities Net Income ($1,725) Plus: Putting together a Statement of Cash Flows HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Sal/Pay 2,400 4,200 +1,800 Cash Salary Paid $61,075 Income St . Salary Exp. $62,875 <ul><li>Revenues $ 92,000 </li></ul><ul><li>Expenses ( 93,725) </li></ul><ul><li>Net Loss ($1,725) </li></ul><ul><li>Sal. Exp. ($ 62,875 ) </li></ul><ul><li>+incr. Sal/Pay 1,800 </li></ul><ul><li>Cash Salary ( $61,075) </li></ul><ul><li>It’s there but it’s hidden! </li></ul>Salary ( $ 61,075 ) Increase in Sal/Pay 1,800 Operating activity
  86. 86. HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Bank Loan 10,000 0 -10,000 Company paid off bank loan. Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Beg. Bal $10,000 End. Bal $0 $10,000 ???? Payments ???? New Loans $10,000 0 Financing activity Now, let’s see how it looks on the SCF ! Cash Effect!! Cash Bk Loan/Pay
  87. 87. SCF Direct Method Financing Activities SCF Indirect Method Financiang Activities Putting together a Statement of Cash Flows Bank Loan Repayment ($10,000) HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Bank Loan 10,000 0 -10,000 Bank Loan Paid 10,000 Company paid off bank loan. Bank Loan Repayment ($10,000) Financing activity
  88. 88. HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet N/P 0 10,000 +10,000 Company issued a Note Payable for cash. Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Beg. Bal $0 End. Bal $10,000 $10,000 ???? Payments ???? New Loans $10,000 0 Financing activity Now, let’s see how it looks on the SCF ! Cash Effect!! Cash Note Payable
  89. 89. SCF Direct Method Financing Activities SCF Indirect Method Financiang Activities Putting together a Statement of Cash Flows Note Payable Issued $10,000 HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet N/P 0 10,000 +10,000 Company issued a Note Payable for cash $10,000. Note Payable Issued $10,000 Financing activity
  90. 90. HRB Comparative Balance Sheets 2001 2002 Change Stockholders’ Equity Common Stock $10,500 $16,500 + 6,000 Retained Earnings 3,725 2,000 - 1,725 Total Stockholders’ Equity $ 13,425 $15,000 + $ 1,575 Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting FIN FIN OP &
  91. 91. HRB Comparative Balance Sheets 2001 2002 Change Stockholders’ Equity Common Stock $10,500 $16,500 + 6,000 Retained Earnings 3,725 2,000 - 1,725 Putting together a Statement of Cash Flows #2 Classify what part of SCF the Balance Sheet Items relate to. Op erating Fin ancing or Inv esting FIN FIN OP Net Income ($ 1,725) Dividends 0 R/E ($ 1,725)
  92. 92. HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Common Stock 10,500 16,500 +6,000 Company issued a Common Stock for cash $6,000. Putting together a Statement of Cash Flows #3 Analyze changes and determine Cash Flow effect along with info from Income Statement and other data as needed Beg. Bal $ 10,500 End. Bal $ 16,500 $6,000 ???? Stock Retired ???? Stock Issued $6,000 0 Financing activity Now, let’s see how it looks on the SCF ! Cash Effect!! Cash Common Stk
  93. 93. SCF Direct Method Financing Activities SCF Indirect Method Financiang Activities Putting together a Statement of Cash Flows Common Stock Issued $6,000 Common Stock Issued $6,000 HRB Comparative Balance Sheets 2001 2002 Change Balance Sheet Common Stock 10,500 16,500 +6,000 Company issued a Common Stock for cash $6,000. Financing activity
