Statement of Cash Flows

Chapter 13

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright 2012 The McGraw-Hill Companies, Inc.

Purpose of the Statement

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. Reasons for difference between net income and net cash flows from operating activities. Need for external financing. Investing and financing transactions for the period.

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Statement of Cash Flows Period Covered Cash flows from operating activities: [List of individual inflows and outflows] Net cash provided (used) by operating activities Cash flows from investing activities: [List of individual inflows and outflows] Net cash provided (used) by investing activities Cash flows from financing activities: [List of individual inflows and outflows] Net cash provided (used) by financing activities Net increase (decrease) in Cash Cash (and equivalents) balance at beginning of period Cash (and equivalents) balance at end of 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:
Interest and dividends received Sales to customers

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

Cash Flows from Operating Activities

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Investing Activities
Sale of investments and

plant assets Collection of principal on loans

Inflows from:

Outflows to:
Purchase investments and plant assets Purchase debt or equity investments Make loans

Cash Flows from Investing Activities _

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Financing Activities
Short-term and long-term
Inflows from:

borrowing + Owners (for example, from issuing stock)

Outflows to:
Make payments on borrowed funds Owners for dividends Purchase treasury stock

Cash Flows from Financing Activities

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Cash and Cash Equivalents

Cash

Cash Equivalents

Currency

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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Company Name Statement of Cash Flows Period Covered Cash flows from operating activities: [List of individual inflows and outflows] Net cash provided (used) by operating activities Cash flows from investing activities: [List of individual inflows and outflows] Net cash provided (used) by investing activities

$ #####

The operating Lets look at cash flows section the direct ##### can be prepared method ##### for Net increase (decrease) in Cash $ using either the preparing the Cash (and equivalents) balance at beginning of period ##### direct method or Cash (and equivalents) balance at end of period $ ##### Statement of the indirect Cash Flows. method.
Cash flows from financing activities: [List of individual inflows and outflows] Net cash provided (used) by financing activities
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#####

Direct Method: Cash Received from Customers

Accrual basis revenue includes sales that
did not result in cash inflows. Can be computed as:
+
Net Sales
Increase in receivables Decrease in receivables

=
Cash Received from Customers

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Direct Method: Cash Received from Customers

The accounts receivable balance was $80,000 on 12/31/10 and $110,000 on 12/31/11. If accrual sales revenue for 2011 was $900,000, what was cash basis revenue?
Net Sales $900,000 $870,000 Cash Received from Customers

$30,000 Increase in receivables

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Direct Method: Interest and Dividends Received

Interest Received Interest = Revenue + Decrease in interest receivable - Increase in interest receivable

Dividends Dividends = Received Revenue

+ Decrease in dividends receivable - Increase in dividends receivable

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Direct Method: Cash Paid for Purchases of Merchandise

Step 1
Purchases = COGS + Increase in inventory - Decrease in inventory

Step 2
Cash paid for merchandise = Purchases + Decrease in A/P - Increase in A/P

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Direct Method: Cash 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.

Cash Paid for Expenses

= Expenses

+ Increase in prepaid expenses - Decrease in prepaid expenses

+ Decrease in accrued liabilities - Increase in accrued liabilities

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Direct Method
Martin Co. Comparative Balance Sheets - Assets December 31, 2010 2011 Cash Accounts Receivable, net Inventory Trading Securities Equipment, net Investments Total Assets $ 60,000 27,000 230,000 500,000 100,000 $ 70,370 35,000 200,000 25,000 425,000 130,000

$ 917,000

$ 885,370
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Direct Method
Martin Co. Comparative Balance Sheets - Liabilities and Equity December 31, 2010 2011 $ 15,000 $ 12,000 7,000 5,000 11,950 7,350 20,000 17,000 70,000 60,000 250,000 150,000 5,000 4,000 450,000 88,050 $ 917,000 500,000 130,020 $ 885,370
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Accounts Payable Salaries Payable Interest Payable Income Tax Payable Notes Payable, 1st Bank Bonds Payable Premium on Bonds Payable Common Stock Retained Earnings Total Liabilities and Equity

