1. Chapter 11 Statement of Cash Flows McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

2. Participation Questions – Chapter 11 1. The dates for the final exam are which of the following: 2. Which publicly traded corporation was showing a cash outflow for the operating cash flow section? 1. JC Penney 2. Apple Computers 3. Target 4. Walmart 3. In which section of the cash flow is the full value of the cash received for a sale of plant equipment shown? 1. Operating 2. Investing 3. Financing 4. The ‘retained earnings’ account is included on the cash flow statement? 1. True/False 5. Investing activities are associated with the long-term liabilities section of the balance sheet. 1. True/False

3. Announcements  Assignments – Due 12/6/15 Chapter 11 Homework (Connect) – unlimited attempts Participation questions for Chapter 11 (Webcourses) – 1 attempt SEC Financial Statement Assignment #3  Accounting Research Survey in Webcourses – 3 points extra credit – open until Monday 12/7/15  Student Evaluations… Open in my.ucf.edu – please provide feedback!  Learn Smart Extra Credit for Block 3 - Chapters 8 – 11 closes on December 13 th at 11:59 PM.  Tutoring Lab hours CBA Tutoring Lab Rm #355 open thru Monday, 12/7/15 only. Closed on Study Tuesday and final exams. SARC Tutoring Lab open through Tuesday, 12/8/15 only.  Final Exam Review sessions During normal class on 12/7/15 (I will go through study guide and Louis will do exam review). SARC - Student Union on Monday 12/7/15 from 12:00 PM to 2:00 PM in the Cape FL Ballroom.

4. Jennifer Moak Director, Accounting Verizon Tuesday, December 1 st, 2015 10 a.m.-11 a.m. BA1 Rm 148 (The Exchange) Register: exchange-moak.eventbrite.com

5. Sears Deal: More REIT Than Light – WSJ Sears – Net loss for year end 2014 = ($1.8 billion) Cash flow generated from operating activities = a ($1.4 billion) use of cash. The way Sears Holdings keeps scissoring off assets, maybe it should rename itself Shears. The retailer plans to raise more than $2.5 billion by selling 254 properties to a real-estate investment trust it has formed and then leasing them back. The REIT, Seritage Growth Properties, will fund the purchase partly by selling stakes to Sears shareholders through a rights offering.Sears These moves -- just the latest in a series of cash-raising exercises that include last year's reduction of its stake in Sears Canada and spinoff of Lands' End -- will provide the firm with much-needed funding. Sears burned through about $1.6 billion of cash in the fiscal year ended January. That left it with just $250 million on hand, and an additional $800 million available to it through a revolving credit facility.SearsLands' EndSears

6. Questions to be Answered Overall - What is financial reporting’s role in today’s American society? Chapter 11 – Since net income does not directly correlate to the cash change in an organization, how do we track the actual cash flow of the organization through an accounting period?

7. What’s up for our Final Chapter?  Why is understanding Cash Flow Important?  How do the accountants measure cash flow during an accounting period? Indirect Method – Start with NI  Operating  Investing  Financing

8. Chapters 11 Cash Flow Statement No New Accounts!!! Finally All areas Dividends NI, depreciation, gains/losses

9. Terminology

10. Cash Flow Preparation Methods – Only differ for Operating Section  Direct Method – adjust the items on the income statement to directly show the cash inflows and outflows from operations.  Indirect Method – begin with net income and then list adjustments to net income, in order to arrive at operating cash flows. This method is used by 99% of all major corporation in the United States.

