Chapter 12

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Chapter 12

  1. 1. The Statement of Cash Flows Chapter 12
  2. 2. Objective 1 <ul><li>Identify the purposes of the statement of cash flows. </li></ul>
  3. 3. <ul><li>Reports the entity’s cash flows (cash receipts and cash payments) during the period </li></ul>Basic Concepts
  4. 4. Purposes of the Statement of Cash Flows <ul><li>Predict future cash flows </li></ul><ul><li>Evaluate management decisions </li></ul><ul><li>Determine the ability to pay dividends to stockholders’ and payments to creditors </li></ul><ul><li>Show the relationship of net income to the business’s cash flows </li></ul>
  5. 5. What is Cash? <ul><li>Cash on hand </li></ul><ul><li>Cash in the bank </li></ul><ul><li>Cash equivalents - highly liquid, short-term investments that can be converted into cash with little delay </li></ul><ul><ul><li>Money-market investments </li></ul></ul><ul><ul><li>U.S. Government Treasury bills </li></ul></ul>
  6. 6. Objective 2 <ul><li>Distinguish among operating, investing, and financing cash flows. </li></ul>
  7. 7. <ul><li>Cash flow statement communicates sources and uses of cash in 3 major management activities: </li></ul>Operating, Investing, and Financing Activities Operating Investing Financing
  8. 8. Operating, Investing, and Financing Activities <ul><li>Operating activities create revenues, expenses, gains, losses i.e. they affect the income statement . </li></ul><ul><li>Investing activities increase and decrease long-term assets . </li></ul><ul><li>Financing activities obtain cash from investors and creditors and they are related to long term liabilities and stockholders’ equity </li></ul>
  9. 9. Two Formats for Operating Activities <ul><li>Indirect method reconciles from net income to net cash provided by operating activities </li></ul><ul><li>Direct method reports all cash receipts and cash payments from operating activities </li></ul><ul><li>The two methods have no effect on investing or financing activities. </li></ul>
  10. 10. Learning Objective 4 <ul><li>Prepare a statement of cash flows by the direct method. </li></ul>
  11. 11. The Direct Method <ul><li>The FASB has expressed a preference for the direct method </li></ul><ul><li>Provides clearer information about the sources and uses of a company’s operating cash </li></ul>
  12. 12. The Direct Method Cash flows from operating activities: Receipts: Collections from customers $271 Interest received on notes receivable 10 Dividends received on investments in stock 9 Total cash receipts $290 Statement of Cash Flows Year Ended December 31, 20x2 (In thousands)
  13. 13. The Direct Method Payments: To suppliers $133 To employees 58 For interest 16 For income tax 15 Total payments 222 Net cash provided by operating activities $ 68 Statement of Cash Flows Year Ended December 31, 20x2 (In thousands)
  14. 14. The Direct Method Net cash provided by operating activities $ 68 Net cash used for investing activities (255) Net cash provided by financing activities 167 Net decrease in cash $(20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2 $ 22 Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
  15. 15. Cash Flows from Operating Activities <ul><li>Cash collections from customers </li></ul><ul><li>Cash receipts of interest </li></ul><ul><li>Cash receipts of dividends </li></ul><ul><li>Payments to suppliers </li></ul><ul><li>Payments to employees </li></ul><ul><li>Payments for interest and income tax expense </li></ul>
  16. 16. <ul><li>Purchases of plant assets; investments in, and loans to, other companies </li></ul><ul><li>Proceeds from the sale of plant assets and investments; and the collections of loans </li></ul>Cash Flows from Investing Activities
  17. 17. <ul><li>Proceeds from the issuance of stock and debt </li></ul><ul><li>Payment of debt and purchases of the company’s own stock </li></ul><ul><li>Payment of cash dividends </li></ul>Cash Flows from Financing Activities
  18. 18. Noncash Investing and Financing Activities Suppose Anchor Corporation issued Common stock valued at $300,000 to acquire a warehouse. Warehouse Building 300,000 Common Stock 300,000
  19. 19. Noncash Investing and Financing Activities Noncash Investing and Financing Activities: (000) Acquisition of building by issuing common stock $300 Acquisition of land by issuing note payable 70 Payment of long-term debt by issuing common stock 100 Total noncash investing and financing activities $470 ©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
  20. 20. Computing Cash Collections from Customers Beginning accounts receivable balance + Total Sales – Collections = Ending accounts receivable balance OR Collections= Beginning accounts receivable balance + Total Sales – Ending accounts receivable balance
  21. 21. Computing Payments to Suppliers (computed in 2 steps) <ul><li>Step 1: How much were the purchases? </li></ul><ul><li>Beginning inventory + Purchases – Cost of goods sold = Ending Inventory </li></ul>$138,000 + X – $150,000 = $135,000 X = $150,000 – $138,000 + $135,000 X = $147,000
  22. 22. Computing Payments to Suppliers Step 2: Beginning balance of Inventory + Purchases – Payments for Inventory = Ending Balance of Inventory Accounts Payable Payments for inventory Beg. balance 57,000 Purchases 147,000 End. balance 91,000
  23. 23. Computing Payments to Suppliers <ul><li>Step 2: How much did the business pay for this inventory? </li></ul><ul><li>Beginning Accounts Payable + Purchases – Payments = Ending Accounts Payable </li></ul>$57,000 + $147,000 – X = $91,000 X = $57,000 + $147,000 – $91,000 X = $113,000
  24. 24. End of Chapter 12

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