Financial Accounting

1
Financial Accounting

• Chapter 18
• The Cash Flow Statement

2
Basic Concepts

• Reports the entitys cash flows (cash receipts
  and cash payments) during the period

3
Purposes of the Statementof Cash Flows

1. Predict future cash flows
2. Evaluate management decisions
3. Determine the ability to pay dividends to
   stockholders and payments to creditors
4. Show the relationship of net income to the
   businesss cash flows

4
What is Cash?

• Cash on hand
• Cash in the bank
• Cash equivalents - highly liquid, short-term
  investments that can be converted into cash with
  little delay
• Money-market investments

5
Financial Accounting

• Statement of Cash Flows
• Sections

6
Operating, Investing, and Financing Activities

• Operating activities create revenues, expenses,
  gains, and losses.
• Investing activities increase and decrease
  long-term assets.
• Financing activities obtain cash from investors
  and creditors.

7
Two Formats forOperating Activities

• Indirect method reconciles from net income to net
  cash provided by operating activities
• Direct method reports all cash receipts and cash
  payments from operating activities
• The two methods have no effect on investing or
  financing activities.

8
Two Formats forOperating Activities
9
Financial Accounting

• The Indirect Operating Section

10
Operating ActivitiesIndirect Method
Investing Activities
11
Depreciation, Depletion, Amortization
Depreciation, Depletion and Amortization are not
Cash transactions, thus Are ADDED back to Net
Income.
12
Gain or Loss fromLong-Term Assets

• Changes to Long-term Assets
• Purchase or Sale
• Effect Cash (Whats the journal entry?)
• They appear in the Investing Section
• But... When Sold Are Reported on the Income
  Statement
• Thus, we need to reverse their effect
• Add back the Loss
• Subtract out the Gain

13
Long-Term Assets
14
Operating Activities fromIndirect Method

• Changes in current assets and current liability
  accounts
• Increase in another current asset decreases cash
• Purchase of Inventory for cash
• Decrease in another current asset increases cash
• Collections of Accounts Receivable
• Decrease in a current liability decreases cash
• Payment of Accounts Payable
• Increase in a current liability increases cash
• Non-Cash Expense (Accrued Expense)

15
Increase in Current AssetsDecreases Cash

• So 2,500 in Sales are NOT cash
• Any increase in Current Assets either uses cash
• Increase Inventory
• Decrease Cash
• Or is increased by a non-cash transaction
• Accounts Receivable

16
Decrease in Current AssetsIncreases Cash

• If A/R decreases that means we collected Cash
• That cash needs to be added back to Net Income
• If Inventory, Supplies or other current assets
  decrease that means we debited an expense but did
  not credit Cash
• So we add back those decreases to Net Income

17
Decrease in Current LiabilitiesDecreases Cash

• How is Accounts Payable decreased?
• Debit Accounts Payable 1,000
• Credit Cash
  1,000
• Same for all other Payables

18
Increase in Current LiabilitiesIncreases Cash

• When Payables Increase
• They create an Expense
• But the expense is a non-cash expense
• So, Add back to Net Income

19
The Indirect MethodOperating Activities
20
The Indirect MethodInvesting Activities
21
The Indirect MethodFinancing Activities
22
Financial Accounting

• Cash Flow Statement
• An Example

23
Comparative Balance Sheets
24
Comparative Balance Sheets
Anchor Corporation December 31
(In thousands)
20x2
20x1
Inc/dec)
Liabilities Current Accounts payable
Salary payable Accrued liabilities Long-term
debt Stockholders equity Common stock Retained
earnings Total
91 34 1 160 359 110 725
57 6 3 77 258 86 487
34 (2) (2) 83 101 24 238
25
Income Statement
Anchor Corporation Year Ended December 31, 20x2
(In 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
26
Income Statement
Anchor Corporation Year Ended December 31, 20x2
(In thousands)
Expenses Cost of goods sold 150 Salary and
wage expense 56 Depreciation
expense 18 Other operating
expense 17 Interest expense 16 Income
tax expense 15 Total expenses 272
27
Income Statement
Anchor Corporation Year Ended December 31, 20x2
(In thousands)
Total revenues and gains 313 Total
expenses 272 Net income 41
28
Statement of Cash FlowsOperating Activities
Depreciation does not affect cash, but it
decreases net income add it back in.
Sales of long-term assets are investing Activities
remove gains from net income.
29
Statement of Cash Flows Operating Activities
Statement of Cash Flows (Indirect Method) Year
Ended December 31, 20x2 (In thousands)
C Increase in accounts receivable (13) C Increase
in interest receivable (2) C Decrease in
inventory 3 C Increase in prepaid
expenses (1) C Increase in accounts
payable 34 C Decrease is salary
payable (2) C Decrease in accrued liabilities
(2) 27 Net cash provided by operating
activities 68
30
Changes in Current Asset and Current Liability
Accounts C
1. An increase in a current asset other than
cash indicates a decrease in cash.
2. A decrease in a current asset other than
cash indicates an increase in cash.
3. A decrease in a current liability
indicates a decrease in cash.
4. An increase in a current liability
indicates an increase in cash.
31
Statement of Cash FlowsInvesting Activities
32
Statement of Cash FlowsFinancing Activities
33
Statement of Cash Flows
34
Noncash Investing andFinancing Activities
Suppose Anchor Corporation issued Common stock
valued at 300,000 to acquire a warehouse.
Warehouse Building 300,000 Common
Stock 300,000
35
Noncash Investing andFinancing Activities
Noncash Investing and Financing
Activities Acquisition of building by issuing
common stock 300 Acquisition of land by
issuing note payable 70 Payment of long-term
debt by issuing common stock 100 Total noncash
investing and financing activities 470