STATEMENT OF CASH FLOWS

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Chapter13
STATEMENT OF CASH FLOWS
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Purpose of the Statement of Cash Flows
Provides information about the cash receipts and
cash payments of a business entity during the
accounting period.

• Helps investors with questions about the
  companys
• Ability to generate positive cash flows.
• Ability to meet its obligations and to pay
  dividends.
• Need for external financing.
• Investing and financing transactions for the
  period.

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Classification of Cash Flows

• The Statement of Cash Flows must include the
  following three sections
• Cash Flows from Operating Activities
• Cash Flows from Investing Activities
• Cash Flows from Financing Activities

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Operating Activities

• Inflows from
• Sales to customers.
• Interest and dividends received.

Cash Flows from Operating Activities

• Outflows to
• Suppliers of merchandise and services.
• Employees.
• Lenders for interest.
• Governments for taxes.

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Investing Activities

• Inflows from
• Selling investments and plant assets.
• Collecting of principal on loans.

Cash Flows from Investing Activities

• Outflows to
• Payments to acquire investments and plant assets.
• Purchase debt or equity investments.
• Make loans.

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Financing Activities

• Inflows from
• Short-term and long-term borrowing.
• Owners (for example, from issuing stock).

Cash Flows from Financing Activities

• Outflows to
• Repayments of borrowed funds.
• Owners for dividends.
• Purchase treasury stock.

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Cash and Cash Equivalents
Cash

• Short-term, highly liquid investments.
• Readily convertible into cash.
• So near maturity that market value is unaffected
  by interest rate changes.

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The operating cash flows section can be prepared
using either the direct method or the indirect
method.
Lets look at the Direct Method for preparing the
Statement of Cash Flows.
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Direct MethodCash Received from Customers

• Accrual basis revenue includes sales that did not
  result in cash inflows.
• Can be computed as

Decrease in receivables


Cash Received from Customers
Net Sales
Increase in receivables


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Direct MethodCash Received from Customers

• The A/R balance was 80,000 on 12/31/02 and
  110,000 on 12/31/03. If accrual sales revenue
  for 2003 was 900,000, what was cash basis
  revenue?

Decrease in receivables


Net Sales 900,000
Cash Received from Customers
Increase in receivables


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Direct MethodCash Received from Customers
The A/R balance was 80,000 on 12/31/02 and
110,000 on 12/31/03. If accrual sales revenue
for 2003 was 900,000, what was cash basis
revenue?
Decrease in receivables
Net Sales 900,000
Cash Received from Customers 870,000
30,000 Increase in receivables


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Now that we understand the process, lets look at
some simplified formulas for computing direct
method cash flows.
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Direct MethodInterest and Dividends Received
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Direct MethodCash Paid for Merchandise

• Step 1
• Step 2

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Direct MethodCash Paid for Merchandise

• How much did Lug Lite pay for inventory in
  2003?
• a. 900,000
• b. 923,000
• c. 947,000
• d. 877,000

Purchases for 2003 were 935,000. Purchases
900,000 35,000 Cash Paid for Merchandise in
2003 was 923,000. Cash Paid 935,000 -
12,000
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Direct MethodCash Payments for Expenses
After deducting depreciation and other noncash
expenses, the cash paid for expenses is affected
by (1) whether the expense was prepaid, and (2)
whether the expense was accrued.
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Now, lets prepare a direct method Statement of
Cash Flows for Grate Big Company.
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Direct Method - Example
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Direct Method - Example
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Direct Method - Example
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Direct Method - Example

• Additional Information
• Trading Securities were purchased during 2003 at
  a cost of 25,000.
• Equipment with a book value of 40,000 was sold
  during the year for 43,000.
• Equipment with a book value of 30,000 was
  destroyed during a freak flood in 2003. There
  was no insurance.
• Grate Big holds a 25 investment in Tiny Co. and
  accounts for it using the Equity Method.

