BlocherChenLin

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11
The Statement of Cash Flows
Part One Financial Accounting

• The McGraw-Hill Companies, Inc., 1999

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Sources of Cash
Slide 11-1

• Operations
• New borrowings
• New stock issues
• Sale of property, plant, and equipment
• Sale of other noncurrent assets

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Uses of Cash
Slide 11-2

• Cash dividends
• Repayment of borrowings
• Repurchase of stock
• Purchase of property, plant, and equipment
• Purchase of other noncurrent assets

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Typical Questions Answered by the SCF
Slide 11-3

• How much cash was provided by the normal, ongoing
  operations of the company?
• In what other ways were significant amounts of
  cash raised?
• Is the company investing enough in new plant and
  equipment to maintain or increase capacity and to
  replace old facilities with more efficient ones?
• Is the company reinvesting excess cash in
  productive assets, or is it using the cash to
  retire stock?

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Major Categories on the SCF
Slide 11-4
Operating activities Transactions associated
with sales revenues and cash outflows associated
with the operating expenses Investing
activities Transactions involving acquiring and
disinvesting in long-lived assets Financing
activities Transactions involving borrowing of
cash through noncurrent instruments and the
issuance of equity securities
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Investing Activities Section of SCF
Slide 11-5
Cash flows from investing activities
Acquisition of plant and equipment (500) Procee
ds from disposals of plant and equipment 20
Purchase of investment securities (25) Proceeds
from sales of investment securities 75 Net
cash used by investing activities (430)
Cash flows from investing activities
Acquisition of plant and equipment (500) Procee
ds from disposals of plant and equipment 20
Purchase of investment securities (25) Proceeds
from sales of investment securities 75 Net
cash used by investing activities (430)
Cash flows from investing activities
Acquisition of plant and equipment (500) Procee
ds from disposals of plant and equipment 20
Purchase of investment securities (25) Proceeds
from sales of investment securities 75 Net
cash used by investing activities (430)
Equipment costing 500,000 was purchased for cash
during the year.
Equipment that originally cost 150,000 was sold
for 20,000, resulting in an inflow of cash .
The net result of these two transaction on the
balance sheet is an increase in plant and
equipment of 350,000.
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Investing Activities Section of SCF
Slide 11-6
Cash flows from investing activities
Acquisition of plant and equipment (500) Procee
ds from disposals of plant and equipment 20
Purchase of investment securities (25) Proceeds
from sales of investment securities 75 Net
cash used by investing activities (430)
Cash flows from investing activities
Acquisition of plant and equipment (500) Procee
ds from disposals of plant and equipment 20
Purchase of investment securities (25) Proceeds
from sales of investment securities 75 Net
cash used by investing activities (430)
Investment securities decreased 50,000 (450,000
to 400,000) during the year.
The firm purchased 25,000 of new securities (an
inflow of cash) and and sold 75,000 of old
securities (and outflow of cash)
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Financing Activities Section of SCF
Slide 11-7
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (160) Net cash provided by
financing activities 326
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (60) Net cash provided by
financing activities 326
Short-term borrowing decreased 21,000 (from
147,000 to 126,000).
The firm borrowed 15,000 using short-term debt
and paid 36,000 on old borrowings.
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Financing Activities Section of SCF
Slide 11-8
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (160) Net cash provided by
financing activities 326
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (60) Net cash provided by
financing activities 326
Long-term debt increased 335,000 (from 500,000
in 1997 to 835,000 in 1998).
The firm borrowed 375,000 using long-term debt
and paid 40,000 on old long-term debt.
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Financing Activities Section of SCF
Slide 11-9
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (160) Net cash provided by
financing activities 326
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (60) Net cash provided by
financing activities 326
On the balance sheet, common stock increased
10,000 and paid-in capital increased by 34,000
between 1997 and 1998.
During 1998, Fairway issued 10,000 additional
shares of 1 par value common stock resulting in
cash proceeds of 44,000.
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Financing Activities Section of SCF
Slide 11-10
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (160) Net cash provided by
financing activities 326
Cash flows from financing activities Proceeds
from short-term debt 15 Payments to settle
short-term debt (36) Proceeds from long-term
debt 375 Payments on long-term
debt (40) Proceeds from issuing common stock 44
Dividends paid (60) Net cash provided by
financing activities 326
During 1998, cash dividends amounted to 60,000.
