16 Chapter5-StatementofCashFlows

Principles of Financial Accounting
Chapter 5
Statement of Cash Flows
The Statement of Cash Flows …

9 Is one of the main financial statements companies are required to report.
9 Reports the entity’s cash flows, i.e. cash receipts (“inflows”) and
cash payments (“outflows”), during a given period of time.
9 Classifies these cash flows based on their related activities, i.e.
operating, financing, or investing activities.
9 Reports separately cash inflows and cash outflows.
9 Is a rearrangement of the cash T-account in a meaningful and
informative manner to explain changes in cash.
9 Beginning and ending cash on the Cash Flow Statement must
equal cash balances reported on the Balance Sheet.
3 On the Statement of Cash Flows, “cash” includes cash equivalents, which are highly
liquid short-term investments that can be quickly converted into cash.
9 Only investments with original maturities of 3 months or less.
9 E.g. money-market investments, investments in U. S. Government Treasury bills.
Professor Lucile Faurel – Principles of Financial Accounting
Chapter 5 – Statement of Cash Flows 2
1
Purpose of the Cash Flow Statement
Help in predicting future cash flows.
Í Determine company’s ability to pay bills,
interest, dividends, etc.
Evaluate management decisions that generate and use cash.
Show relation between cash flows and net income. A company

may have abundant cash flow but little accounting income or
vice versa.
Does a better job at spotting losers than winners!

Í With a few exceptions, cash flows cannot be manipulated.

Net Cash Flow vs. Net Income

The Income Statement and the Statement of Cash Flows fill
different critical information needs.
The Income Statement:

Í Matches revenues and expenses using the accrual concept and
provides a measure of economic activity and performance.
The Statement of Cash Flows shows:

Í The net cash flow from a company’s operating activities.
Í How a company is receiving and disbursing cash.
Í A company’s ability to pay future debts.

2

3
There are six parts to every Cash Flow Statement:
1. Cash flows from operations

2. Cash flows from investing activities
3. Cash flows from financing activities
4. Total change in cash
5. Beginning cash Must equal cash
reported in the
6. Ending cash Balance Sheet!

3
5 4
Chapter 5 – Statement of Cash Flows 6 8
4
Typical Activities Affecting Cash
The three types of “activities” on a Statement of Cash Flows are:
ÍOperating Activities
9 Relate to the main, day-to-day activities of the firm.
ÍInvesting Activities
9 Relate to the acquisition and disposal of long-term assets.
ÍFinancing Activities
9 Relate to the firm’s financing decisions, i.e. borrowing
money, repaying debt, issuing securities, etc.
3 See Exhibit 5-1, p.187.

Parts of the Cash Flow Statement

Cash Flows from Operating Activities (“CFO”)
Note: Involve current operating assets or current operating liabilities.
Í Cash Inflows:
9 From sale of goods or services (“cash collections from customers”)
9 From return on loans (interest)
9 From return on equity securities (dividends)
Í Cash Outflows:
9 Payments for acquisitions of inventory (“cash payments to suppliers”)
9 Payments to employees
9 Payments to governments (taxes)
9 Payments of interest expense
9 Payments for other expenses
5
Cash Flows from Investing Activities (“CFI”)
Note: Involve non-current assets or current non-operating assets.
Í Cash Inflows:
9 From sale of property, plant and equipment
9 From sale of debt or equity securities of other corporations***
9 From receipts from loans collected***
Í Cash Outflows:
9 From purchase of property, plant, and equipment
9 From purchase of debt or equity securities of other entities***
9 From loans to other entities***
*** Not covered in this class…


Cash Flows from Financing Activities (“CFF”)
Note: Involve non-operating liabilities and owners’ equity.
Í Cash Inflows:
9 From issuance (sale) of equity securities
9 From issuance (sale) of bonds, mortgages, notes, and other short- or
long-term borrowings
9 From borrowing cash from creditors
Í Cash Outflows:
9 Payment of dividends
9 Reacquisition of firm’s stock
9 Payment of amounts borrowed

6
Note…
9 Cash receipts of interest and dividends are
reported in Cash Flow from Operating Activities**
9 Cash payments of interest are reported in Cash Flow

from Operating Activities**
9 Dividend payments to shareholders are reported in Cash

Flow from Financing Activities
** “Dumb” US GAAP rule (in my opinion)… in some countries, interest

payments are reported as financing outflows.

