The Statement of Cash Flows

1
The Statement of Cash Flows

• Chapter 17

2
Purpose of The Statement ofCash Flows Basic
Concepts
The statement of cash flows reports the entitys
cash flows (cash receipts and cash
payments) during the period.
3
Objective 1

• Identify the Purposes of
• the Statement of Cash Flows.

4
Purposes of the Statementof 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
Statement of Retained Earnings
Balance Sheet
Balance Sheet
Statement of Cash Flows
5
Purposes of the Statementof 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 firms cash

6
Cash Balance Includes...

• cash on hand.
• cash in the bank.
• cash equivalents.

7
Cash Equivalents Are....

• short-term, highly liquid investments
  convertible into cash with little delay.
• money market accounts.
• U.S. Government Treasury bills.

8
Objective 2

• Distinguish Among Operating,
• Investing, and Financing Cash Flows.

9
Basic Organization of theStatement of Cash Flows

• A business may be evaluated in terms of three
  types of business activities
• Operating activities
• Investing activities
• Financing activities

10
Operating Activities
Operating activities are related to
the transactions that make up net income.
Operating activities also affect current assets
and current liabilities on the balance sheet.
11
Investing Activities
Investing activities increase and decrease the
assets that are available to the business.
Investing activities are related to the Long-Term
Asset accounts.
12
Financing Activities
These are transactions involving
obtaining resources from the owners or returning
resources to them.
It also involves obtaining resources from
creditors and repaying the amount borrowed.
13
Format of the Statementof Cash Flows

• FASB Statement 95 approved two methods for
  reporting cash flows from operating activities.
• Indirect method
• Direct method

14
Objective 3

• Prepare a Statement of Cash Flows
• by the Indirect Method.

15
Preparing the Statement

• Follow the template provided in the text
• Use comparative balance sheets to determine the
  change in cash, current assets and current
  liabilities
• Use the income statement to gather net income,
  depreciation, amortization, gains or losses on
  asset sales
• Complete the statement of cash flows

16
The Indirect Method
Current Assets
Add to Net Income if this account has decreased
Deduct from Net Income if this account has
increased
17
The Indirect Method
Current Liabilities
Add to Net Income if this account has increased
Deduct from Net Income if this account has
decreased
18
Computing Individual Amounts for the Statement of
Cash Flows
Income Statement Year Ended December 31, 2005
(Thousands)
Revenues and gains Sales revenue 284 Int
erest revenue 12 Dividend
revenue 9 Gain on sale of plant
assets 8 Total revenues and
gains 313
19
Computing Individual Amounts for the Statement of
Cash Flows
Expenses Cost of goods sold 150 Salary
expense 56 Depreciation expense
18 Other operating expense 17 Interest
expense 16 Income tax expense
15 Total expenses 272
20
Computing Individual Amounts for the Statement of
Cash Flows
Income Statement Year Ended December 31, 2005
(Thousands)
Total revenues and gains 313 Total
expenses 272 Net income 41
21
Comparative Balance Sheets
Assets 2005 2004 Inc./(Dec.) Current
Cash 22 42 (20) Accounts
receivable 96 81 15 Inventory
143 145 (2) Plant assets, net 464
219 245 Total assets 725 487 238
22
Comparative Balance Sheets
Liabilities 2005 2004
Inc./(Dec.) Current Accounts payable 91
57 34 Accrued liabilities 5
9 (4) Long-term notes payable 160
77 83 Stockholders equity Common stock
359 258 101 Retained earnings
110 86 24 Total liabilities
and shareholders equity 725 487 238
23
The Indirect Method
Statement of Cash Flows (Indirect Method) Year
Ended December 31, 2005 (Thousands)
Cash flows from operating activities Net
Income 41 Adjustments to reconcile
net income to net cash provided by operating
activities Depreciation 18 Gain on
sale of plant 8 Increase in accounts
receivable (15) Decrease in
inventory 2
24
The Indirect Method
Statement of Cash Flows (Indirect Method) Year
Ended December 31, 2005 (Thousands)
Adjustments to reconcile net income to net cash
provided by operating activities Increase in
accounts payable 34 Decrease in accrued
liabilities (4) Net cash provided by
operating activities 68
25
The Indirect Method
Statement of Cash Flows (Indirect Method) Year
Ended December 31, 2005 (Thousands)
Cash flows from investing activities Acquisition
of plant assets (317) Proceeds from sale of
plant assets 62 Net cash used for
investing activities (255)
26
Acquisition and Salesof Plant Assets

• The business had plant assets net of depreciation
  of 219,000 at the beginning of the year and
  464,000 at year end.
• Further, the acquisition of plant assets amounted
  to 317,000 during the year.