11. LO1 Classification of Transactions Categories of Cash Flows Operating activities Investing activities Financing activities Include cash receipts and cash payments for transactions relating to revenue and expense activities Company makes investments involving the purchase and sale of long-term assets and current investments using cash Inflows and outflows of cash resulting from the external financing of a business (Long-term Debt and Invested Capital) 11-11

12. Sources of Information for cash flow A. Operating activities 1. Income Statement 2. Current Assets 3. Current Liabilities B. Investing activities 1. Long-term Assets C. Financing activities 1. Long-term Liabilities 2. Stockholders’ Equity

13. 13 Apple Computers

15. Apple (Operating)

16. Apple (Investing & Financing)

17. JC Penney

21. Reporting Noncash Activities – (Informational Purposes Only) oOnly involves investing (Long-term assets) and/or financing activities (Liabilities or stockholders’ equity) – for our class oTransactions that don’t increase or decrease cash oExcluded from the statement of cash flows oReported in a separate note to the financial statements as noncash activities oNon-cash activities will typically only involve long-term assets, long-term liabilities, and stockholders’ equity. Purchase of long-term assets by issuing debt Purchase of long-term assets by issuing stock Conversion of bonds payable into common stock. Exchange of long-term assets Examples: 11-21

22. Part B Preparing the Statement of Cash Flows 11-22

23. Explanation of Indirect Method Calculations Indirect Measurement: https://www.youtube.com/watch?v=F6fltSqImFMhttps://www.youtube.com/watch?v=F6fltSqImFM  Operating Section Adjusted Net Income is combined with the cash changes as measured in Current Asset and Current Liabilities Accounts  Investing Section Cash changes to Long-term Asset accounts  Financing Section  Cash changes to Long-term Liabilities and Stockholders’ Equity

24. Overview of Preparing the Statement of Cash Flows – Indirect method Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the balance sheets. Step 2. Determine the net cash flows from investing activities, by analyzing changes in long- term asset accounts from the balance sheets. Step 3. Determine the net cash flows from financing activities, by analyzing changes in long- term liabilities and stockholders’ equity accounts from the comparative balance sheets. Step 4. Combine the operating, investing, and financing activities, and make sure the total agrees with the net increase (decrease) in cash. Step 5. Footnote all noncash activity. 11-24

25. Operating Activities – Calculating Cash Flow Amounts (indirect)  Steps for preparing the Operating Section: Net Income - always start with the Net Income figure.  Net income approximates cash flow, so it is a good starting point. Next, reverse the impact of Non-cash Expenses to the Net Income figure. Next, reverse the impact Gains and Losses on sales of long-term assets to the Net Income figure (full value of sale is shown in investing section). Last, compare the current year and prior year account balances for all of the current asset and current liability accounts to recognize the cash impact of the change. 25

26. Noncash Expenses Depreciation and/or amortization are non-cash expenses that been recognized (deducted) on the Income Statement to arrive at the Net Income figure. The affect on cash for these items was shown in the investing section when the asset was acquired.  How to address in Cash Flow: These amounts are added back to Net Income to reverse (neutralize) their impact. 26

27. Example of Non-cash Expense (Attempting to get as close to cash as possible)

28. Gains and Losses on Sale of Plant Assets Gains and losses result from the sale of plant assets. These amounts have been recognized (added or deducted) on the Income Statement to arrive at the Net Income figure.  The affect on cash for these items is shown in the investing at the full value of the cash received in the sale.  How to address in the Operating Section of Cash Flow: These amounts are added or subtracted from Net Income to reverse (neutralize) their impact.  Gain: deduct from Net Income.  Loss: add back to Net Income. 28

29. Where is the cash?

30. Example of Loss on sale of asset – Cash flow Equipment cost = $10,000 Accumulated depreciation to date = $5,000 Sales price (cash) = 4,000

31. Changes to Current Assets and Current Liability Accounts Recognize the indirect cash changes based on the Current Asset and Current Liability account changes. These changes do not directly impact cash, but will eventually… – hence the name indirect!  Current asset account changes Increase current asset account – Use of Cash Decrease current asset account – Source of Cash  Current liability account changes Increase current liability asset account – Source of Cash Decrease current liability account – Use of Cash

32. Increase in Current Assets  It takes Cash to Acquire Current Assets – Decreases Cash 32

33. Decrease to Current Assets  A decrease in another current asset increases cash 33

34. Increases in Current Liabilities  Increases in current liabilities increase cash 34

35. Decreases in Current Liabilities  Payment of a current liability decreases cash 35

36. Cash Flow Template: Operating 36 Cash Flows From Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: + Depreciation/depletion/amortization expense + Loss on sale of long-term assets - Gain on sale of long-term assets - Increases in current assets other than cash + Decreases in current assets other than cash + Increases in current liabilities - Decreases in current liabilities = Net cash provided by operating activities

37. Illustration: Operating Section Only The income statement, balance sheets, and additional information for E-Games, Inc., are provided in the following Illustration. We will use this information in preparing the statement of cash flows following the four basic steps. Step 1. OPERATING - Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the balance sheets. 11-37 What 3 pieces of info will be useful for the operating section of the cash flow?