Transactions Affecting Cash Flows

+ = increase in cash, - = decrease in cash, 0 = no effect on cash
Effects of operating transactions on cash:
9 Sales of goods and services for cash +
9 Sales of goods and services on credit 0
9 Receive dividends or interest +
9 Collection of accounts receivable +
9 Recognize cost of goods sold 0
9 Purchase inventory for cash – Relate to
9 Purchase inventory on credit 0 Operating
9 Pay off accounts payable – Activities
9 Accrue operating expenses 0 (i.e. CFO)
9 Pay operating expenses –
9 Accrue interest 0
9 Pay interest –
9 Prepay expenses for cash –
9 Use up prepaid expenses 0
9 Record depreciation or amortization 0
7
Transactions Affecting Cash Flows
+ = increase in cash, - = decrease in cash, 0 = no effect on cash
Effects of operating transactions on cash:
9 Purchase fixed assets for cash – Relate to
9 Purchase fixed assets by issuing debt 0 Investing
Activities
9 Sell fixed assets for cash
+
(i.e. CFI)
9 Increase long-term or short-term debt +

9 Reduce long-term or short-term debt –
9 Sell common or preferred shares for cash + Relate to
9 Purchase treasury stock – Financing
Activities
9 Pay dividends –
(i.e. CFF)
9 Convert debt to common stock 0
9 Reclassify long-term debt to short-term debt 0

Which part of the Cash Flow Statement will

reflect the various items listed below?
a. Capital expenditures for equipment CFI
b. Amount paid to suppliers CFO
c. Amount paid for employees’ salaries CFO

d. Payment of dividends to stockholders CFF
e. Proceeds from issuance (sale) of common stock CFF
f. Payment of current portion of long-term debt CFF
g. Short-term loan taken from a bank CFF
h. Purchase of a truck (equipment) CFI
i. Payment of taxes CFO
j. Sale of PPE CFI

8
Approaches to Calculating
Cash Flow from Operating Activities
Two approaches may be used to compute Cash Flow from Operating
Activities (CFO).
Í Direct method:
9 Lists cash receipts and cash payments for each major operating activity.
9 Easy to understand.
9 Difficult to prepare
Í Indirect method:
9 Adjusts Net Income to reflect only cash receipts and cash payments
related to operating activities.
9 Difficult to initially understand underlying intuition.
9 Easy to prepare.
3 Under either method, the final cash flow from operating activities is (and
should be) the same.
Direct versus Indirect Method

Direct Method: Indirect Method:
Net Income
Cash collected from Customers
– Cash not received for sales
(change in AR account)
- Cash paid to suppliers
+ Cash not paid for COGS (change in
- Cash paid for Expenses Inv account)
+ Cash not paid for Expenses (change

in AP account)
…
…
= Net Cash Flow from Operations = Net Cash Flow from Operations

9
Intuition for the Indirect Method
• Assets = Liabilities + Owners Equity
• Assets = Liabilities + Paid-In Capital + Retained Earnings
• Δ Assets = Δ Liabilities + Δ Paid-In Capital + Δ Retained Earnings
• Δ Cash + Δ Other Current Asset + Δ PPE = Δ Current Liabilities + Δ LT Debt + Δ PIC
+ NI – Dividends
• Δ Cash = Δ CL + Δ LT Debt + Δ PIC + NI – DIV – Δ Other CA – Δ PPE
• Δ Cash = Δ CL + Δ LT Debt + Δ PIC + NI – DIV – Δ Other CA
– (Purchase of PPE – Depreciation – Book value of PPE sold)
• Δ Cash = Δ CL + Δ LT Debt + Δ PIC + NI – DIV – Δ Other CA
– Purchase of PPE + Deprec + (Cash from Sale of PPE – Gain (loss) on Sale of PPE)
• Δ Cash
= NI + Depreciation – Gain (loss) on Sale of PPE – Δ Other CA + Δ CL Operating
– Purchase of PPE + Cash from Sale of PPE Investing
+ Δ PIC + Δ LT Debt – DIV Financing
CFO: The Indirect Method

This method starts with Net Income and adjusts Net Income to
reflect only the cash receipts and cash payments related to
operating activities.
Í Start with Net Income and…
Add these items
Depreciation/amortization
Loss on sale of long-term assets
Decreases in current operating assets other than cash
Increases in current operating liabilities
Deduct these items

