14 C H A P T E R Statement of Cash Flows

Learning Objective 1 Understand the purpose of a statement of cash flows.

What Does The Statement of Cash Flows Do?

Learning Objective 2 Recognize the different types of information reported in the statement of cash flows.

What Are Cash Equivalents?

The Flow of Cash inflows outflows Cash received from operating activities from investing from financing Cash and cash equivalents inflows Cash paid for operating activities for investing for financing outflows

Match Classifications of Cash Flows 1.Transactions and events that enter into the determination of net income. 2.Transactions and events that involve the purchase and sale of securities, property, plant, equipment, and other assets not generally held for resale, and the making and collecting of loans. 3.Transactions and events whereby resources are obtained from, or repaid to, owners and creditors. Operating Activities Financing Activities Investing Activities

Statement of Cash Flows Operating Activities Financing Activities Cash Inflows Investing Activities Cash 4

Statement of Cash Flows Cash Outflows Operating Activities Financing Activities Investing Activities 5

What Items Are Classified as Operating Activities? Cash Inflow Cash Outflow 14

What Items Are Classified as Investing Activities? Cash Inflow Cash Outflow 16

What Items Are Classified as Financing Activities? Cash Inflow Cash Outflow 18

Define Noncash Items

You Can Do It! Learning Objective 3 Prepare a simple statement of cash flows.

What is the Format of the Statement of Cash Flows? 12

A Simple Example

A Simple Example The following transactions were conducted by Red Bull Corp during 2003: 1. Sales on account, $1,300 2. Collections on account, $1,800 3. Paid accounts payable, $1,000 4. Paid long-term debt, $100 5. Issued stock at par value, $200 6. Paid interest on debt, $50 7. Sold equipment, $100 (original cost, $250, accumulated depreciation, 225) Record the appropriate journal entries.

A Simple Example

A Simple Example Red Bull Corporation Trial Balance, 12/31/03 Debit Credit Cash $1,450 Accounts Receivable 800 Property, Plant & Equipment 250 Accumulated Depreciation $ 125 Accounts Payable 100 Long-Term Debt 150 Common Stock 500 Retained Earnings 300 Sales 1,300 Gain on Sale 75 Interest Expense 50 Totals $2,550 $2,550

A Simple Example STATEMENT OF CASH FLOWS Operating activities: Collections on account. . . . . . . . . . . . . $ 1,800 Payment of accounts payable . . . . . . . $1,000 Payment for interest . . . . . . . . . . . . . . . 50 (1,050) Cash flows from operating activities. . . $ 750 Investing activities: Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100 Financing activities: Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100) Cash flows from financing activities . . . 100

A Simple Example Statement of Cash Flows (continued) Net increase in cash. . . . . . . . . . . . . . . . $ 950 Beginning cash balance. . . . . . . . . . . . . 500 Ending cash balance . . . . . . . . . . . . . . . $1,450

Learning Objective 4 Analyze financial statements to prepare a statement of cash flows.

6-Step Process for Preparing a Statement of Cash Flows Compute the change in the cash and cash-equivalent accounts for the period of the statement. Convert the income statement from an accrual-basis to a cash-basis summary of operations. Analyze the long-term assets to identify the cash flow effects of investing activities. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

Example: Change in Cash Red Bull Corporation Beginning cash balance. . . . . . . . . . . . . $ 500 Ending cash balance . . . . . . . . . . . . . . . 1,450 Net increase in cash. . . . . . . . . . . . . . . . $ 950

Cash Flow Statements—Match A method of reporting net cash flows from operations that shows the major classes of cash receipts and payments for a period of time. A method of reporting net cash flows from operations that involves converting accrual-basis net income to a cash basis. Indirect Method Direct Method

6-Step Process for Preparing a Statement of Cash Flows Compute the change in the cash and cash-equivalent accounts for the period of the statement. Convert the income statement from an accrual-basis to a cash-basis summary of operations. Analyze the long-term assets to identify the cash flow effects of investing activities. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

Income Statement Conversion Cash Flows from Operations Income Statement Adjustments Sales $1,300 +500 $1,800 Accounts payable -1,000 (1,000) Interest expense (50) No change (50) $1,250 -500 net adjustment $ 750

6-Step Process for Preparing a Statement of Cash Flows Compute the change in the cash and cash-equivalent accounts for the period of the statement. Convert the income statement from an accrual-basis to a cash-basis summary of operations. Analyze the long-term assets to identify the cash flow effects of investing activities. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

Investing Activities Red Bull Corporation sells a piece of equipment for $100 during the year. The T-accounts relating to the equipment and the associated depreciation are given as follows. PP&E 500 ? 250 PP&E 500 250 Acc. Dep. 350 ? 125 Acc. Dep. 350 225 125

Investing Activities From the preceding T-Accounts make Red Bull Corporation’s journal entries relating to Property, Plant, & Equipment for the year:

Investing Activities Record the investing activities section of Red Bull Corporation’s statement of cash flows:

6-Step Process for Preparing a Statement of Cash Flows Compute the change in the cash and cash-equivalent accounts for the period of the statement. Convert the income statement from an accrual-basis to a cash-basis summary of operations. Analyze the long-term assets to identify the cash flow effects of investing activities. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

Investing Activities Red Bull Corporation’s financing activities section of its statement of cash flows is as follows:

6-Step Process for Preparing a Statement of Cash Flows 1. Compute the change in the cash and cash-equivalent accounts for the period of the statement. 2. Convert the income statement from an accrual-basis to a cash-basis summary of operations. 3. Analyze the long-term assets to identify the cash flow effects of investing activities. 4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. 5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. 6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

A Simple Example STATEMENT OF CASH FLOWS Operating activities: Collections on account. . . . . . . . . . . . . $1,800 Payment of accounts payable . . . . . . . $1,000 Payment for interest. . . . . . . . . . . . . . . 50 (1,050) Cash flows from operating activities. . . 750 Investing activities: Sold equipment. . . . . . . . . . . . . . . . . . . $ 100 Cash flows from investing activities . . . 100 Financing activities: Issued stock . . . . . . . . . . . . . . . . . . . . . $ 200 Repayment of debt . . . . . . . . . . . . . . . . (100) Cash flows from financing activities . . . 100 Net increase in cash. . . . . . . . . . . . . . . . . $950 Beginning cash balance. . . . . . . . . . . . . . 500 Ending cash balance . . . . . . . . . . . . . . . . $1,450

6-Step Process for Preparing a Statement of Cash Flows 1. Compute the change in the cash and cash-equivalent accounts for the period of the statement. 2. Convert the income statement from an accrual-basis to a cash-basis summary of operations. 3. Analyze the long-term assets to identify the cash flow effects of investing activities. 4. Analyze the long-term debt and stockholders’ equity accounts to determine the cash flow effects of any financing transactions. 5. Prepare a formal statement of cash flows by classifying all cash inflows and outflows according to operating, investing, and financing activities. 6. Report any significant investing or financing transactions that did not involve cash in a narrative or in a separate schedule.

Define Noncash Transactions

Learning Objective 5 Use information from the statement of cash flows to make decisions.

Analysis of Statement of Cash Flows continued

Analysis of Statement of Cash Flows General from from from Explanation Operating Investing Financing Operating cash flow problems covered by sale 5. – + + of fixed assets, borrowing, and contributions. Rapid growth, short falls in 6. – – + operating cash flow, and purchase of fixed assets. Sale of fixed assets is 7. – + – financing operating cash flow shortages. Company is using cash reserves to finance cash 8. – – – flow short falls and pay creditors.

Chapter 14 is Complete We must be the change we wish to see in the world. Ghandi