Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Spiceland | Thomas | Herrmann Financial Accounting Statement of Cash Flows Chapter 11

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives Classify cash transactions as operating, investing, or financing activities Prepare the operating activities section of the statement of cash flows using the indirect method Prepare the investing activities section and the financing activities section of the statement of cash flows Perform financial analysis using the statement of cash flows 11-2

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objectives Prepare the operating activities section of the statement of cash flows using the direct method 11-3

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part A Formatting the Statement of Cash Flows 11-4

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 1 Classify cash transactions as operating, investing, or financing activities 11-5

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Cash Flow Activities Operating activities: cash receipts and cash payments for transactions relating to revenue and expense activities Investing activities: cash transactions involving the purchase and sale of long-term assets and current investments Financing activities: inflows and outflows of cash resulting from the external financing of a business 11-6

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Information Sources for Preparing the Statement of Cash Flows Income statement Balance sheets Detailed accounting records 11-7

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Noncash Activities Significant investing and financing activities that do not affect cash Reported after the cash flow statement or in a note to the financial statements 11-8

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Operating Activities—Indirect and Direct Methods Differ in presentation format for operating activities Both methods report investing, financing, and noncash activities identically Begin with net income and then list adjustments to net income in order to arrive at operating cash flows Most popular method Easier and less costly Adjust the items on the income statement to directly show the cash inflows and outflows from operations Conceptually better method More difficult and more costly Indirect MethodDirect Method 11-9

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Part B Preparing the Statement of Cash Flows 11-10

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Steps in Preparing the Statement of Cash Flows Step 1: Calculate net cash flows from operating activitiesStep 2: Calculate net cash flows from investing activities Step 3: Calculate net cash flows from financing activities Step 4: Combine operating, investing, and financing activities 11-11

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 2 Prepare the operating activities section of the statement of cash flows using the indirect method 11-12

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Operating Activities—Indirect Method Both net income and cash flows from operating activities represent the same operating activities Net income includes both cash and noncash components Net cash flows from operating activities removes noncash components 11-13

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Adjustments for Noncash Effects Depreciation expense Gain or loss on sale of an asset 11-14

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Changes in Current Assets and Current Liabilities – Increase in a current asset + Decrease in a current asset + Increase in a current liability – Decrease in a current liability 11-15

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 3 Prepare the investing activities section and the financing activities section of the statement of cash flows 11-16

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Investing Activities Increase or decrease in investments Increase or decrease in long-term assets 11-17

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Financing Activities Examine changes in long-term liabilities and stockholders’ equity accounts from the balance sheet 11-18

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 4 Perform financial analysis using the statement of cash flows 11-19

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Components of Cash Return on Assets Cash return on assets measures the operating cash flow generated per dollar of assets Cash flow to sales measures the operating cash flows generated for each dollar of sales Asset turnover measures the sales revenue generated per dollar of assets Cash return on assets Cash flow to sales Asset turnover ×= Operating cash flows Average total assets Operating cash flows Net sales Average total assets ×= 11-20

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Learning Objective 5 Prepare the operating activities section of the statement of cash flows using the direct method 11-21

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Operating Activities—Direct Method Report the cash inflows and cash outflows directly Converts each revenue and expense item to its cash-basis amount Income statement items that have no cash effect are not reported 11-22

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. End of Chapter