Statement of Cash Flows Statement of Cash Flows 14 Statement of Cash Flows Statement of Cash Flows Student Version

1 Describe the cash flow activities reported in the statement of cash flows 14-2

1 The statement of cash flows reports a firm’s major cash inflows and outflows for a period. It provides useful information about a company’s ability to do the following: Generate cash from operations Maintain and expand its operating capacity Meet its financial obligations Pay dividends

Cash Flows from Investing Activities 1 Cash Flows from Investing Activities Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets. Cash outflows from investing activities normally include payments to acquire fixed assets, investments, and intangible assets.

Cash Flows from Financing Activities 1 Cash Flows from Financing Activities Cash inflows from financing activities normally arise from issuing debt or equity securities. Cash outflows from financing activities normally include paying cash dividends, repaying debt, and acquiring treasury stock.

Noncash Investing and Financing Activities 1 Noncash Investing and Financing Activities Noncash investing and financing activities are transactions that do not directly affect cash. The effect of such transactions is recorded in a separate schedule that appears at the bottom of the statement of cash flows.

Prepare a statement of cash flows, using the indirect method. 2 Prepare a statement of cash flows, using the indirect method. 14-7

2 Retained Earnings The analysis of Retained Earnings provides a good starting point for determining the cash flows from operating activities.

2 The Retained Earnings account for Rundell Inc. reveals that the balance increased $80,000 during the year. The net income of $108,000 is the first amount reported in the Cash Flows from Operating Activities section.

Adjustments to Net Income 2 Adjustments to Net Income Cash flows from operating activities: Net income $108,000 Adjustments to reconcile net income to net cash flow from operating activities: This phrase is added to indicate that accrual basis net income is being adjusted to arrive at cash flows from operations.

2 Adjustments to Net Income (Loss) Using the Indirect Method Exhibit 4 Step 1 Step 2 Step 3

2 Step 1 Expenses that do not affect cash are added. Such expenses decreased net income, but did not involve cash payments and, thus, are added to net income. Examples include depreciation of fixed assets and amortization of intangible assets.

2 Step 2 Loses and gains on disposal of assets are added or deducted. The disposal (sale) of assets is an investing activity, rather than an operating activity. Losses on disposal of assets are added back to net income. Gains on disposal of assets are deducted from net income.

2 Step 3 Changes in current operating assets and liabilities are added or deducted as follows: Increases in noncash current operating assets are deducted. Decreases in noncash current operating assets are added. Increases in current operating liabilities are added. Decreases in current operating liabilities are deducted.

2 Exhibit 5 (continued on Slide 17) Cash Flows from Operating Activities—Indirect Method Exhibit 5 Step 1 Step 2 Step 3 (continued on Slide 17)

2 Step 1: The comparative balance sheets indicate that Accumulated Depreciation—Building increased by $7,000. The account, shown below, indicates that Accumulated Depreciation—Building increased by $7,000.

2 Exhibit 5 (continued on Slide 19) Cash Flows from Operating Activities—Indirect Method (continued) Exhibit 5 Step 1 (continued on Slide 19)

2 Step 2 The proceeds, which included the gain, are reported in the Investing section of the statement of cash flows. Thus, the $12,000 is deducted from net income in determining cash flows from operating activities.

2 Exhibit 5 (continued on Slide 21) Cash Flows from Operating Activities—Indirect Method (continued) Exhibit 5 Step 2 (continued on Slide 21)

2 December 31 Increase Accounts 2010 2009 Decrease* Accounts receivable (net) $ 74,000 $ 65,000 Inventories 172,000 180,000 Accounts payable (mdse.) 43,500 46,700 Accrued expenses payable 26,500 24,300 Income taxes payable 7,900 8,400 9,000 8,000* 3,200* 2,200 500* Note that Cash and Dividends Payable are not included in this analysis.

2 Cash Flows from Operating Activities—Indirect Method (concluded) Exhibit 5 Step 1 Step 2 Step 3

2 Dividends Cash dividends of $28,000 were declared during 2010. Note the entry highlighted in yellow.

2 Only $24,000 of the dividends was paid in 2010. Since dividend payments are a financing activity, the dividend payment is reported in the Financing Activities section.

2 Common Stock Rundell, Inc.’s Common Stock account increased by $8,000 during 2010.

2 Paid-in Capital in Excess of Par—Common Stock increased $40,000 during the year. Issuing company stock is a financing activity, so cash flows from financing activities increases by $48,000 ($8,000 + $40,000).

2 Bonds Payable Bonds Payable decreased $50,000 during 2010. A check with Rundell’s income statement show that there was no gain or loss on the retirement. Retiring a bond payable is a financing activity, so a cash outflow of $50,000 is reported in the Financing Activities section of the statement of cash flows.

2 Building The Building account increased by $60,000. The cash outflow for this purchase is shown in the Financing Activities section of the statement.

2 Land The $45,000 decline in the Land account was from two transactions.

2 Earlier, as part of Step 2 in preparing the Operating Activities section, the $12,000 gain was deducted from net income. Step 2 The proceeds of $72,000 from the sale of land are reported in the Investing Activities section of the statement of cash flows.

2 The October 12 transaction is the purchase of land for cash of $15,000. This transaction is reported as an outflow of cash in the Cash Flows from Investing Activities section.

2 Exhibit 6 Statement of Cash Flows—Indirect Method payable

Prepare a statement of cash flows, using the direct method. 3 Prepare a statement of cash flows, using the direct method. 14-32

3 Exhibit 7 Statement of Cash Flows—Direct Method (continued)

3 Exhibit 7 Statement of Cash Flows—Direct Method (continued)