2. Purpose of The Statement of
Cash Flows: Basic Concepts
The statement of cash flows
reports the entity’s cash flows
(cash receipts and cash payments)
during the period.
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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
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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
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7. Cash Equivalents Are....
– short-term, highly liquid investments
convertible into cash with little delay.
– money market accounts.
– Government Treasury bills.
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8. Objective 2
Report cash flows from
operating,
investing, and financing activities.
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9. Basic Organization of the
Statement of Cash Flows
A business may be evaluated in terms of
three types of business activities:
1 Operating activities
2 Investing activities
3 Financing activities
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10. Operating Activities
Operating activities are related to the
Operating activities are related to the
transactions 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.
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11. Investing Activities
Investing activities increase and decrease
Investing activities increase and decrease
the 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.
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12. Financing Activities
These are transactions involving obtaining
These 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.
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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 method
2 Indirect method
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14. Format of the Statement
of Cash Flows
The direct method lists cash receipts from
specific operating activities and cash
payments for each major operating activity.
The indirect method is a short-cut method
for accrual systems.
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15. Objective 3
Prepare a statement of
cash
flows by the direct method.
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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. 271
Interest received on notes receivable 10
Dividends received on investments in stock 9
Total receipts Rs. 290
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17. The Direct Method
Statement of Cash Flows (Direct Method)
Year Ended December 31, 2002 (Thousands)
Payments:
To suppliers Rs. 133
To employees 58
For interest 16
For income tax 15
Total payments 222
Net cash inflows from operating activities Rs. 68
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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 62
Net cash outflow from
investing activities Rs. (255)
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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. 101
Proceeds from issuance of long-term
notes payable 94
Payment of long-term notes payable (11)
Payment of dividends (17)
Net cash inflow from financing activities Rs. 167
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20. The Direct Method
Statement of Cash Flows (Direct Method)
Year Ended December 31, 2002 (Thousands)
Net cash inflows from operating activities Rs. 68
Net Cash outflow from investing activities (255)
Net Cash inflow from financing activities 167
Net (decrease in cash) Rs. (20)
Cash balance, December 31, 2001 42
Cash balance, December 31, 2002 Rs. 22
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21. Objective 4
Compute the cash
effects
of a wide variety of
business transactions.
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22. Computing Individual Amounts
for the Statement of Cash Flows
Revenues or expenses from the income statement
+
–
Adjusted for the change in the
related balance sheet account(s)
=
Amount for the statement of cash flows
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23. Computing Individual Amounts
for the Statement of Cash Flows
Income Statement
Year 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
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24. Computing Individual Amounts
for 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
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25. Computing Individual Amounts
for the Statement of Cash Flows
Income Statement
Year Ended December 31, 2002 (Thousands)
Total revenues and gains Rs. 313
Total expenses 272
Net income Rs. 41
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28. Computing Cash Collections
from Customers
Collections can be computed by converting
sales revenue to the cash basis.
Beginning Accounts Receivable balance +
Sales on account – Collections = Ending
Accounts Receivable balance
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29. Computing Cash Collections
from Customers
Rs.80,000 + Rs.284,000 – 93,000 =
Rs.271,000
Because Accounts Receivable increased by
Rs.13,000, the business received Rs.13,000
less cash than its sales revenue for the
period.
All collections of receivables are computed
following the pattern illustrated for
collections from customers. 17 - 2
30. Computing Payments
to Suppliers
This computation includes two parts,
payments for inventory and payments for
expenses other than interest and income tax.
Payments for inventory are computed by
converting cost of goods sold to the cash
basis.
This is accomplished by analyzing the
Inventory and Accounts Payable accounts.
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31. Payments for Inventory
Inventory
Beg. inventory 138,000 Cost of goods sold 150,000
Purchases x
End. inventory 135,000
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32. Payments for Inventory
How much were the purchases?
Rs.138,000 + x – Rs.150,000 = Rs.135,000
x = Rs.135,000 – Rs.138,000 + Rs.150,000
Rs.147,000
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33. Payments for Inventory
Accounts Payable
Payments for Beg. balance 57,000
inventory x Purchases 147,000
End. balance 91,000
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34. Payments for Inventory
How much did the business pay for this
inventory?
Rs.57,000 + Rs.147,000 – x = Rs.91,000
x = Rs.57,000 + Rs.147,000 – Rs.91,000
x = Rs.113,000
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35. Payments for Operating
Expenses
Increases in prepaid expenses require cash
payments, and decreases indicate that
payments were less than expenses.
Decreases in accrued liabilities can occur
only from cash payments, and increases
mean that cash was not paid.
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36. Payments to Employees
Salary Payable was Rs.6,000 at the
beginning of the year and Rs.4,000 at year
end.
During the year Salary and Wages Expense
was Rs.56,000.
How much did the business pay?
Rs.58,000
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37. Acquisition and Sales
of Plant Assets
The business had plant assets net of
depreciation of Rs.219,000 at the beginning
of the year and Rs.453,000 at year end.
Further, the acquisition of plant assets
amounted to Rs.306,000 during the year.
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38. Acquisition and Sales
of Plant Assets
The income statement shows depreciation
expense of Rs.18,000 and a Rs.8,000 gain
on 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
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39. Acquisition and Sales
of Plant Assets
Rs.219,000 + Rs.306,000 – Rs.18,000 – x =
Rs.453,000
x = Rs.219,000 + Rs.306,000 – Rs.18,000 –
Rs.453,000
x = Rs.54,000 (book value)
How much are the proceeds from the sale
of plant assets?
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40. Acquisition and Sales
of Plant Assets
Book value + Gain or – Loss = Proceeds
Rs.54,000 + Rs.8,000 = Rs.62,000
How do we determine acquisitions?
Beginning net balance + Acquisitions
– Depreciation – Book value of assets sold
= Ending balance
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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
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42. Issuance and Payments of
Long-Term Notes Payable
Beginning balance was Rs.77,000.
New debt amounting to Rs.94,000 was
incurred during the year.
The ending balance for the Long-Term
Notes Payable account was Rs.160,000.
How much was the payment?
Rs.11,000
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43. Computing Dividend Payments
Dividend payments are computed by
analyzing the Dividends Payable account.
Beginning balance + Dividends declared
– Dividend payments = Ending balance
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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.
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45. Reconciling Net Income
to Net Cash Flow
The Accounting Standard requires
companies that format operating activities
by the direct method to report a
reconciliation from net income to net cash
inflow (or outflow).
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47. The Indirect Method
Current Assets
Add to Net Income if this account has decreased
Deduct from Net Income if this account has increased
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48. The Indirect Method
Current Liabilities
Add to Net Income if this account has increased
Deduct from Net Income if this account has decreased
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49. The Indirect Method
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 2002 (Thousands)
Cash flows from operating activities:
Net Income 41
Add (deduct) items that affect net income
and cash flows differently:
Depreciation 18
Gain on sale of plant 8
Increase in accounts receivable (13)
Increase in interest receivable (2)
Decrease in inventory 3
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50. The Indirect Method
Statement of Cash Flows (Indirect Method)
Year Ended December 31, 2002 (Thousands)
Add (deduct) items that affect net income
and cash flows differently:
Increase in prepaid expenses (1)
Increase in accounts payable 34
Decrease is salary payable (2)
Decrease in accrued liabilities (2)
Net cash inflow from operating activities 68
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