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Homework assignment 11  Using Connect – 9 Questions for 60 Points For Chapter 11. ALL1 - 9 Today  Last day for Homework for ALL Chapters is 5/4 at 11:59 PM; Today. 12 Reporting Cash Flows  Prepare chapter 12 “ Reporting Cash Flows.” Happiness is having all homework up to date 3

Chapter 12 Reporting cash flows 4

How does a company receive its cash? Where does a company spend its cash? What explains the change in the cash balance? Purpose of the Statement of Cash Flows 5

What explains the change in the cash balance? Why do income and cash flows differ? Where does a company spend its cash? How does a company receive its cash? Importance of Cash Flows 6

Cash equivalents are…  short-term, highly liquid investments.  readily convertible into cash.  sufficiently close to maturity so that market value is unaffected by interest rate changes. Measurement of Cash Flows 7

Classification of Cash Flows 8

9 The Statement of Cash Flows includes the following three sections: – Operating Activities – Investing Activities – Financing Activities C1

Operating Operating Activities 10 C1

Investing Investing Activities 11 C1

Financing Financing Activities 12 C1

Noncash Noncash Investing and Financing 13 C1 Examples of Noncash Investing and Financing Activities

Preparing the Statement of Cash Flows 14

Format of the Statement of Cash Flows 15 P1

Preparing the Statement of Cash Flows 16 P1

Analyzing the Cash Account 17 P1 The Cash account is a natural place to look for information about cash flows from operating, investing, and financing activities.

Analyzing Noncash Account 18 P1 A second approach to preparing the statement of cash flows is analyzing noncash accounts.

Information to Prepare the Statement 19 P1 Comparative Balance Sheets Comparative Balance Sheets Current Income Statement Current Income Statement Additional Information Additional Information Information to prepare the statement of cash flows usually comes from three sources:

NEED-TO-KNOW Classify the following cash flows as operating, investing, or financing activities. a.Purchase equipment for cashg.Cash paid for utilities b.Cash payment of wagesh.Cash paid to acquire investments c.Issuance of stock for cashi.Cash paid to retire debt d.Receipt of cash dividends from investmentsj.Cash received as interest on investments e.Cash collections from customersk.Cash received from selling investments f.Note payable issued for cashl.Cash received from a bank loan Operating activities - Day-to-day cash receipts and disbursements that determine net income (Generally related to current assets and current liabilities.) Investing activities - Cash receipts and disbursements generally related to the purchase and sale of long-term assets. (And non-operating short-term investments) Financing Activities - Cash receipts and disbursements generally related to long-term liabilities and equity. (And non-operating short-term debts) C1 20

Investing NEED-TO-KNOW Current assetsCurrent liabilities Plant assetsLong-term liabilities Equity Total assetsTotal liabilities and equity XYZ Company Balance Sheet December 31, 20X1 AssetsLiabilities P1 21

NEED-TO-KNOW b.Cash payment of wages d.Receipt of cash dividends from investments e.Cash collections from customers g.Cash paid for utilities j.Cash received as interest on investments a.Purchase equipment for cash h.Cash paid to acquire investments k.Cash received from selling investments c.Issuance of stock for cash f.Note payable issued for cash i.Cash paid to retire debt l.Cash received from a bank loan Operating activities - Day-to-day cash receipts and disbursements that determine net income (Generally related to current assets and current liabilities.) Investing activities - Cash receipts and disbursements generally related to the purchase and sale of long-term assets. (And non-operating short-term investments) Financing Activities - Cash receipts and disbursements generally related to long-term liabilities and equity. (And non-operating short-term debts) Classify the following cash flows as operating, investing, or financing activities. a.Purchase equipment for cashg.Cash paid for utilities b.Cash payment of wagesh.Cash paid to acquire investments c.Issuance of stock for cashi.Cash paid to retire debt d.Receipt of cash dividends from investmentsj.Cash received as interest on investments e.Cash collections from customersk.Cash received from selling investments f.Note payable issued for cashl.Cash received from a bank loan P1 22

Cash Flows from Operating Indirect and Direct Methods of Reporting 23 identical The net cash amount provided by operating activities is identical under both the direct and indirect methods. DirectMethodDirectMethod IndirectMethodIndirectMethod

Applying the Indirect Method of Reporting 24

These financial statements will help us prepare the statement of cash flows for Genesis using the indirect method. 25

Applying the Indirect Method of Reporting 26 P2 Additional information on Genesis Inc.’s 2015 transactions: a. The accounts payable balances result from inventory purchases. b. Purchased $60,000 in plant assets by issuing $60,000 of notes payable. c. Sold plant assets with a book value of $8,000 (original cost of $20,000 and accumulated depreciation of $12,000) for $2,000 cash, yielding a $6,000 loss. d. Received $15,000 cash from issuing 3,000 shares of common stock. e. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain. f. Declared and paid cash dividends of $14,000.

