Accounting Principles, Ninth Edition Chapter 17 Statement of Cash Flows Accounting Principles, Ninth Edition

Statement of Cash Flows The Statement of Cash Flows: Usefulness and Format Preparing the Statement of Cash Flows—Indirect Method Using Cash Flows to Evaluate a Company Usefulness Classifications Significant noncash activities Format Preparation Indirect and direct methods Step 1: Operating activities Step 2: Investing and financing activities Step 3: Net change in cash Free cash flow Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Usefulness of the Statement of Cash Flows Provides information to help assess: Entity’s ability to generate future cash flows. Entity’s ability to pay dividends and obligations. Reasons for difference between net income and net cash provided (used) by operating activities. Cash investing and financing transactions during the period. SO 1 Indicate the usefulness of the statement of cash flows.

Classification of Cash Flows Operating Activities Investing Activities Financing Activities Income Statement Items Generally Long-Term Asset Items Generally Long-Term Liability and Equity Items SO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 17-1 Operating activities - Income statement items Cash inflows: From sale of goods or services. From interest received and dividends received. Cash outflows: To suppliers for inventory. To employees for services. To government for taxes. To lenders for interest. To others for expenses. SO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 17-1 Investing activities - Changes in investments and long-term assets Cash inflows: From sale of property, plant, and equipment. From sale of investments in debt or equity securities. From collection of principal on loans to other entities. Cash outflows: To purchase property, plant, and equipment. To purchase investments in debt or equity securities. To make loans to other entities. SO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Classification of Typical Inflows and Outflows Illustration 17-1 Financing activities - Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock. From issuance of long-term debt (bonds and notes). Cash outflows: To stockholders as dividends. To redeem long-term debt or reacquire capital stock (treasury stock). SO 2 Distinguish among operating, investing, and financing activities.

Classification of Cash Flows Significant Noncash Activities 1. Issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Issuance of debt to purchase assets. 4. Exchanges of plant assets. Companies report these activities in either a separate schedule at the bottom of the statement of cash flows or in a separate note or supplementary schedule to the financial statements. SO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows Order of Presentation: Operating activities. Investing activities. Financing activities. The cash flows from operating activities section always appears first, followed by the investing and financing sections. Direct Method Indirect Method SO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows Illustration 17-2 SO 2 Distinguish among operating, investing, and financing activities.

Preparing the Statement of Cash Flows Three Sources of Information: Comparative balance sheets Current income statement Additional information Three Major Steps: Illustration 17-3 SO 2 Identify the major classifications of cash flows.

Preparing the Statement of Cash Flows Three Major Steps: Illustration 17-3 SO 2 Identify the major classifications of cash flows.

Preparing the Statement of Cash Flows Indirect and Direct Methods Companies favor the indirect method for two reasons: It is easier and less costly to prepare, and It focuses on the differences between net income and net cash flow from operating activities. SO 2 Identify the major classifications of cash flows.

Demonstration Problem Preparing the Statement of Cash Flows Indirect Method Demonstration Problem Illustration 17-4 SO 3 Prepare a statement of cash flows using the indirect method.

Demonstration Problem Preparing the Statement of Cash Flows Indirect Method Demonstration Problem Illustration 17-4 SO 3 Prepare a statement of cash flows using the indirect method.

Demonstration Problem Preparing the Statement of Cash Flows Demonstration Problem Additional information for 2010: 1. The company declared and paid a $29,000 cash dividend. 2. Issued $110,000 of long-term bonds in direct exchange for land. 3. A building costing $120,000 and equipment costing $25,000 were purchased for cash. 4. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash. 5. Issued common stock for $20,000 cash. 6. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment. Illustration 17-4 SO 3 Prepare a statement of cash flows using the indirect method.