The Statement of Cash Flows Chapter 12

The statement of cash flows reports the entity’s cash flows (cash receipts and cash payments) during the period. Used to be called Sources and Uses of Cash Basic Concepts

Timing of the Financial Statements December 31, 20x1 (a point in time) Balance Sheet December 31, 20x2 (a point in time) Balance Sheet For the Year Ended December 31, 20x1 (a period of time) Income Statement Statement of Stockholders’ Equity Statement of Cash Flows

Purposes of the Statement of Cash Flows The statement of cash flows serves the following purposes: 1. Predict future cash flows 2. Evaluate management decisions 3. Determine the ability to pay dividends to stockholders’ and payments to creditors 4. Show the relationship of net income to the business’s cash flows

Operating, Investing, and Financing Activities A business engages in three types of business activities: Operating activities Investing activities Financing activities

Operating, Investing, and Financing Activities Operating activities create revenues, expenses, gains, and losses. Investing activities increase and decrease long-term assets. Financing activities obtain cash from investors and creditors.

Two Formats for Operating Activities Indirect method reconciles from net income to net cash provided by operating activities. Direct method reports all cash receipts and cash payments from operating activities. The two methods have no effect on investing or financing activities.

Two Formats for Operating Activities Indirect Method Net income$XXX Adjustments: Depreciation, etc. XXX Net CASH provided by operating activities$XXX Direct Method Collection from customers$XXX Deductions: Payment to suppliers, etc. XXX Net CASH provided by operating activities$XXX

Prepare a statement of cash flows by the indirect method.

The Indirect Method: Operating Activities Positive Items Net income Depreciation/amortization Loss on sale of long-term assets Decreases in current assets other than cash Increases in current liabilities (ex: AP) Negative Items Net loss Gain on sale of long-term assets Increases in current assets other than cash Decreases in current liabilities

Investing Activities Positive Items Sale of plant assets Sale of investments that are not cash equivalents Collections of loans receivable Negative Items Acquisition of plant assets Purchase of investments that are not cash equivalents Making loans to others

Financing Activities Positive Items Issuing stock Selling treasury stock Borrowing money Negative Items Payment of dividends Purchase of treasury stock Payment of principal amounts of debts

Comparative Balance Sheets Assets Current: Cash Accounts receivable Interest receivable Inventory Prepaid expenses Long-term receivable Plant assets, net Total $ $725 $ – 219 $487 $ (20) 13 2 (3) $238 (In thousands)20x220x1(Change) Anchor Corporation – December 31

Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands) Cash flows from operating activities: Net Income$41 Adjustments to reconcile net income to net cash provided by operating activities: ADepreciation18 BGain on sale of plant(8) Statement of Cash Flows: Operating Activities

CIncrease in accounts receivable(13) CIncrease in interest receivable (2) CDecrease in inventory 3 CIncrease in prepaid expenses (1) CIncrease in accounts payable 34 CDecrease is salary payable (2) CDecrease in accrued liabilities (2) 27 Net cash provided by operating activities$68 Statement of Cash Flows: Operating Activities Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

Depreciation, Depletion, and Amortization – A Depreciation expense has no effect on cash. However, it is deducted from revenues in order to compute net income. The addback cancels the earlier noncash deduction.

Gains and Losses on the Sale of Assets – B Gains are subtracted from net income and excluded from cash flows from operations.

Changes in the Current Asset and Current Liability Accounts – C 1. An increase in a current asset other than cash indicates a decrease in cash. 2. A decrease in a current asset other than cash indicates an increase in cash. 3. A decrease in a current liability indicates a decrease in cash. 4. An increase in a current liability indicates an increase in cash.

Statement of Cash Flows Net cash provided by operating activities$ 68 Net cash used for investing activities (255) Net cash provided by financing activities 167 Net decrease in cash$ (20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2$ 22 Statement of Cash Flows (Indirect Method) Year Ended December 31, 20x2 (In thousands)

Compute the cash effects of a wide variety of business transactions.

Computing Acquisition and Sales of Plant Assets Anchor had plant assets, net of depreciation, of $219,000 at the beginning of the year and $453,000 at year end. The acquisition of plant assets amounted to $306,000 during the year. The income statement shows depreciation expense of $18,000 and an $8,000 gain on sale of plant assets. What is the book value of the assets sold?

Computing Acquisition and Sales of Plant Assets Plant Assets (Net) Beginning balance219,000 Acquisitions306,000 Ending balance453,000 Acc Depreciation18,000 Book value of assets sold54,000

Computing Acquisition and Sales of Plant Assets How much are the CASH proceeds from the sale of plant assets? Book value + Gain – Loss = Sale proceeds Sale proceeds = $54,000 + $8,000 – 0 = $62,000

Computing Acquisition and Sales of Investments Beginning balance + Purchases – Book value of investment sold = Ending balance (Amounts assumed) $100,000 + $50,000 – X = $140,000 X = $10,000

Computing Loans and Their Collections Beginning balance + New loans made – Collections = Ending balance (Amounts assumed) $90,000 + $10,000 – X = $30,000 X = $70,000

Computing Issuances and Payments of Long-Term Debt Beginning balance was $77,000. New debt amounting to $94,000 was incurred during the year. The ending balance for the Long-Term Debt account was $160,000. How much was the payment?

Computing Issuances and Payments of Long-Term Debt Long-Term Debt Beginning balance 77,000 Issuance of new debt 94,000Payments11,000 Ending balance160,000

Computing Dividend Payments Retained earnings beginning balance + Net income – Dividends declared = Ending balance $86,000 + $41,000 – X = $110,000 X = $17,000 (if div’s declared were paid in the CY, $17000 is the div payment)

Computing Cash Collections from Customers Beginning accounts receivable balance + Sales on account – Collections = Ending accounts receivable balance $80,000 + $284,000 – X = $93,000 X = $271,000

Computing Payments to Suppliers Accounts Payable Payments 113,000 Beg. balance 57,000 Purchases147,000 End. balance 91,000

Noncash Investing and Financing Activities Suppose Anchor Corporation issued common stock valued at $320,000 to acquire a warehouse. Warehouse Building320,000 Common Stock320,000

Noncash Investing and Financing Activities Noncash Investing and Financing Activities:(000) Acquisition of building by issuing common stock$320 Acquisition of land by issuing note payable 72 Payment of long-term debt by transferring investments to the creditor 104 Acquisition of equipment by issuing short-term note payable 37 Total noncash investing and financing activities$533

Prepare a statement of cash flows by the direct method.

Cash flows from operating activities: Receipts: Collections from customers$271 Interest received on notes receivable 10 Dividends received on investments in stock 9 Total cash receipts$290 Statement of Cash Flows Year Ended December 31, 20x2 (In thousands) The Direct Method

Payments: To suppliers$133 To employees 58 For interest 16 For income tax 15 Total payments 222 Net cash provided by operating activities $ 68 The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands)

Net cash provided by operating activities$ 68 Net cash used for investing activities (255) Net cash provided by financing activities 167 Net decrease in cash$(20) Cash balance, December 31, 20x1 42 Cash balance, December 31, 20x2$ 22 The Direct Method Statement of Cash Flows Year Ended December 31, 20x2 (In thousands)

End of Chapter 12