Gain on sale of long-term assets
Increases in current operating assets other than cash
Decreases in current operating liabilities
10
Depreciation and Amortization:
Í All expenses with no cash effect are added back to Net Income to get to
cash flow when using the indirect method.
Í Although depreciation expense has no effect on cash, it is deducted on the
income statement when computing Net Income.
Í Thus, the add-back cancels the earlier deduction.
Gains and Losses on the Sale of Assets

Í Sales of plant assets are investing activities.
Í When a sale of plant assets includes a gain, the gain is reported on the
income statement.
Í The cash receipt from the sale includes the gain.
Í To avoid counting the gain twice, the gain is removed from Net Income,
and the cash receipt is reported as an investing activity (CFI section).
Í Similarly, any loss on asset sales is added back to Net Income to compute
cash flow from operations.

Changes in the current operating asset and current operating
liability accounts are reported as adjustments to Net Income:
Í An increase in a current operating asset (other than cash) indicates a
decrease in cash.
Í A decrease in a current operating asset (other than cash) indicates an
increase in cash.
9 Think of when Accounts Receivable decrease because credit customers
finally pay.
Í A decrease in a current operating liability indicates a decrease in
cash.
9 Think of when Accounts Payable are paid out.
Í An increase in a current operating liability indicates an increase in
cash.
11
Net Income
+ Depreciation
+ Depletion
+ Amortization
+ Loss on disposal (sale) of long-term asset
– Gain on disposal (sale) of long-term asset
+ Decrease in current operating asset other than cash
– Increase in current operating asset other than cash
+ Increase in current operating liability
– Decrease in current operating liability
= Net Cash Flow from Operating Activities
Indirect Method – Practice Problem

December 31 2002 2001 Change
Cash $ 29,700 $ 10,200
Accounts receivable (net) 53,400 20,300 +33,100
Inventory 39,000 42,000 - 3,000
Land 0 15,000
Plant Assets, net of depreciation 180,900 125,000
$303,000 $212,500
Accounts payable $ 16,000 $ 26,500 - 10,500

Accrued liabilities 28,000 17,000 +11,000
Long-term notes payable 40,000 50,000
Common stock 150,000 90,000
Retained earnings 69,000 29,000
$303,000 $212,500
Year ended December 31, 2002
Sales Revenue $340,000
Cost of Goods Sold (200,000)
Operating Expenses (58,400)
Depreciation Expense (10,600)
Gain on Sale of Land 4,000
Chapter 5 – Statement of Cash Flows
Net Income $ 75,000 24
12
Indirect Method – Solution
Net Income
+ Depreciation Expense
– Gain on sale of land
+ Decrease in current operating asset other than cash
– Increase in current operating asset other than cash
+ Increase in current operating liability
– Decrease in current operating liability
= Cash Flow from Operations
Net Income $ 75,000
+ Depreciation Expense 10,600
- Gain on Sale of Land (4,000)
- Increase in Accounts Receivable (33,100)
+ Decrease in Inventory 3,000
- Decrease in Accounts Payable (10,500)
+ Increase in Accrued Liabilities 11,000
= Cash Flow from Operations $ 52,000
CFO: The Direct Method

This method lists cash receipts from operations (i.e. collections
from customers, interest received) and cash disbursements for
operations (i.e. payments to suppliers, employees, taxes).
9 Cash collections from customers
9 Cash receipts of interest
9 Cash receipts of dividends
9 Payments to suppliers
9 Payments to employees
9 Payments for interest
9 Payments for taxes
9 Etc.
NOTE: Depreciation is a non-cash expense so
it is not included when using the direct method.
13
Three Ways to Solve…
9 Fill in the T-Account and back out cash

9 Use an algebraic formula
9 Use a FAKE journal entry to track NET movements in
the accounts…
) Use whichever approach you like best…

Computing Cash Collected from Customers

Total AR Allowance for U.A.
Beg. Balance Cash Collections Beg. Balance
Sales Write-Offs Bad Debt Expense

Write-Offs
End. Balance
End. balance
Net AR
Net Beg. Balance
Cash Collections
Sales
Bad Debt Expense
Net End. balance
Cash Collected from Customers =

Sales – Bad Debt Exp – Ending Net AR + Beginning Net AR
Note: If company has also Unearned Revenue on the Balance Sheet, then
Cash Collected from Customers = Sales – BDE – Ending Net AR + Beginning Net AR
Chapter 5 – Statement of Cash Flows + End. Unearned Revenue – Beg. Unearned Revenue 28
14
Example
9 Beginning Net Accounts Receivable = 100.
9 Ending Net Accounts Receivable = 112.
9 Sales were 100.
9 Bad debt expense is 5.
Í How much cash was collected from customers?