Direct Method
Martin Co. Income Statement Amounts For the Year Ending December 31, 2011 Sales Revenues Cost of Goods Sold Depreciation Expense Interest Expense Income Tax Expense Salary Expense Other Expenses Amortization of Bond Premium Gain on Sale of Equipment Extraordinary Loss Equity in Investee Income Net Income $ 800,000 560,000 5,000 28,050 27,980 80,000 71,000 1,000 3,000 30,000 40,000 $ 41,970
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Direct Method
Additional Information
Trading Securities were purchased during 2009 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 2009. There was no insurance. Martin owns 25% of the common stock of another company and uses the equity method to account for this investment. Martins tax rate is 40%. The Notes Payable to the 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. Sold stock during 2009 for $50,000. Received $10,000 dividends from its equity investment.
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Direct Method
Cash Received from Customers
Sales Revenues Less: Increase in A/R Cash Received from Customers $ 800,000 (8,000) $ 792,000

Cash Paid to Employees

Salary Expense Add: Decrease in Salary Payable Cash Paid to Employees $ $ 80,000 2000 2,000 82,000
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Direct Method
Cash Paid for Inventory
Cost of Goods Sold Add : Decrease in A/P Less: Decrease in Inventory Cash Paid for Inventory $ 560,000 3,000 (30,000) $ 533,000

Cash Paid for Interest

Interest Expense Add: Decrease in Interest Payable Cash Paid for Interest $ $ 28,050 2000 4,600 32,650

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Direct Method
Cash Paid for Taxes
Income Tax Expense Add: Decrease in Taxes Payable Cash Paid for Taxes $ $ 27,980 2000 3,000 30,980

Other Operating Cash Flows

Add : Dividends from Tiny Co. Less: Purchase of Trading Securities Less: Other Operating Expenses Cash Flow from Other Sources $ 10,000 (25,000) (71,000)

$ (86,000)
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Direct Method
Cash Flows From Operating Activities
Cash Received from Customers Cash Paid to Employees Cash Paid for Inventory Cash Paid for Interest Cash Paid for Taxes Cash Paid to Other Sources Cash From Operating Activities $ $ 792,000 (82,000) (533,000) (32,650) (30,980) (86,000) 27,370

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Martin Co. Statement of Cash Flows For the Period Ending December 31, 2011 Operating Cash Flows Investing Cash Flows Proceeds from sale of Equipment Financing Cash Flows Proceeds from sale of Stock Principal paid on Bonds Principal paid on Notes Net Cash Flows for the Period Add: Beginning Cash Balance $ 50,000 (100,000) (10,000) 43,000 $ 27,370

(60,000) $ 10,370 60,000 $ 70,370

Ending Cash Balance

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Martin Co. Equipment Statement of Cash Flows with a book value of $40,000 was sold Ending December 31, 2011 For the Period for $43,000. Operating Cash Flows Investing Cash Flows Proceeds from sale of Equipment Financing Cash Flows Proceeds from sale of Stock Principal paid on Bonds Principal paid on Notes Net Cash Flows for the Period Add: Beginning Cash Balance $ 50,000 (100,000) (10,000) 43,000 $ 27,370

(60,000) $ 10,370 60,000 $ 70,370

Ending Cash Balance

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Martin Co. Equipment Statement of Cash Flows with a book value of $40,000 was sold Ending December 31, 2011 For the Period for $43,000. Operating Cash Flows Investing Cash Flows Bonds from sale of Equipment Proceeds Payable decreased from $250,000 to $150,000 during 2011. Financing Cash Flows Proceeds from sale of Stock Principal paid on Bonds Principal paid on Notes Net Cash Flows for the Period Add: Beginning Cash Balance $ 50,000 (100,000) (10,000) $ 27,370