  94. 94. <ul><li>HRB Advertising </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li> 2001 2002 </li></ul><ul><li>Operating Activities </li></ul><ul><li>Advertising Services $45,000 $96,225 </li></ul><ul><li>Salaries (36,250) (61,075) </li></ul><ul><li>Rent (24,000) (24,000) </li></ul><ul><li>Utilities (650) (1,075) </li></ul><ul><li>Supplies (800) (1,300) </li></ul><ul><li>Interest –- (1,575) </li></ul><ul><li>Total Op. Cash Flow ($16,700) $7,200 </li></ul><ul><li>Investing Activities </li></ul><ul><li>Equipment Purchase ($15,000) ($ 1,500) </li></ul><ul><li>Total Inv. Cash Flow($15,000) ($1,500 ) </li></ul><ul><li>Financing Activities </li></ul><ul><li>Bank borrowing $10,000 ($10,000) </li></ul><ul><li>Note issuance – 10,000 </li></ul><ul><li>Stock issuance 10,500 6,000 </li></ul><ul><li>Total Fin. Cash Flow $20,500 $6000 </li></ul><ul><li>Change in Cash ($11,200) $11,700 </li></ul><ul><li>The statement of cash flows is useful because it: </li></ul><ul><li>Shows the entity’s ability to </li></ul><ul><li>generate future cash flows . </li></ul>
  95. 95. <ul><li>HRB Advertising </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li> 2001 2002 </li></ul><ul><li>Operating Activities </li></ul><ul><li>Advertising Services $45,000 $96,225 </li></ul><ul><li>Salaries (36,250) (61,075) </li></ul><ul><li>Rent (24,000) (24,000) </li></ul><ul><li>Utilities (650) (1,075) </li></ul><ul><li>Supplies (800) (1,300) </li></ul><ul><li>Interest –- (1,575) </li></ul><ul><li>Total Op. Cash Flow ($16,700) $7,200 </li></ul><ul><li>Investing Activities </li></ul><ul><li>Equipment Purchase ($15,000) ($ 1,500) </li></ul><ul><li>Total Inv. Cash Flow($15,000) ($1,500 ) </li></ul><ul><li>Financing Activities </li></ul><ul><li>Bank borrowing $10,000 ($10,000) </li></ul><ul><li>Note issuance – 10,000 </li></ul><ul><li>Stock issuance 10,500 6,000 </li></ul><ul><li>Total Fin. Cash Flow $20,500 $6000 </li></ul><ul><li>Change in Cash ($11,200) $11,700 </li></ul>The statement of cash flows is useful because it: 2. Shows the entity’s ability to pay dividends and meet obligations .
  96. 96. <ul><li>HRB Advertising </li></ul><ul><li>Statement of Cash Flows </li></ul><ul><li> 2001 2002 </li></ul><ul><li>Operating Activities </li></ul><ul><li>Net Income $3,725 ($1,725) </li></ul><ul><li>Depreciation 2,250 3,250 </li></ul><ul><li>Adjustments : </li></ul><ul><li>A/R dec (inc) (20,000) 4,225 </li></ul><ul><li>Supplies dec (inc) (100) ( 125) </li></ul><ul><li>Prepaid Rent dec (inc) (6,000) -- </li></ul><ul><li>Utilities Pay inc (dec) 75 (25) </li></ul><ul><li>A/P Supplies inc (dec) 50 25 </li></ul><ul><li>Int/Pay inc (dec) 900 (225) </li></ul><ul><li>Sal/Pay inc (dec) 2,400 1,800 </li></ul><ul><li>Total Op. Cash Flow ($16,700) $7,200 </li></ul>The statement of cash flows is useful because it: 3. Details differences between net income and cash provided by operations .
  97. 97. HRB Advertising Statement of Cash Flows 2001 2002 Operating Activities Total Op. Cash Flow ($16,700) $7,200 Investing Activities Total Inv. Cash Flow ($15,000) ($1,500 ) Financing Activities Total Fin. Cash Flow $20,500 $6000 Change in Cash ($11,200) $11,700 Significant Non-Cash Investing & Financing Activities Exchanged Land $15,000 -- for Stock Purchased Building -- $25,000 with Note Payable The statement of cash flows is useful because it: 4. Details cash and noncash investing and financing activities .

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