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 © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Adapted by Cynthia Fortin, CPA, CMA Introduction to Managerial Accounting, Brewer, Garrison,Noreen

12-2 This chapter explains how to prepare and interpret the statement of cash flows

12-3  Warm up exercise  1 to 10

12-4 Statement of Cash Flows Ongoing operations Investments Financing Can we pay debts? Can we pay dividends? Can we keep investing?

12-5 Operating Activities cash collected and cash paid Direct Method Adjusted net income to cash instead of accrual basis Indirect Method Used by 99% of companies

12-6 First I like to start with calculating the change in Cash from period to period. Because I know that the total changes of Operating + Investing + Financing must equal the change in cash period to period. I know where I’m heading!

12-7 Operating Activities Indirect Method Step 1 Net Income + Depreciation* * Change in Accumulation depreciation ending balance plus accumulated depreciation debited as a result of disposals.

12-8 Operating Activities Indirect Method Step 2 Analyze changes Noncash Current Assets & Liabilities

12-9 Let’s review the activities

12-10 Operating Activities Indirect Method Step 3 Adjust - Gains or + Losses Under U.S. GAAP and IFRS rules, proceeds of asset disposals must be included in the investing activities. Under Operating activities substract gains and/or add losses of such asset disposals.

12-11 Day 2 Cash flow example Apparel.xlsx Let’s look at an example

12-12 Operating: related to revenue and expense affecting net income. Investing: related to acquiring or disposing of noncurrent assets cash ins and cash outs Financing: related to borrowing and repaying principal and activities with the stockholders Change in cash balance

12-13 Summary of Key Concepts

12-14 Step 1: Add Depreciation Charges Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $300 – $70 + Credits = $500 Credits = $500 – $300 + $70 Credits = $270 Account Activity for Accumulated Depreciation Beginning balance $300 Ending balance$500 Accumulated depreciation of equipment sold $70

12-15 Step 2: Analyze Net Changes in Noncash Balance Sheet Accounts

12-16 Investing and Financing Activities: Gross Cash Flows U.S. GAAP and IFRS require that the investing and financing sections of the statement of cash flows disclose gross cash flows.

12-17 Property, Plant, and Equipment Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance $1,000 + Debits – $100 = $1,800 Debits = $1,800 – $1,000 + $100 Debits = $900 (cash outflow) Report $40 cash inflow. Report $900 cash outflow. Account Activity for Property, Plant, and Equipment Beginning balance $1,000Original cost of equipment sold $100 Ending balance$1,800Accumulated depreciation of equipment sold $70 Cash proceeds from sale of equipment $40Gain on the sale of equipment (included in net income) $10

12-18 Retained Earnings Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $2,000 – Debits + $1,200 = $3,000 $3,200 = $3,000 + Debits Debits = $200 (cash outflow) Report $1,200 net income in Operating Activities. Report $200 dividends paid in Financing Activities. Account Activity for Retained Earnings Beginning balance $2,000 Ending balance$3,000 Net income$1,200

12-19 Interpreting the Statement of Cash Flows Within company’s context Start-up Comparing operating CF to sales Comparing operating CF to current liabilities

12-20 Free Cash Flows Ability to fund Capital expenditures and Pay dividends With Operating net cash

12-21 Free Cash Flows