Net Income Cash Flows from Operating Activities Changes in noncash current assets and current liabilities + Losses and - Gains + + Noncash expenses such as depreciation and amortization Applying the Indirect Method of Reporting 27 P2 1 23

Use this table when adjusting Net Income to Operating Cash Flows. 1) Adjustments for Changes in Current Assets and Current Liabilities 28 P2

Adjustments for Changes in Current Assets and Current Liabilities 29

P2 2) Adjustments for Operating Items Not Providing or Using Cash 30

P2 Adjustments for Nonoperating Items 31

P2 Summary of Adjustments for Indirect Method 32 Common adjustments to net income when computing net cash provided or used by operating activities under the indirect method:

NEED-TO-KNOW At December 31Current Yr.Prior Yr. Sales revenue$120Accounts receivable$12$10 Expenses:Inventory69 Cost of goods sold50Accounts payable711 Depreciation expense30Salaries payable83 Salaries expense17Interest payable10 Interest expense3 Net income$20 Selected Balance Sheet AccountsIncome Statement For Current Year Ended December 31 A company’s current year income statement and selected balance sheet data at December 31 of the current and prior years follow. Prepare the cash flows from operating activities section only of its statement of cash flows using the indirect method for the current year. P2 33

NEED-TO-KNOW Net income Adjustments to reconcile net income to net cash provided by operating activities Adjust for changes in current operating assets (other than cash) Opposite direction Add the decreases Subtract the increases Adjust for changes in current operating liabilities Same direction Add the increases Subtract the decreases Adjust for non-cash revenues and expenses Opposite direction Add any expenses that don't require cash Subtract any revenues that don't provide cash Adjust for any gains/losses related to long-term accounts Opposite direction Add the losses Subtract the gains Net cash provided (used) by operating activities General Format - Operating Activities section - Indirect method P2 34

NEED-TO-KNOW At December 31Current Yr.Prior Yr. Sales revenue$120Accounts receivable$12$10 Expenses:Inventory69 Cost of goods sold50Accounts payable711 Depreciation expense30Salaries payable83 Salaries expense17Interest payable10 Interest expense3 Net income$20 Selected Balance Sheet AccountsIncome Statement For Current Year Ended December 31 Net income$20 Depreciation expense30 Increase in accounts receivable(2) Decrease in inventory3 Decrease in accounts payable(4) Increase in salaries payable5 Increase in interest payable1 33 Net cash provided by operating activities$53 Adjustments to reconcile net income to net cash provided by operating activities: General Format - Operating Activities section - Indirect method P2 35

Thank you, and see you, Next Week at the Same Time for Course revision on May 9 th. and Final Exam on May 11th,

Cash Flows from Investing and Financing Activities 37

P3 Cash Flows from Investing 38 Identify changes in investing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects A three-stage process to determine cash provided or used by investing activities:

P3 Cash Flows from Investing 39 This analysis reveals a $40,000 increase in plant assets from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,000.

P3 Cash Flows from Investing 40 Item b: Genesis purchased plant assets of $60,000 by issuing $60,000 in notes payable to the seller. We also reconstruct the entry for Depreciation Expense using information from the income statement. Item c reports that Genesis sold plant assets costing $20,000 (with $12,000 of accumulated depreciation) for $2,000 cash, resulting in a $6,000 loss.

NEED-TO-KNOW Use the following information to determine this company’s cash flows from investing activities. a.A factory with a book value of $100 and an original cost of $800 was sold at a loss of $10. b.Paid $70 cash for new equipment. c.Long-term stock investments were sold for $20 cash, yielding a loss of $4. d.Sold land costing $175 for $160 cash, yielding a loss of $15. We use a three-stage process to determine cash provided or used by investing activities: (1) identify changes in investing-related accounts, (2) explain these changes using reconstruction analysis, and (3) report their cash flow effects P3 41

NEED-TO-KNOW a.A factory with a book value of $100 and an original cost of $800 was sold at a loss of $10. Cash flows from operating activities: Net income$XXX Loss on sale of factory10 Cash flows from investing activities: Cash received from sale of factory90 Cost800To date700 Book Value = $100 Adjustments to reconcile net income to net cash provided by operating activities: FactoryAccumulated Depreciation DebitCredit a)Cash90 Loss on sale of factory10 Accumulated Depreciation700 Factory800 General Journal P3 42