9 Cash Receipts = Sales – Bad Debt Exp. – End. Net AR + Beg. Net AR
= 100 – 5 – 112 + 100 = 83
Dr. Accounts Receivable 12

“Fake”
journal entry Dr. Bad Debt Expense 5
approach Dr. Cash 83
Cr. Sales 100
Computing Cash Paid to Suppliers

Inventory Accounts Payable
Beg. Balance Beg. Balance
Purchases COGS Cash Paid Purchases
End. Balance End. Balance
Cash Paid to Suppliers =

COGS + End. Inventory – Beg. Inventory
– End. Accounts Payable + Beg. Accounts Payable

15
Example
9 Balance of Accounts Payable account increased from 100 to 108.
9 Balance of Inventory account increased from 510 to 520.
9 Cost of Goods Sold = 50.
Í How much was cash paid to suppliers for inventory?

9 Cash Payments = COGS + End. Inventory – Beg. Inventory
– End. AP + Beg. AP
= 50 + 520 – 510 – 108 + 100 = 52
Dr. Inventory 10
“Fake”
journal entry Dr. COGS 50
approach Cr. Accounts Payable 8
Cr. Cash 52
Computing Cash Payments to Employees
Salaries Payable
Beg. Balance
Cash Paid Salary Expense
End. Balance
Cash Paid =
Salary Expense – End. Salary Payable + Beg. Salary Payable
Note: This computation applies to all operating expenses and

accrued liabilities (e.g. interest expense and interest payable)
16
Computing Cash Paid for Expenses
Prepaid Insurance
Beg. Balance
Insurance Expense
Cash Paid
End. Balance
Cash Paid for Insurance =

Insurance Exp + Ending Prepaid Insurance – Beg. Prepaid Insurance
Note: This computation applies to all prepaid expenses

(e.g. rent expense and prepaid rent)
Direct Method – Practice Problem

December 31 2002 2001
Cash $ 29,700 $ 10,200
Accounts receivable (net) 53,400 20,300
Inventory 39,000 42,000
Land 0 15,000
$303,000 $212,500
Accounts payable $ 16,000 $ 26,500

Accrued liabilities 28,000 17,000
$303,000 $212,500
Cost of Goods Sold (200,000)
Operating Expenses (58,400)
Depreciation Expense (10,600)
Gain on Sale of Land 4,000
Chapter 5 – Statement of Cash Flows
Net Income $ 75,000 34
17
Direct Method – Solution
Cash collected from customers $306,900 1
Cash paid to suppliers (207,500)2 Direct
Method
Cash paid for operating expenses (47,400)3
= Cash Flow from Operations $ 52,000
1 Cash collected from customers = Sales – BDE – End. Net AR + Beg. Net AR
= 340,000 – 0 – 53,400 + 20,300 = $306,900
2 Cash paid to suppliers = COGS + End. Inventory – Beg. Inventory – End. AP + Beg. AP
= 200,000 + 39,000 – 42,000 – 16,000 + 26,500 = $207,500
3 Cash Payment = Operating Expense – End. Accrued Liabilities + Beg. Accrued Liabilities
= 58,400 – 28,000 + 17,000 = $47,400
Net Income $ 75,000
+ Depreciation Expense 10,600
- Gain on Sale of Land (4,000)
Indirect - Increase in Accounts Receivable (33,100)
Method + Decrease in Inventory
- Decrease in Accounts Payable
3,000
(10,500)
+ Increase in Accrued Liabilities 11,000
Professor Lucile Faurel – Principles of Financial Accounting = Cash Flow from Operations $ 52,000
General Rule for Algebraic Way

To calculate cash receipts:
Í Cash Receipts
= Revenue – End. CA + Beg. CA + End. CL – Beg. CL
To calculate cash payments:

Í Cash Payments
= Expense + End. CA – Beg. CA – End. CL + Beg. CL
Where:
9 CA = the specific current operating asset
9 CL = the specific current operating liability

18
FASB versus Reality
Although the FASB encourages firms to use the direct method

of computing cash flows from operations because it is easier for
readers to understand, only 1% of publicly traded firms in the
U.S. do.
Í The indirect method is less intuitive, but easier to implement.

