Reporting the Statement of Cash Flows Chapter 12 PowerPoint Editor: Beth Kane, MBA, CPA Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Wild, Shaw, and Chiappetta Financial & Managerial Accounting 6th Edition Wild, Shaw, and Chiappetta Financial & Managerial Accounting 6th Edition

How does a company receive its cash? Where does a company spend its cash? What explains the change in the cash balance? Purpose of the Statement of Cash Flows 2

What explains the change in the cash balance? Why do income and cash flows differ? Where does a company spend its cash? How does a company receive its cash? Importance of Cash Flows 3

Cash equivalents are…  short-term, highly liquid investments.  readily convertible into cash.  sufficiently close to maturity so that market value is unaffected by interest rate changes. Measurement of Cash Flows 4

Classification of Cash Flows The Statement of Cash Flows includes the following three sections: – Operating Activities – Investing Activities – Financing Activities C1 5

Operating Activities C1 6

Investing Activities C1 7

Financing Activities C1 8

Noncash Investing and Financing C1 Examples of Noncash Investing and Financing Activities 9

Format of the Statement of Cash Flows 10 P1

Preparing the Statement of Cash Flows P1 11

Analyzing the Cash Account P1 The Cash account is a natural place to look for information about cash flows from operating, investing, and financing activities. 12

Analyzing Noncash Account P1 A second approach to preparing the statement of cash flows is analyzing noncash accounts. 13

Information to Prepare the Statement P1 Comparative Balance Sheets Comparative Balance Sheets Current Income Statement Current Income Statement Additional Information Additional Information Information to prepare the statement of cash flows usually comes from three sources: 14

Cash Flows from Operating Indirect and Direct Methods of Reporting The net cash amount provided by operating activities is identical under both the direct and indirect methods. Direct Method Direct Method Indirect Method Indirect Method 15 P1

These financial statements will help us prepare the statement of cash flows for Genesis using the indirect method. 16

Applying the Indirect Method of Reporting P2 Additional information on Genesis Inc.’s 2015 transactions: a. The accounts payable balances result from inventory purchases. b. Purchased $60,000 in plant assets by issuing $60,000 of notes payable. c. Sold plant assets with a book value of $8,000 (original cost of $20,000 and accumulated depreciation of $12,000) for $2,000 cash, yielding a $6,000 loss. d. Received $15,000 cash from issuing 3,000 shares of common stock. e. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain. f. Declared and paid cash dividends of $14,

Net Income Cash Flows from Operating Activities Changes in noncash current assets and current liabilities + Losses and - Gains + Noncash expenses such as depreciation and amortization Applying the Indirect Method of Reporting P

Use this table when adjusting Net Income to Operating Cash Flows. Adjustments for Changes in Current Assets and Current Liabilities P2 19

P2 Adjustments for Changes in Current Assets and Current Liabilities 20

P2 Adjustments for Operating Items Not Providing or Using Cash 21

P2 Adjustments for Nonoperating Items 22

P2 Summary of Adjustments for Indirect Method Common adjustments to net income when computing net cash provided or used by operating activities under the indirect method: 23

P3 Cash Flows from Investing Identify changes in investing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects A three-stage process to determine cash provided or used by investing activities: 24

P3 Cash Flows from Investing This analysis reveals a $40,000 increase in plant assets from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,

P3 Cash Flows from Investing Item b: Genesis purchased plant assets of $60,000 by issuing $60,000 in notes payable to the seller. We also reconstruct the entry for Depreciation Expense using information from the income statement. Item c reports that Genesis sold plant assets costing $20,000 (with $12,000 of accumulated depreciation) for $2,000 cash, resulting in a $6,000 loss. 26

P3 Cash Flows from Financing Identify changes in financing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects A three-stage process to determine cash provided or used by financing activities: 27

P3 Cash Flows from Financing This analysis reveals: 1.an increase in notes payable from $64,000 to $90,

P3 Cash Flows from Financing Item e: Notes with a carrying value of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain. 29

P3 Cash Flows from Financing Item d: Issued 3,000 shares of common stock at par for $5 per share. Item f: Cash dividends of $14,000 are paid. 30

P3 31

P3 Overall Summary Using T-Accounts 32

Global View Reporting Cash Flows from Operating Both U.S. GAAP and IFRS permit the reporting of cash flows from operating activities using either the direct or indirect method. However, two notable differences include: 1.U.S. GAAP requires cash inflows from interest revenue and dividend revenue be classified as operating, whereas IFRS permits classification under operating or investing provided that this classification is consistently applied across periods. 2.U.S. GAAP requires cash outflows for interest expense be classified as operating, whereas IFRS again permits classification under operating or financing provided that it is consistently applied across periods. Reporting Cash Flows from Investing and Financing U.S. GAAP and IFRS are broadly similar in computing and classifying cash flows from investing and financing activities. One notable exception is that U.S. GAAP requires cash outflows for income tax be classified as operating, whereas IFRS permits the splitting of those cash flows among operating, investing, and financing depending on the sources of that tax. 33

Analyzing Cash Sources and Uses A1 Most managers stress the importance of understanding and predicting cash flows for business decisions. 34

Used, along with income-based ratios, to assess company performance. Cash flow on total assets = Operating cash flows Average total assets Cash Flow on Total Assets A1 35

P4 A spreadsheet, also called work sheet or working paper, can help us organize the information needed to prepare a statement of cash flows. Appendix 12A: Spreadsheet Preparation of the Statement of Cash Flows 36

Appendix 12B: Direct Method of Reporting Operating Cash Flows P5 Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts: Framework for reporting cash receipts and cash payments 37

Appendix 12B: Direct Method of Reporting Operating Cash Flows P5 38