NEED-TO-KNOW b.Paid $70 cash for new equipment. Cash flows from operating activities: Net income$XXX Loss on sale of factory10 Cash flows from investing activities: Cash received from sale of factory90 Cash paid for new equipment(70) Adjustments to reconcile net income to net cash provided by operating activities: DebitCredit b)Equipment70 Cash70 General Journal P3 43

NEED-TO-KNOW c.Long-term stock investments were sold for $20 cash, yielding a loss of $4. Cash flows from operating activities: Net income$XXX Loss on sale of factory10 Loss on sale of investments4 Cash flows from investing activities: Cash received from sale of factory90 Cash paid for new equipment(70) Cash received from sale of long-term investments20 Adjustments to reconcile net income to net cash provided by operating activities: DebitCredit c)Cash20 Loss on sale of investments4 Long-term investments24 General Journal P3 44

NEED-TO-KNOW d.Sold land costing $175 for $160 cash, yielding a loss of $15. Cash flows from operating activities: Net income$XXX Loss on sale of factory10 Loss on sale of investments4 Loss on sale of land15 Cash flows from investing activities: Cash received from sale of factory90 Cash paid for new equipment(70) Cash received from sale of long-term investments20 Cash received from sale of land160 Net cash provided by investing activities$200 Adjustments to reconcile net income to net cash provided by operating activities: DebitCredit d)Cash160 Loss on sale of land15 Land175 General Journal P3 45

P3 Cash Flows from Financing 46 Identify changes in financing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects A three-stage process to determine cash provided or used by financing activities:

P3 Cash Flows from Financing 47 This analysis reveals: 1.an increase in notes payable from $64,000 to $90,000.

P3 Cash Flows from Financing 48 Item e: Notes with a carrying value of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain.

P3 Cash Flows from Financing 49 Item d: Issued 3,000 shares of common stock at par for $5 per share. Item f: Cash dividends of $14,000 are paid.

P3 50

NEED-TO-KNOW Use the following information to determine this company’s cash flows from financing activities. a.Issued common stock for $40 cash. b.Paid $70 cash to retire a note payable at its $70 maturity value. c.Paid cash dividend of $15. d.Paid $5 cash to acquire its treasury stock Cash flows from financing activities: Cash received from issuance of common stock$40 Cash paid to settle note payable(70) Cash paid for dividend(15) Cash paid to acquire treasury stock(5) Net cash used by financing activities($50) DebitCredit a)Cash40 Common Stock40 b)Notes payable70 Cash70 c)Retained earnings15 Cash15 d)Treasury stock5 Cash5 General Journal P3 51

P3 Overall Summary Using T-Accounts 52

Global View 53 Reporting Cash Flows from Operating Both U.S. GAAP and IFRS permit the reporting of cash flows from operating activities using either the direct or indirect method. However, two notable differences include: 1.U.S. GAAP requires cash inflows from interest revenue and dividend revenue be classified as operating, whereas IFRS permits classification under operating or investing provided that this classification is consistently applied across periods. 2.U.S. GAAP requires cash outflows for interest expense be classified as operating, whereas IFRS again permits classification under operating or financing provided that it is consistently applied across periods. Reporting Cash Flows from Investing and Financing U.S. GAAP and IFRS are broadly similar in computing and classifying cash flows from investing and financing activities. One notable exception is that U.S. GAAP requires cash outflows for income tax be classified as operating, whereas IFRS permits the splitting of those cash flows among operating, investing, and financing depending on the sources of that tax.

END OF THE COURSE THANK YOU 54

Thank you and See You NEXT WEEK at the Same Time, for Course revision Final Exam on MAY 11 th, Thank you and See You NEXT WEEK at the Same Time, for Course revision Final Exam on MAY 11 th, 55

12-A1: Cash Flow Analysis 56

Analyzing Cash Sources and Uses 57 A1 Most managers stress the importance of understanding and predicting cash flows for business decisions.

Used, along with income-based ratios, to assess company performance. Cash flow on total assets = Operating cash flows Average total assets Cash Flow on Total Assets 58 A1

12-P4: Spreadsheet Preparation of the Statement of Cash Flows 59

P4 A spreadsheet, also called work sheet or working paper, can help us organize the information needed to prepare a statement of cash flows. Appendix 12A: Spreadsheet Preparation of the Statement of Cash Flows 60

12-P5: Direct Method of Reporting Operating Cash Flows 61

Appendix 12B: Direct Method of Reporting Operating Cash Flows 62 P5 Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts: Framework for reporting cash receipts and cash payments

Appendix 12B: Direct Method of Reporting Operating Cash Flows 63 P5