38. Illustration (cont.) 11-38 Look at the individual transactions

39. Cash Flows from Operating Activities 11-39

40. Check-in’s – Operating Section  For the indirect method, the operating section begins with net income? True or False (Circle one)  For the indirect method, the depreciation is subtracted from net income? True or False (Circle one)  For the indirect method, a gain is added back to net income? True or False (Circle one)  If inventory account increased by $10,000 from the prior accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)  If the accounts payable account decreased by $10,000 from the prior accounting period, this change is shown as a source of cash or a use of cash? (Circle one)

41. Investing - Calculating Cash Flow Amounts 41 Each Long-term Asset account is reviewed for changes to see if the change resulted in a source or use of cash. Long-term asset account changes (General Rules) Increase long-term asset account – Use of Cash Decrease long-term asset account – Source of Cash

42. Investing - Calculating Cash Flow Amounts 42 Cash Flows from Investing Activities +Sales of long-term assets (Full amount of proceeds shown here) -Purchases of long-term assets +Collections of notes receivable -Loans to others =Net cash provided by (used for) investing activities

43. LO3 Investing Activities Cash Outflow Cash Inflow 11-43

44. Check-in’s – Investing Section  The investing section is only concerned with changes in Stockholders’ Equity. True or False (Circle one)  When an asset is sold, only the gain or loss is listed in the investing section. True or False (Circle one)  When an asset is sold, the amount of cash received for the sale is shown in the investing section, regardless of any gain or loss recognized. True or False (Circle one)  If a notes receivable has been paid down by $10,000 from the prior accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)  If new equipment is purchased in the amount of $10,000 during this accounting period, this change is shown as a source of cash or a use of cash? (Circle one)

45. Financing - Calculating Cash Flow Amounts 45 Financing activities affect long-term liabilities and stockholders’ equity. Each long-term liability and stockholders’ equity account is reviewed for changes to see if the change resulted in a source or use of cash. Long-term liability and stockholders’ equity account changes Increase in account – Source of Cash Decrease in account – Use of Cash Exceptions – Treasury Stock and Dividends

46. Financing - Calculating Cash Flow Amounts 46 Cash Flows from Financing Activities +Issuance of stock -Purchase of treasury stock +Borrowing -Payment of notes and bonds payable - Payment of dividends Net cash provided by (used in) financing activities

47. LO3 Financing Activities Cash Inflow Cash Outflow Retained earnings, beg. Balance $41,000 + Net income 42,000 – Dividends (12,000) Retained earnings, ending balance $71,000 11-47

48. Check-in’s – Financing Section  The financing section is only concerned with changes in Stockholders’ Equity. True or False (Circle one)  If treasury stock (acquired in a prior accounting period) is reissued in the amount of $10,000 during this accounting period, this change is shown as a cash inflow or cash outflow? (Circle one)  A new bond with a face value of $100,000 is issued at a discount and the bonds payable account is credited for $90,000. This change is shown as a source of cash or a use of cash and how much ________________? (Circle One and fill in the blank)

49. Exercise: I = inflow (addition or source) O = outflow (subtraction or use) NCA – non-cash activity Plus – which section?

50. Notes: Dividends = $5,000 Marketable securities sold for cash Long-term debt increased cash

52. Sources of Information for Cashflow Statement  Operating activities Income Statement Current Assets Current Liabilities  Investing activities Long-term Assets  Financing activities Long-term Liabilities Stockholders’ Equity

54. End of chapter 11 11-54