Northrop Grumman Corporation is one of only a few

companies providing cash from operations in both formats.
Í Indirect method:

19
Í Direct method:


Í Direct method (cont’d):

20
Cash Flows from
Investing Activities
Cash Inflows
Sale of plant assets (PP&E)
Sale of investments that are not cash equivalents***
Collections of principal on notes receivable***
Cash Outflows
Acquisition of plant assets (PP&E)
Purchase of investments that are not cash equivalents***
Making loans (notes receivable) to others***
Professor Lucile Faurel – Principles of Financial Accounting *** Not covered in this class…
Cash Flows from Investing Activities

Cash Flows from Investing Activities equals cash proceeds from
disposal of PP&E (or other investments) less the amount paid for
any acquisitions of PP&E (or other investments).
Í If we do not know these amounts precisely, we can look at the
change in net fixed assets.
9 Three items usually explain changes in net fixed assets: acquisitions,
disposals, and depreciation expense for the period.
9 For example, if gross PP&E increased by $500,000 and accumulated
depreciation changed only by the amount of depreciation expense, we
would conclude that we acquired $500,000 of fixed assets during the
period (i.e. there was no sale of PP&E).

21
Computation of CFI
Property, Plant & Equipment Accumulated Depreciation
Beg. Balance Beg. Balance
Purchase of PP&E Depreciation Exp.
Sale of PP&E Sale of PP&E
(Original) Cost Accum. Dep
End. Balance End. Balance
Cash Received Book Value Gain (Loss) on

from Sale of PP&E = of PP&E Sold + Sale of PP&E
(Original) Cost – Accum. Dep.

of PP&E Sold of PP&E Sold

December 31
Cash
2002
$ 29,700
2001
$ 10,200
CFI
Accounts receivable (net)
Inventory
53,400
39,000
20,300
42,000 Practice
Land 0 15,000
$303,000 $212,500

$303,000 $212,500
Year ended December 31, 2002 Additional data:

Sales Revenue $340,000 During 2002:
Cost of Goods Sold (200,000) -No new Land was purchased.
Operating Expenses (58,400) -New Plant Asset costing $66,500
Depreciation Expense (10,600) was purchased in cash.
Gain on Sale of Land 4,000 -No Plant Asset was sold.
Net Income $ 75,000
22
CFI Practice – Solution
Cash Proceeds from Sale of Land 19,000 1
Equipment Purchase (66,500)2
Cash Flow from Investing Activities $(47,500)
1. Land:
Beg. Land + Purchases – BV Sold = End. Land
15,000 + 0 – BV Sold = 0
BV Sold = 15,000
Cash Received = BV Sold + Gain = 15,000 + 4,000 = $19,000
2. Plant Assets:
Cash Paid for Equipment = $66,500

Cash Flows from Financing Activities
Cash Inflows
Issuing stock
Issuing bonds
Borrowing money
Cash Outflows
Repurchase of stocks
Retirement / repurchase of bonds
Repayment of principal amounts borrowed
Payment of dividends

23
Cash Flows from Financing Activities
Cash Flows from Financing Activities equal cash proceeds received
from issuing debt or stock less dividends paid in cash less cash paid
to retire debt or stock.
Í If the amounts are not known precisely, we can look at the changes
in long-term debt or notes payable to determine whether more debt
was issued or whether some was repaid.
Í Similarly, we can look at the changes in stockholders’ equity
accounts to determine whether capital stock was issued or
repurchased, or whether dividends were paid.