43,000

(60,000) $ 10,370 60,000 $ 70,370

Ending Cash Balance

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Martin Co. Equipment Statement of Cash Flows with a book value of $40,000 was sold Ending December 31, 2011 For the Period for $43,000. Operating Cash Flows Investing Cash Flows Bonds from sale of Equipment Proceeds Payable decreased from $250,000 to $150,000 during 2011. Financing Cash Flows Proceeds from sale of Stock Principal paid on Bonds Principal paid on Notes $ 50,000 (100,000) (10,000) $ 27,370

43,000

(60,000) $ 10,370 60,000 $ 70,370

Net Cash Flows for the Period Notes Payable decreased from Add: Beginning Cash Balance 2011. $70,000 to $60,000 during Ending Cash Balance

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Notice that the Ending Cash Operating Cash Flows per the Statement of Balance Investing CashCash Flows agrees with the Flows 12/31/11 Cash balance on the Proceeds from sale of Equipment Balance Sheet.
Financing Cash Flows Proceeds from sale of Stock Principal paid on Bonds Principal paid on Notes Net Cash Flows for the Period Add: Beginning Cash Balance

Martin Co. Statement of Cash Flows For the Period Ending December 31, 2011 $ 27,370

43,000

$ 50,000 (100,000) (10,000)

(60,000) $ 10,370 60,000 $ 70,370

Ending Cash Balance

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Reconciling Net Income with Net Cash Flows

There are two major categories of reconciling items. They include adjusting for: 1. Noncash Expenses. 2. Timing Differences.
Accounts receivable Depreciation Expense

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Reporting Operating Cash Flows by the Indirect Method

Changes in current assets and current liabilities as shown on the following table

Net Income

Cash Flows from Operating Activities

+ Losses and - Gains

+ Noncash expenses such as depreciation and amortization

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Reconciling Net Income with Net Cash Flows

Change in Account Balance During Year Increase Decrease Subtract from net Add to net income income Add to net income Subtract from net income

Current Assets Current Liabilities

Use this table when adjusting Net Income to Operating Cash Flows.

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The Indirect Method: A Summary Net Income

Add: Depreciation expense Decrease in accounts receivable Decrease in inventories Decrease in prepaid expenses Increase in accounts payable Increase in accrued expenses payable Nonoperating losses deducted in computing net income Deduct: Increase in accounts receivable Increase in inventories Increase in prepaid expenses Decrease in accounts payable Decrease in accrued expenses payable Decrease in deferred income taxes payable Nonoperating gains added in computing net income

Net Cash Provided by (used in) operating activities

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Managing Cash Flows

Cash Budgets are used by management to plan and forecast future cash flows.
A Cash Budget can be used to:
Force management to coordinate activities. Provide managers with advance notice of available resources. Provide targets useful in evaluating performance. Provide advance warnings of potential cash shortages.
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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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A Worksheet for Preparing a Statement of Cash Flows

AUTO SUPPLY COMPANY Comparative Balance Sheets December 31 2010 2011 Assets Cash Marketable securities Accounts receivable Inventory Plant and equipment (net of depreciation) Totals Liabilities & Stockholders' Equity Accounting payable Accured expenses payable Mortage note payable (long-term) Bonds payable (due in 2020) Capital stock (no par) Retained earnings Totals $ 50,000 40,000 320,000 240,000 600,000 $ 1,250,000 $ 150,000 60,000 500,000 160,000 380,000 $ 1,250,000 $ 45,000 25,000 330,000 235,000 640,000 $ 1,275,000 $ 160,000 45,000 70,000 350,000 160,000 490,000 $ 1,275,000
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A Worksheet for Preparing a Statement of Cash Flows

Additional Information
1. Net income for the year amounted to $250,000. cash dividends of $140,000 were declared and paid. 2. Autos only noncash expense was depreciation, which totaled $60,000. 3. Marketable securities costing $15,000 were sold for $35,000 cash, resulting in a $20,000 nonoperating gain. 4. The company purchased plant assets for $100,000, making a $30,000 cash down payment and issuing a $70,000 mortgage not payable for the balance of the purchase price.
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The Worksheet
Balance sheet effects: Assets Cash Marketable securities Accounts receivable Inventory Plant and equipment (net of depreciation) Totals Liabilities & Stockholders' Equity Accounting payable Accured expenses payable Mortage note payable (long-term) Bonds payable (due in 2020) Capital stock (no par) Retained earnings Totals