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Operating Activities Section of SCF
Slide 11-11
Net cash flow from operating activities Cash
received from customers 3,103 Dividends and
interest received 19 Cash provided by
operating activities 3,122 Cash paid to
suppliers and employers 2,729 Interest
paid 67 Income taxes paid 98 Cash
disbursed for operating activities 2,894 Net cash
flow from operating activities 228
Direct Method
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Operating Activities Section of SCF
Slide 11-12
Net cash flow from operating activities Net
income 200 Noncash expenses, revenues, and
losses included in income Depreciation 120
Deferred taxes 5 Increase in accounts
receivable (87) Increase in inventories (47)
Increase in accounts payable 56 Increase in
taxes payable 1 Gain on sale of
equipment (20) Cash flow from
operating activities 228
Net cash flow from operating activities Net
income 200 Noncash expenses, revenues, and
losses included in income Depreciation 120
Deferred taxes 5 Increase in accounts
receivable (87) Increase in inventories (47)
Increase in accounts payable 56 Increase in
taxes payable 1 Gain on sale of
equipment (20) Cash flow from
operating activities 228
Indirect Method
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Operating Activities Section of SCF
Slide 11-13
The actual adjusting entry made
Depreciation Expense 120,000 Accumulation
Depreciation 120,000
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Operating Activities Section of SCF
Slide 11-14
The restated entry
Cash provided by operations 120,000 Accumulation
Depreciation 120,000
Examine Illustration 11-6 closely. Notice that
entry (3) matches the restated entry above.
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Operating Activities Section of SCF
Slide 11-15
Net cash flow from operating activities Net
income 200 Noncash expenses, revenues, and
losses included in income Depreciation 120
Deferred taxes 5 Increase in accounts
receivable (87) Increase in inventories (47)
Increase in accounts payable 56 Increase in
taxes payable 1 Gain on sale of
equipment (20) Cash flow from
operating activities 228
Net cash flow from operating activities Net
income 200 Noncash expenses, revenues, and
losses included in income Depreciation 120
Deferred taxes 5 Increase in accounts
receivable (87) Increase in inventories (47)
Increase in accounts payable 56 Increase in
taxes payable 1 Gain on sale of
equipment (20) Cash flow from
operating activities 228
Indirect Method
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Operating Activities Section of SCF
Slide 11-16
Inventories
Beginning balance 610,000
Cost of sales 2,290,000
Purchases 2,337,000
Ending balance 657,000
Purchases Cost of sales (Ending
Balance - Beginning Balance)
Actual cash payments (assume all purchases
were cash purchases) 2,337,000 Cost of sales
(based on units sold) 2,290,000 Excess of cash
spent over amount recorded as a cost on the
income statement 47,000
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Operating Activities Section of SCF
Slide 11-17
Net cash flow from operating activities Net
income 200 Noncash expenses, revenues, and
losses included in income Depreciation 120
Deferred taxes 5 Increase in accounts
receivable (87) Increase in inventories (47)
Increase in accounts payable 56 Increase in
taxes payable 1 Gain on sale of
equipment (20) Cash flow from
operating activities 228
Net cash flow from operating activities Net
income 200 Noncash expenses, revenues, and
losses included in income Depreciation 120
Deferred taxes 5 Increase in accounts
receivable (87) Increase in inventories (47)
Increase in accounts payable 56 Increase in
taxes payable 1 Gain on sale of
equipment (20) Cash flow from
operating activities 228
Indirect Method
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Operating Activities Section of SCF
Slide 11-18
Freeway Corporation sold equipment that
originally cost 150,000 for 20,000. The asset
was fully depreciated at the time of sale.
The journal entry made was
Cash 20,000 Accumulated Depreciation 150,000 Equi
pment, at Cost 150,000 Gain on Disposal of
Equipment 20,000
This gain increased net income by 20,000.
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Operating Activities Section of SCF
Slide 11-19
The actual cash inflow should be treated as cash
provided by investing activities and the gain on
disposal subtracted from net income through
reducing cash provided by operations (see entry 6
in Illustration 11-6).
The restated entry is
Cash provided by investing activities 20,000 A
ccumulated Depreciation 150,000 Equipment, at
Cost 150,000 Cash provided by operating
activities 20,000
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Operating Activities Section of SCF
Slide 11-20
Suppose the equipment had a book value of 10,000
at the time of sale, and the cash proceeds
totaled 15,000.
The journal entry made was
Cash 15,000 Accumulated Depreciation 140,000 Equi
pment, at Cost 150,000 Gain on Disposal of
Equipment 5,000
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Operating Activities Section of SCF
Slide 11-20
Suppose the equipment had a book value of 10,000
at the time of sale, and the cash proceeds
totaled 15,000.
The entry restated is
Cash provided by investing activities 15,000 A
ccumulated Depreciation 140,000 Equipment, at
Cost 150,000 Cash provided by operating
activities 5,000
Cash provided by investing activities increased
15,000 and cash provided by operating activities
decreased 5,000.
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Chapter 11
The End