5-1 Statement of Cash Flows: Direct and Indirect Methods Chapter 5 Illustrated Solution: Exercises 23 & 24

5-2 Accrual Accounting Revenues and Expenses  Cash Flows

5-3 Accrual Accounting Revenues and Expenses  Cash Flows Ending Cash = $22 Beginning Cash = 16 Change in Cash = 6

5-4 Accrual Accounting Revenues and Expenses  Cash Flows Ending Cash = $22 Beginning Cash = 16 Change in Cash = 6 Three Activities:Two Methods: OperatingIndirect *InvestingDirect *Financing * Identical under both the Indirect and the Direct Method

5-5 Indirect Method Worksheet format illustrated on text page 245

5-6 Indirect Method

5-7 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable

5-8 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable a. Cash………….50 A/R………..50

5-9 Indirect Method a. Cash………….50 A/R………..50 Add decrease in accounts receivable— cash inflow > revenue a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable

5-10 Indirect Method b. Inventory….….30 ????………..30 a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable

5-11 Indirect Method Assume no change in Accounts Payable b. Inventory….….30 Cash………..30 a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable

5-12 Indirect Method Add increase in inventory— cash outflow > expense a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable b. Inventory….….30 Cash………..30

5-13 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable c. Inventory….….25 Acct. Pay…..25

5-14 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable c. Inventory….….25 Acct. Pay…..25

5-15 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable d. Dep. Exp….….60 Acc. Dep…..60

5-16 Indirect Method Add back depreciation expense—cash outflow is zero. a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable d. Dep. Exp….….60 Acc. Dep…..60

5-17 Indirect Method Problem assumes all A/P relate to inventory purchases a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable e. Prepaids.….….8 Cash………..8

5-18 Indirect Method Add increase in prepaids— cash outflow > expense a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable e. Prepaids.….….8 Cash………..8

5-19 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable f. Int. Exp….….….2 Int. Pay……..2

5-20 Indirect Method Subtract increase in interest payable—cash outflow < expense a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable f. Int. Exp….….….2 Int. Pay……..2

5-21 Indirect Method a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable g. Tax Pay...….….17 Cash….……..17

5-22 Indirect Method Add decrease in taxes payable—cash outflow > expense a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable g. Tax Pay...….….17 Cash….……..17

5-23 Indirect Method Compute Net Cash Flow from Operations a.Decrease in accounts receivable b.Increase in inventory c.Increase in accounts payable d.Amount of reported depreciation expense e.Increase in prepaid general expenses f.Increase in interest payable g.Decrease in income taxes payable

5-24 Indirect Method To compute Cash Flows from operating activities under the indirect method, we start with net income and make adjustments for changes in all current assets and current liabilities.

5-25 Indirect Method To compute Cash Flows from operating activities under the indirect method, we start with net income and make adjustments for changes in all current assets and current liabilities. We just did this on the worksheet!

5-26 Indirect Method LaForge Company Statement of Cash Flows (Indirect Method) For the Year Ended December 31, 2002 (Dollars in thousands) Cash flows from operating activities: Net income$70 Adjustments: Depreciation expense$60 Decrease in accounts receivable50 Increase in inventory(30) Increase in prepaid general expenses(8) Increase in accounts payable25 Increase in interest payable2 Decrease in income taxes payable(17) 82 Net cash provided by operating activities$152

5-27 Direct Method To compute Cash Flows from operating activities under the direct method, we simply list all the cash inflows and cash outflows from operations—we don’t start with net income.

5-28 Direct Method To compute Cash flows from operating activities under the direct method, we simply list all the cash inflows and cash outflows from operations—we don’t start with net income. We just did this on the worksheet!

5-29 Direct Method LaForge Company Statement of Cash Flows (Direct Method) For the Year Ended December 31, 2002 (Dollars in thousands) Cash flows from operating activities: Cash receipts from customers$1,350 Cash payments for: Purchases of inventory$(885) General expenses(248) Interest expense(13) Income tax expense(52)(1,198) Net cash provided by operating activities$152

5-30 Investing Activities COMPUTATIONS: Beginning plant assets$1,000 Less: Plant assets sold330 Add: Plant assets purchased?? Equals Ending plant assets$1,019 Cash flows from investing activities: Sale of plant assets$200 Purchase of plant assets Net cash used in investing activities

5-31 Investing Activities Cash flows from investing activities: Sale of plant assets$200 Purchase of plant assets(349) Net cash used in investing activities$(149) COMPUTATIONS: Beginning plant assets$1,000 Less: Plant assets sold330 Add: Plant assets purchased Equals Ending plant assets$1,

5-32 Cash flows from financing activities: Issuance of bonds payable$40 Issuance of common stock38 Payment of cash dividends(75) Net cash provided by financing activities$3 COMPUTATIONS: Beginning bonds payable$77 Ending bonds payable117 Increase (bonds payable issued)$40 Beginning common stock$300 Ending common stock338 Increase (common stock issued)$38 Financing Activities

5-33 Solution to Exercise 5-23 (Indirect)

5-34 Solution to Exercise 5-24 (Direct)

5-35 End of Problem