December 31
Cash
2002
$ 29,700
2001
$ 10,200
CFF
Accounts receivable (net)
Inventory
53,400
39,000
20,300
42,000 Practice
Land 0 15,000
$303,000 $212,500

$303,000 $212,500
Year ended December 31, 2002 Additional data:
Cost of Goods Sold (200,000) During 2002:
Operating Expenses (58,400) -Made $10,000 repayment on long-term
Depreciation Expense (10,600) note payable.
Gain on Sale of Land 4,000 -No new borrowing made.
Net Income $ 75,000 -Issued additional common stock for cash.
Professor Lucile Faurel – Principles of Financial Accounting -No common stock was repurchased.
24
CFF Practice – Solution
Notes Payable Payments (10,000)1
Common Stock Issued 60,000 2
Dividends Paid (35,000)3
Cash Flow from Financing Activities $15,000
1. Long-term Notes Payable: Cash Payment $10,000
2. Common Stock (CS)

Beg. CS + Issued – Repurchased = End. CS
90,000 + Issued – 0 = 150,000
Issued = $60,000
3. Dividends paid:
Beg. RE + NI – Dividends = End. RE
29,000 + 75,000 – Dividends = 69,000
Dividends = $35,000
XYZ, Inc.
Cash Collected from Customers 306,900
Cash Paid for Inventory (207,500)
Cash Paid for Other Purchases (47,400)
Cash Flows from Operating Activities $52,000
Cash Proceeds from Sale of Land 19,000
Equipment Purchase (66,500)
Cash Flows from Investing Activities $(47,500)
Notes Payable Payments (10,000)
Common Stock Issued 60,000
Dividends (35,000)
Cash Flows from Financing Activities $15,000
Total Change in Cash $19,500
Cash Balance, Beginning 10,200
Cash Balance, Ending $29,700
25
Analyzing
Statements of Cash Flows

Comparing Operating Cash Flow and Net Income

to Assess the Integrity of Net Income
Í W.T. GRANT COMPANY (Statement of Cash Flows, amounts in thousands)
1970 1971 1972 1973 1974 1975
Operations
Net Income............................................. $ 41,809 $ 36,415 $ 31,625 $34,965 $10,902 $(177,340)

Depreciation............................................ 8,972 9,619 10,577 12,004 13,579 14,587
Other.................................................... (2,470) (2,470) (1,758) (1,699) (1,345) (16,993)
(Inc.)Decr. in Receivables........................... (55,491) (11,981) (49,873) (60,281) (72,220) 109,601
(Inc.)Decr. in Inventories............................. (13,505) (38,364) (38,184) (100,857) (51,104) 43,280
(Inc.)Decr. in prepayments.......................... (635) (209) (132) (1,271) (650) 718
Inc.(Decr.) in Accounts Payable.................... 2,064 13,947 6,899 (12,094) (8,013) 42,328
Inc.(Decr.) in Other Cur. Liab. ................... 15,370 (21,907) 13,928 14,967 15,647 (101,078)
Cash Flow from Operations......................... $ (2,975) $ (14,950) $ (26,918) $(114,266) $ (93,204) $ (84,897)
Investing
Acquisition of Property, Plant, and Equipment.. $ (14,352) $ (16,141) $ (25,918) $ (26,251) $ (23,143) $ (15,535)
Acquisition of Investments........................... -- (436) (5,951) (2,216) (5,700) (5,282)
Cash Flow from Investing........................... $ (14,352) $ (16,577) $ (31,869) $ (28,467) $ (28,843) $ (20,817)
Financing
Inc.(Decr.) in Short-Term Borrowing............. $ 64,007 $ 64,288 $ (8,679) $ 152,293 $ 63,063 $ 147,598

Inc.(Decr.) in Long-Term Borrowing............. (1,687) (1,538) 98,385 (1,584) 93,926 (3,995)
Inc.(Decr.) in Capital Stock......................... (17,860) (8,954) 7,407 (8,227) 1,833 886
Dividends............................................... (19,737) (20,821) (21,139) (21,141) (21,122) (4,457)
Cash Flow from Financing.......................... $ 24,723 32,975 $ 75,974 $ 121,241 $ 137,700 $ 140,032
Other.................................................... $ (58) $ (416) $ (1,345) $ 2,484 $ (645) $ (627)
Change in Cash........................................ $ 7,338 $ 1,032 $ 15,842 $ (18,908) $ 15,008 $ 33,691

