CHAPTER 13

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CHAPTER 13

  1. 1. Chapter 13- Statement of Cash Flows I. Purpose of the Statement of Cash Flows A. Focuses on the company’s ability to generate cash internally, its management of current assets and current liabilities, and the details of its investments and its external financing. B. The statement compares cash at the beginning of the period to cash at the end of the period C. For purposes of the cash flow statement, the definition of cash includes cash and cash equivalents. Remember cash equivalents are investments with original maturities of three months or less. Examples include: Treasury Bills, Commercial Paper, Certificates of Deposit, Money Market Funds D. There are 3 sections of the cash flow statement: 1. Cash Flow from Operations 2. Cash Flow from Investing 3. Cash Flow from Financing II. Accrual Basis Accounting vs. Cash Basis Accounting 1
  2. 2. Decrease in A/R Increase in A/R Increase in A/P Decrease in A/P 2
  3. 3. Example: The following information has been developed by the bookkeeper of the ABC Co. It relates to the company’s operations for 2008. Cash Receipts from customers $46,100 Cash disbursements for expenses 10,600 Account balances as of Dec. 31 2007 2008 Accounts Receivables $10,400 $9,600 Accrued Expenses payable 1,900 1,600 Required: Prepare an income statement for the year ended Dec. 31, 2008. II. Cash Flow Statement 3
  4. 4. Gives a detailed review of how the company's cash was used (outflows) and where the cash inflows came from. It reconciles the change in cash for the period. (It tells you what activities caused your cash balance to change throughout the year) A. 3 Major Sections of Cash Flow Statement 1. Operating Activities -cash inflow and outflow related to revenue and expense accounts reported on the income statement. INDIRECT METHOD: Net Income Add: Depr. & Amort. Exp. Loss on Sale of PPE Decreases in all CA Increases in all CL Subtract: Gain on Sale of PPE Increases in all CA Decreases in all CL Cash Flow from Operations xx 2. Investing Activities – cash inflows and outflows related to the purchase and disposal on long-term assets Add: Proceeds from Sale of PPE Proceeds from Sale of Investments Proceeds from Collection of Note Subtract: Purchase of PPE using CASH Purchase of Intangibles using CASH Note Receivable (Principle only) Cash Flow from Investing xx 3. Financing Activities – cash inflows and outflows related to the issuance and repayment of long-term liabilities and equity Add: Proceeds from issuing Bonds Payable Proceeds from issuing Stock Subtract: Payment of Cash Dividends Pmt. of L-T Debt (principle only) Purchase of Treasury stock Cash Flow from Financing xx CHANGE IN CASH XX (Add together: Cash Flow Operations + Cash Flow Investing + Cash Flow Financing = Change in Cash) Cash Flow Problems: 1. Below is the income statement for Lopes Company for the year ending December 31, 2008: 4
  5. 5. Sales (net) $500,000 Cost of Goods Sold: Beginning Inventory $ 50,000 Purchases 300,000 Goods Available for Sale 350,000 Ending Inventory 40,000 Cost of Goods Sold 310,000 Gross Margin $ 190,000 Expenses: Wages $35,000 Depreciation 30,000 Advertising 15,000 Administrative 5,000 $85,000 Income from Operations $105,000 Gain on Sale of Equipment 50,000 Net Income $155,000 The following balances were derived from the balance sheet: December 31 2008 2007 Accounts Receivable $100,000 $90,000 Accounts Payable 30,000 50,000 Prepaid Advertising Expense 5,000 3,000 Wages Payable 5,000 4,000 Inventory 40,000 50,000 Required: Prepare the Cash Flows from Operating Activities using the Indirect Method. 5