27
Acquisition and Salesof Plant Assets

• The income statement shows depreciation expense
  of 18,000 and a 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

28
Acquisition and Salesof Plant Assets

• 219,000 317,000 18,000 x 464,000
• x 464,000 -219,000 - 317,000 18,000
• x 54,000 (book value)
• How much are the proceeds from the sale
  of plant assets?

29
Acquisition and Salesof Plant Assets

• Book value Gain or Loss Proceeds
• 54,000 8,000 62,000
• How do we determine acquisitions?
• Beginning net balance Acquisitions
  Depreciation Book value of assets sold Ending
  balance

30
Computing the Cash Amountsof Financing Activities

• Financing activities affect liability and
  stockholders equity accounts.
• Long-Term Notes Payable
• Bonds Payable
• Common Stock
• Retained Earnings

31
The Indirect Method
Statement of Cash Flows (Indirect Method) Year
Ended December 31, 2005 (Thousands)
Cash flows from financing activities Proceeds
from issuance of common stock 101 Proceeds from
issuance of long-term notes payable
94 Payment of long-term notes payable
(11) Payment of dividends (17) Net
cash provided by financing activities 167
32
Issuance of Common Stock

• Take beginning balance of common stock
• Subtract ending balance of common stock
• Equals issuance of new common stock

33
Issuance and Payments ofLong-Term Notes Payable

• Beginning balance was 77,000.
• New debt amounting to 94,000 was incurred during
  the year.
• The ending balance for the Long-Term Notes
  Payable account was 160,000.
• How much was the payment?
• 11,000

34
Computing Dividend Payments

• Dividend payments are computed by analyzing
  Retained Earnings.
• Beginning balance Dividends declared
  Dividend payments Ending balance

35
The Indirect Method
Statement of Cash Flows (Indirect Method) Year
Ended December 31, 2005 (Thousands)
Net cash inflows from operating activities
68 Net Cash outflow from investing activities
(255) Net Cash inflow from financing activities
167 Net (decrease in cash) (20)
Cash balance, December 31, 2004 42 Cash
balance, December 31, 2005 22
36
Noncash Investing andFinancing Activities...

• are not reported in the statement of cash flows.
• The FASB requires that significant non-cash
  investing and financing activities be shown in a
  separate schedule at the bottom of the statement.

37
Objective 4

• Prepare a Statement of Cash
• Flows by the Direct Method.

38
The Direct Method
Statement of Cash Flows (Direct Method) Year
Ended December 31, 2005 (Thousands)
Cash flows from operating activities Receipts Co
llections from customers 269 Interest
received on notes receivable 12 Dividends
received on investments in stock 9 Total
receipts 290
39
The Direct Method
Statement of Cash Flows (Direct Method) Year
Ended December 31, 2005 (Thousands)
Payments To suppliers (135) To
employees (56) For
interest (16) For income
tax (15) Total payments
(222) Net cash provided by operating activities
68
40
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
41
Computing Cash Collectionsfrom 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

42
Computing Cash Collectionsfrom Customers

• 81,000 284,000 96,000 269,000
• Because Accounts Receivable increased by 15,000,
  the business received 15,000 less cash than its
  sales revenue for the period.
• All collections of receivables are computed
  following the pattern illustrated for collections
  from customers.

43
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.

44
Reconciling Net Incometo Net Cash Flow

• The FASB requires companies that format operating
  activities by the direct method to report a
  reconciliation from net income to net cash inflow
  (or outflow).

45
End of Chapter 17