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Direct Method - Example

• Additional Information
• Grate Bigs tax rate is 40.
• The Notes Payable to Bobs Bank carry a 12 rate.
  The payments are due on the first day of each
  month.
• The Bonds Payable carry a 9 rate. Interest is
  payable semiannually on July 1 Jan. 1.
• Grate Big sold stock during 2001 for 50,000.
• Grate Big received 10,000 dividends from Tiny Co.

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Direct Method - Example

• Cash Received from Customers
• Cash Paid to Employees

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Direct Method - Example

• Cash Paid for Inventory
• Cash Paid for Interest

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Direct Method - Example

• Cash Paid for Taxes
• Other Operating Cash Flows

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Direct Method - Example

• Cash Flows From Operating Activities

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Equipment with a book value of 40,000 was sold
for 43,000.
Bonds Payable decreased from 250,000 to 150,000
during 2003.
Notes Payable decreased from 70,000 to 60,000
during 2003.
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Notice that the Ending Cash Balance per the
Statement of Cash Flows agrees with the 12/31/03
Cash balance on the Balance Sheet.
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Lets look at the Indirect Method that is used by
over 97 of all companies.
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Indirect Method
Changes in current assets and current liabilities
as shown on the following table.
Cash Flows from Operating Activities
Net Income
Losses and - Gains
Noncash expenses such as depreciation and
amortization.
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Indirect Method
Use this table when adjusting Net Income to
Operating Cash Flows.
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Lets prepare a complete Statement of Cash
Flows using the Indirect Method.
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Indirect Method - Example

• Joes Place has prepared the Balance Sheet as of
  March 31, 2003, and March 31, 2002. The Income
  Statement for the year ended 3/31/03 has also
  been prepared. Joe needs help preparing the
  Statement of Cash Flows.

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Indirect Method - Example
The 8,000 gain was the result of selling land
costing 32,000 for 40,000 during the period.
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Indirect Method - Example
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Indirect Method - Example
Joes Place issued 50,000 of no par common stock
to settle the 50,000 note payable.
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Indirect Method - Example
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Indirect Method - Example
With the indirect method, always start with the
net income or net loss for the period.
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Indirect Method - Example
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Indirect Method - Example
Accounts receivable decreased. 3/31/03
3/31/02 23,000 - 40,000 (17,000)
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Indirect Method - Example
Accounts payable increased. 3/31/03
3/31/02 38,000 - 27,000 11,000
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Indirect Method - Example
Inventory increased. 3/31/03 3/31/02
350,000 - 300,000 50,000
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Indirect Method - Example
Salaries payable decreased. 3/31/03
3/31/02 9,000 - 14,000 (5,000)
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Indirect Method - Example
Add back non-cash expenses.
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Indirect Method - Example
Subtract gains.
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Indirect Method - Example
The operating cash flows amount comes from the
schedule just prepared.
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Indirect Method - Example
Land originally costing 32,000 was sold for
40,000.
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Indirect Method - Example
Dividends of 20,000 were paid to owners during
the year.
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Indirect Method - Example
Compute the net change in cash for the period.
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Indirect Method - Example
Complete the Statement of Cash Flows by
reconciling beginning cash to ending cash.
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Indirect Method - Example
Note that the ending cash amount ties back to the
Joes Place Balance Sheet at 3/31/03.
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Indirect Method - Example
In addition, on the face of the statement or in a
supplemental schedule, disclose the 50,000
noncash financing activity.
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Indirect Method - Example
In addition, cash interest payments and cash tax
payments must also be disclosed separately.
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Managing Cash Flows
Cash Budgets are used by management to plan and
forecast future cash flows.
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Managing Cash Flows

• Increase collection of accounts receivables.
• Keep inventory low.
• Delay payment of liabilities.
• Plan timing of major expenditures.
• Invest idle cash.

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Cash Budgeting
The ending cash balance of one month becomes the
beginning cash balance of the next month.
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Cash Budgeting
Financing is needed in June because the company
must maintain a minimum cash balance of 10,000.
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End of Chapter 13
Chester, ol buddy, I wonder if you could help me
with a little cash flow problem Im having?