  6. 6. 2. Condensed financial data of Fern Galenti, Inc. appear below: FERN GALENTI, INC. Comparative Balance Sheet December 31 Assets 2007 2006 Cash and Cash Equivalents $ 97,800 $ 38,400 Accounts Receivable 90,800 33,000 Inventories 112,500 102,850 Prepaid expenses 18,400 16,000 Investments 108,000 94,000 Plant Assets 270,000 242,500 Accumulated Depreciation (50,000) (52,000) $647,500 $474,750 Liabilities & Stockholder’s Equity Accounts Payable $ 92,000 $ 67,300 Accrued Expenses payable 16,500 17,000 Bonds Payable 85,000 110,000 Common Stock 180,000 150,000 CIEP – Common Stock 40,000 25,000 Retained Earnings 234,000 105,450 $647,500 $474,750 FERN GALENTI, INC. Income Statement For the Year Ended December 31, 2007 Sales $342,780 Less: Cost of Goods Sold $ 115,460 Operating Expenses 58,910 Income Tax Expense 7,280 Interest Expense 2,730 Loss on Sale of Plant Assets 7,500 191,880 Net Income $150,900 Additional Information: 1. New plant assets were purchased for cash during the year. 2. Old plant assets having an original cost of $57,500 were sold for $1,500 cash. 3. Bonds matured and were paid off at face value for cash. 4. A cash dividend was declared and paid during the year. Required: Prepare a statement of cash flows using the indirect method. Fern Galenti, Inc. Statement of Cash Flows 6
  7. 7. 3. The following balance sheets apply to Kleocyk Company. Prepare a statement of cash flow. Assets: 2008 2007 Cash and Cash Equivalents $1,200 $ 800 7
  8. 8. Accounts Receivable 400 440 Inventory 1,220 740 Land 820 500 Equipment 4,600 4,140 Accumulated Depreciation (800) (620) Total Assets $7,440 $6,000 Liabilities & Equities: Accounts Payable $ 1,000 $ 1,600 Long-Term Borrowings 1,440 1,800 Common Stock 2,000 1,200 Retained Earnings 3,000 1,400 Total Liabilities & Equities $7,440 $6,000 Additional Data: a. Net Income for 2008 was $2,200. b. During 2008, the company sold for $740 equipment that cost $740 and had a book value of $600. c. The company sold land for $400, resulting in a loss of $80. The remaining land change was due to the acquisition of land for common stock. Kleocyk Company Statement of Cash Flows 8
  9. 9. 4. Prepare a Statement of Cash Flows using the following financial statements: BREWER, INC. Comparative Balance Sheet December 31 2008 2007 Assets: Current Assets: Cash and Cash Equivalents $ 5,000 $45,000 Accounts Receivable 100,000 75,000 Inventories 50,000 45,000 9
  10. 10. Prepaid Expenses 30,000 35,000 Total Current Assets 185,000 $200,000 Non-current Assets: Land $100,000 $75,000 Buildings 200,000 175,000 Accumulated Depr. – Bldgs (50,000) (40,000) Equipment 100,000 75,000 Accumulated Depr – Equip. (35,000) (15,000) Patents 20,000 30,000 TOTAL ASSETS $520,000 $500,000 Liabilities & Stockholder’s Equity: Current Liabilities: Accounts Payable $50,000 $40,000 Notes Payable 25,000 25,000 Accrued Expenses 40,000 35,000 Total Current Liabilities $115,000 $100,000 Long-Term Liabilities: Bonds Payable $100,000 $140,000 Stockholder’s Equity: Common Stock ($100 par value) $230,000 $200,000 Capital in Excess of Par 40,000 30,000 Retained Earnings 35,000 30,000 Total Stockholders Equity $305,000 $260,000 TOTAL LIABILITIES & EQUITY $520,000 $500,000 10
  11. 11. BREWER, INC. Income Statement For the year ended December 31, 2008 Sales $2,000,000 Cost of Goods Sold 1,500,000 Gross Profit $ 500,000 Operating Expenses 485,000 Income From Operations $ 15,000 Other Revenues & Expenses: Add: Gain on Sale of Building 20,000 $ 35,000 Less: Loss on sale of Land $10,000 Interest Expense 15,000 25,000 Net Income before Taxes $ 10,000 Less: Income Tax Expense 5,000 Net Income $ 5,000 Additional Data: a. A building which cost $50,000 and had accumulated depreciation of $10,000 was sold. b. Common stock with $30,000 par value was sold c. Land with a cost of $25,000 was sold for $15,000 d. Land was purchased for $50,000. e. No equipment was sold during the year. 11
  12. 12. BREWER, INC. STATEMENT OF CASH FLOWS 12

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