26
Identifying Income Statement Misclassifications
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
CONSOLIDATED STATEMENT OF EARNINGS
(in millions)
FOR THE YEAR ENDED DECEMBER 31: NOTES 2000 1999 1998
================================================================ ==================
Revenue:
Hardware $ 37,777 $ 37,888 $ 36,096
Global Services 33,152 32,172 28,916
Software 12,598 12,662 11,863
Global Financing 3,465 3,137 2,877
Enterprise Investments/Other 1,404 1,689 1,915
--------------------------------------------------------------------------------------------------------------------------------------------
Total revenue 88,396 87,548 81,667
--------------------------------------------------------------------------------------------------------------------------------------------
Cost:
Hardware 27,038 27,591 24,653
Global Services 24,309 23,304 21,125
Software 2,283 2,240 2,260
Global Financing J 1,595 1,446 1,494
Enterprise Investments/Other 747 1,038 1,263
--------------------------------------------------------------------------------------------------------------------------------------------
Total cost 55,972 55,619 50,795
--------------------------------------------------------------------------------------------------------------------------------------------
Gross profit 32,424 31,929 30,872 Operating
--------------------------------------------------------------------------------------------------------------------------------------------
Expense: Income
Selling, general and administrative P 15,639 14,729 16,662
Research, development and engineering R 5,151 5,273 5,046
2000: 11,634
Other income (617) (557) (589) 1999: 11,927
Interest expense J&K 717 727 713 1998: 9,164
---------------------------------------------------------------------------------------------------------------------------------------------
Total expense 20,890 20,172 21,832
---------------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,534 11,757 9,040
Provision for income taxes O 3,441 4,045 2,712
---------------------------------------------------------------------------------------------------------------------------------------------
Net income 8,093 7,712 6,328
================================================================ ===================
27

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16 Chapter5-StatementofCashFlows

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Principles of Financial Accounting

The Statement of Cash Flows …

 Evaluate management decisions that generate and use cash.

 Show relation between cash flows and net income. A company

 Does a better job at spotting losers than winners!

Professor Lucile Faurel – Principles of Financial Accounting

Net Cash Flow vs. Net Income

 The Income Statement:

 The Statement of Cash Flows shows:

Professor Lucile Faurel – Principles of Financial Accounting

Professor Lucile Faurel – Principles of Financial Accounting

1. Cash flows from operations

Professor Lucile Faurel – Principles of Financial Accounting

3 See Exhibit 5-1, p.187.

Parts of the Cash Flow Statement

*** Not covered in this class…

Parts of the Cash Flow Statement

Professor Lucile Faurel – Principles of Financial Accounting

9 Cash payments of interest are reported in Cash Flow

9 Dividend payments to shareholders are reported in Cash

** “Dumb” US GAAP rule (in my opinion)… in some countries, interest

Professor Lucile Faurel – Principles of Financial Accounting

Transactions Affecting Cash Flows

9 Increase long-term or short-term debt +

Professor Lucile Faurel – Principles of Financial Accounting

Which part of the Cash Flow Statement will

b. Amount paid to suppliers CFO

c. Amount paid for employees’ salaries CFO

e. Proceeds from issuance (sale) of common stock CFF

f. Payment of current portion of long-term debt CFF

g. Short-term loan taken from a bank CFF

h. Purchase of a truck (equipment) CFI

i. Payment of taxes CFO

j. Sale of PPE CFI

Professor Lucile Faurel – Principles of Financial Accounting

Direct versus Indirect Method

+ Cash not paid for Expenses (change

Professor Lucile Faurel – Principles of Financial Accounting

CFO: The Indirect Method

Deduct these items

 Gains and Losses on the Sale of Assets

CFO: The Indirect Method

Indirect Method – Practice Problem

Accounts payable $ 16,000 $ 26,500 - 10,500

CFO: The Direct Method

9 Fill in the T-Account and back out cash

) Use whichever approach you like best…

Professor Lucile Faurel – Principles of Financial Accounting

Computing Cash Collected from Customers

Sales Write-Offs Bad Debt Expense

Cash Collected from Customers =

Í How much cash was collected from customers?

Dr. Accounts Receivable 12

Computing Cash Paid to Suppliers

Cash Paid to Suppliers =

Professor Lucile Faurel – Principles of Financial Accounting

Í How much was cash paid to suppliers for inventory?

Computing Cash Payments to Employees

Note: This computation applies to all operating expenses and

Cash Paid for Insurance =

Note: This computation applies to all prepaid expenses

Direct Method – Practice Problem

Evaluate management decisions that generate and use cash.

Show relation between cash flows and net income. A company

Does a better job at spotting losers than winners!

The Income Statement:

The Statement of Cash Flows shows:

Gains and Losses on the Sale of Assets

To calculate cash payments:

Although the FASB encourages firms to use the direct method