Cash effects: Operating activities: AUTO SUPPLY COMPANY Net income (1) 250,000 Worksheet for Statement of Cash Flows

Sources of Cash

Uses of Cash

For the Year Ended December 31, 2011 Effects of Transactions Beginning Debit Credit Balance Changes Changes 50,000 40,000 320,000 240,000 600,000 1,250,000 150,000 60,000 500,000 160,000 380,000 1,250,000

Ending Balance 45,000 25,000 330,000 235,000 640,000 1,275,000 160,000 45,000 70,000 350,000 160,000 490,000 1,275,000
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(1) 250,000

The Worksheet
Uses of AUTO Sources of SUPPLY COMPANY Cash effects: Worksheet for Statement of Cash Flows Cash Cash Operating activities: For the Year Ended December 31, 2011 Effects of Transactions Net income (1) 250,000 Debit Credit Depreciation expense (3) Beginning 60,000 Balance sheet effects: Balance Changes Changes Assets Cash 50,000 Marketable securities 40,000 Accounts receivable 320,000 Inventory 240,000 Plant and equipment (net of depreciation) 600,000 (3) 60,000 Investing activities: Totals 1,250,000 Liabilities & Stockholders' Equity Accounting payable 150,000 Financing activities: Accured expenses payable 60,000 Dividends paid Mortage note payable (long-term) - (2) 140,000 Bonds payable (due in 2020) 500,000 Capital stock (no par) cash 160,000 Net change in Retained earnings 380,000 (2) 140,000 (1) 250,000 Totals 1,250,000
Ending Balance 45,000 25,000 330,000 235,000 640,000 1,275,000 160,000 45,000 70,000 350,000 160,000 490,000 1,275,000
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The Worksheet

Cash effects: Operating activities: Worksheet for Statement of Cash Flows Net income (1) 250,000 For the Year Ended December 31, 2011 Depreciation expense (3) 60,000 Effects of Transactions Increase in accounts receivable (4) 10,000 Beginning Debit Credit Decrease in inventory (5) 5,000 Balance Balance sheet effects: Changes Changes Increase in accounts payable (6) 10,000 Assets Cash 50,000 Decreases in accrued expenses (7) 15,000 Marketable securities 40,000 Accounts receivable 320,000 (4) 10,000 Inventory 240,000 (5) 5,000 Plant and equipment (net of depreciation) 600,000 (3) 60,000 Totals 1,250,000 Liabilities & Stockholders' Equity Accounting payable 150,000 (6) 10,000 Accured expenses payable 60,000 (7) 15,000 Mortage note payable (long-term) Bonds payable (due in 2020) 500,000 Capital stock (no par) 160,000 Retained earnings 380,000 (2) 140,000 (1) 250,000 Totals 1,250,000

Sources of Uses of Cash SUPPLY COMPANY Cash AUTO

Ending Balance 45,000 25,000 330,000 235,000 640,000 1,275,000 160,000 45,000 70,000 350,000 160,000 490,000 1,275,000
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Cash effects: Operating activities: Net income Depreciation expense Increase in accounts receivable Decrease in inventory Increase in accounts payable Decreases in accrued expenses Gain on sale of securities Investing activities: Preceeds for sale of securities Plant acquired for cash Balance sheet effects: Financing activities: Assets Dividends paid Cash Retirement of bonds payable Marketable in cash Net decrease securities

Sources of Cash Uses of Cash (1) 250,000 (3) 60,000 (4) 10,000 (5) 5,000 (6) 10,000SUPPLY COMPANY AUTO (7) 15,000 Worksheet for Statement of Cash Flows (8) 20,000 For the Year Ended December 31, 2011 (8) 35,000

