Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 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 The Statement of Cash Flows Revisited Chapter 21

21-2 Cash Inflows and Outflows Investing ActivitiesOperating ActivitiesFinancing Activities Sale of operational assets Sale of investments Collections of loans Cash received from revenues Issuance of stock Issuance of bonds and notes Cash Inflows Business Cash Outflows Purchase of operational assets Purchase of investments Loans to others Cash paid for expenses Payment of dividends Repurchase of stock Repayment of debt

21-3 Role of the Statement of Cash Flows Lists all cash inflows and all cash outflows by category: operating, investing, and financing Explains the change in cash during the period Required by GAAP Cash is King! Especially during an economic downturn.

21-4 Cash and Cash Equivalents  Short-term, highly liquid investments.  Readily converted into cash, with little or no risk of loss.  Examples: money market funds Treasury bills  Maturity date must not be longer than 3 months from date of purchase. Resources immediately available to pay obligations.

21-5 Operating Activities Investing Activities Financing Activities Reconciliation of the Net Increase or Decrease in Cash with the Change in the Balance of the Cash Account Noncash Investing and Financing Activities Primary Elements of the Statement of Cash Flows

21-6 Cash Flows from Operating Activities + Inflows from: customers. interest and dividends. _ Outflows to: suppliers of goods. salaries and wages. interest on debt. income taxes.

21-7 Direct Method or Indirect Method of Reporting Cash Flows from Operating Activities Reports the cash effects of each operating activity Direct Method Starts with accrual net income and converts to cash basis Indirect Method Two Formats for Reporting Operating Activities Note that no matter which format is used, the same amount of net cash flows from operating activities is generated.

21-8 Cash Flows from Investing Activities + Inflows from: Sale of long-term assets used in the business. Sale of investment securities (stocks and bonds). Collection of nontrade receivables. _ Outflows to: Purchase of long-term assets used in the business. Purchase of investment securities (stocks and bonds). Create nontrade receivables.

21-9 Cash Flows from Financing Activities Inflows from: Sale of shares to owners. Borrowing from creditors through notes, loans, mortgages, and bonds. Cash Flows from Financing Activities + _ Outflows to: Owners in the form of dividends or other distributions. Owners for the reacquisition of shares previously sold. Creditors as repayment of the principal amounts of debt.

21-10 U.S. GAAP and IFRS The FASB and IASB are working together on a project, Financial Statement Presentation, to establish a common standard for presenting information in the financial statements.

21-11 U.S. GAAP and IFRS Based on the joint FASB and IASB Financial Statement Presentation project, the statement of cash flows is slated to change in several ways. Operating and Investing cash flows would be categorized as “Business” activities and some cash flows may switch categories. The statement would have three additional groupings: income taxes, discontinued operations, and equity (if needed). Direct method would be required. The concept of “cash equivalents” would be eliminated in favor of cash only.

21-12 Preparation of the Statement of Cash Flows A spreadsheet can be used to ensure that no reportable activities are inadvertently overlooked. Reconstructing the events and transactions that occurred during the period helps identify the operating, investing, and financing activities to be reported.

21-13 U.S. GAAP vs. IFRS  Operating Activities  Dividends Received  Interest Received  Interest Paid  Investing Activities  Financing Activities  Dividends Paid  Operating Activities  Investing Activities  Dividends Received  Interest Received  Financing Activities  Dividends Paid  Interest Paid Typical Classification of Interest and Dividends Consistent with U.S. GAAP, cash flows are classified as operating, investing, or financing.

21-14 Components of Net Income That Do Not Increase or Decrease Cash Depreciation Expense Loss on Sale of Equipment Adding these items back to net income restores net income to what it would have been had depreciation and the loss not been subtracted at all. Subtracting the gain reverses the effect of the gain having been added to net income. Gain on Sale of Land

21-15 End of Chapter 21