Beginning (9) 30,000 Balance

(2) 140,000 50,000 (10) 150,000 40,000 5,000

Effects of Transactions Debit Credit Changes Changes

Ending Balance 45,000 25,000 330,000 235,000 640,000 1,275,000 160,000 45,000 70,000 350,000 160,000 490,000 1,275,000
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(8) 15,000 (4) 10,000 (9) 100,000 (5) 5,000 (3) 60,000

Accounts receivable Inventory Plant and equipment (net of depreciation) Totals Liabilities & Stockholders' Equity Accounting payable Accured expenses payable Mortage note payable (long-term) Bonds payable (due in 2020) Capital stock (no par) Retained earnings Totals

320,000 240,000 600,000 1,250,000

150,000 60,000 (7) 15,000 500,000 (10) 150,000 160,000 380,000 (2) 140,000 1,250,000 415,000

(6) 10,000 (9) 70,000

(1) 250,000 410,000

The Worksheet
AUTO SUPPLY COMPANY Worksheet for Statement of Cash Flows For the Year Ended December 31, 2011 Effects of Transactions Beginning Debit Credit Balance Changes Changes (x) 5,000 (8) 15,000 (5) 5,000 (3) 60,000

Balance sheet effects: Assets Cash 50,000 Marketable securities 40,000 Cash effects: Sources of Cash Uses of Cash Accounts receivable 320,000 (4) 10,000 Operating activities: Inventory 240,000 Net income (1) 250,000 Plant and equipment (net of depreciation) 600,000 (9) 100,000 Depreciation expense (3) 60,000 Totals 1,250,000 Increase in accounts receivable (4) 10,000 Decrease in inventory (5) 5,000 Liabilities & Stockholders' Equity Increase in accounts payable (6) 10,000 Accounting payable 150,000 Decreases in accrued expenses (7) 15,000 Accured expenses payable 60,000 (7) 15,000 Gain on sale of securities (8) 20,000 Mortage note payable (long-term) Investing activities: Bonds payable (due securities 500,000 (10) 150,000 Preceeds for sale of in 2020) (8) 35,000 Capital stock (no par) 160,000 Plant acquired for cash (9) 30,000 Financing activities: Retained earnings 380,000 (2) 140,000 Dividends paid (2) 140,000 Totals 1,250,000 415,000
Retirement of bonds payable Net decrease in cash (x) 5,000 (10) 150,000 5,000

Ending Balance 45,000 25,000 330,000 235,000 640,000 1,275,000 160,000 45,000 70,000 350,000 160,000 490,000 1,275,000
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(6) 10,000 (9) 70,000

(1) 250,000 415,000

Statement of Cash Flows

AUTO SUPPLY COMPANY Statement of Cash Flows For the Year Ended December 31, 2011 Cash flows from operating activities: Net income $ 250,000 Add: Depreciation expense 60,000 Decrease in inventory 5,000 Increase in accounts payable 10,000 Less: Increase in accounts receivable (10,000) Decrease in accrued expenses (15,000) Gain on sale of securities (20,000) Net cash provided by operating activities 280,000 Cash flows from investing activities: Proceeds from sale of securities $ 35,000 Cash paid for plant assets (30,000) Net cash provided by investing activities 5,000 Cash flows from financing activities: Dividends paid (140,000) Retirement of bonds payable (150,000) Net cash used for financing activities (290,000) Net decrease in cash (5,000) Cash and cash equivalents, January 1, 2009 50,000 Cash and cash equivalents, December 31, 2009 $ 45,000
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Supplemental Information
We are required to disclose information concerning major investing and financing activities that do not involve cash.
AUTO SUPPLY COMPANY Supplementary Schedule: Noncash Investing and Financing Activities Purchases of plant assets Less: Portion financed by issuance of long-term debt Cash paid to acquire plant assets $ 100,000 70,000 $ 30,000

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End of Chapter 13

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