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: - April 28 – 29 only 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  Student Evaluations… Open in my.ucf.edu – please provide feedback!  Assignments – Due 4/17/16 Chapter 10 Homework (Connect) – unlimited attempts Participation questions for Chapter 10 (Webcourses) – 1 attempt Definitions Quiz Block 3 (Webcourses) – 2 attempts  Due 4/21/16 Final Exam Review sessions - During normal class on 4/21/16 (I will go through study guide and Louis will do exam review). Accounting Research Survey – 3 points extra credit – available next week until Thursday April 21  Assignments – Due 4/24/16 Chapter 11 Homework (Connect) – unlimited attempts Participation questions for Chapter 11 (Webcourses) – 1 attempt SEC Annual Report Assignment (Webcourses) – 1 attempt. Please wait until we have started chapter 11 to work on this assignment.  Tutoring Lab hours - CBA Tutoring Lab Rm #355 open thru Monday, 4/25/16 only.  Learn Smart Extra Credit for Block 3 - Chapters 8 – 11 closes on April 27 th at 11:59 PM.  Final Exam 4/28 – 4/29

4. 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

5. Questions to be Answered Overall - How has society shaped today’s financial reporting? 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 actual cash flow during an accounting period?  Preparation of Cash Flow Indirect Method – Start with Net Income  Operating  Investing  Financing

8. Terminology

9. 2 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 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. Indirect Measurement: https://www.youtube.com/watch?v=F6fltSqImFMhttps://www.youtube.com/watch?v=F6fltSqImFM

10. 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) 11-10

11. 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

12. 12 Apple Computers

14. Apple (Operating)

15. Apple (Investing & Financing)

16. JC Penney

20. Noncash Activities – (Informational Purposes Only) oTransactions that don’t increase or decrease cash oInvolves investing (Long-term assets) and/or financing activities (Liabilities or stockholders’ equity) – for our class oExcluded from the statement of cash flows oReported in a separate note to the financial statements as noncash activities 1.Purchase of long-term assets by issuing debt 2.Purchase of long-term assets by issuing stock 3.Exchange of long-term assets 4.Conversion of bonds payable into common stock. Examples: 11-20

21. Part B Preparing the Statement of Cash Flows 11-21

22. Indirect Method – Order of Preparation Order of preparation 1. Operating Section 1. Calculate Adjusted Net Income 2. Calculate Cash changes in Current Asset and Current Liabilities Accounts 2. Investing Section Show cash changes to Long-term Asset accounts 3. Financing Section  Show cash changes to Long-term Liabilities and Stockholders’ Equity

23. Operating Activities  Steps: Two separate sets of calculations in the operating section: 1. Part A - Calculate Adjusted Net Income 1. Net Income – The operating section starts with Net Income. 2. Add back any Non-cash Expenses. 1. Since Net income includes some expenses that are not cash (i.e. depreciation), these Non-cash Expenses are reversed to negate their impact to Net Income. 3. Reverse the effects Gains and Losses on sales of long-term assets 1. The full value of the cash received for the sale of long-term assets will be shown in the investing section. 2. Part B – Indirect cash changes to current assets and current liabilities: 1. Compare the changes in account balance over the prior two years. Each change will indirectly represent either a source or use of cash. 1. Increase in the Inventory account represents a use of cash. 23

24. Part A, Step 1 – Start with Net Income

25. Part A, Step 2 – Add Back Noncash Expenses Depreciation and/or amortization are non-cash expenses that have been deducted from revenue to calculate Net Income. 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. 25 $ Cash $Benefit Time Periods Cash usage incurred to purchase an asset in time period 0

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

27. Part A, Step 3 - Gains and Losses on Sale of Plant Assets The full value of the cash received for the sale of plant assets will be shown in the investing section of the cash flow. Therefore, any gains or losses contained in the income statement (operating section of the cash flow) based on the sale of assets will be counting the cash twice (sort of…) on the cash flow statement, so the effect of the gains/losses needs to be removed from the income statement.  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. 27

28. Where is the cash?

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

30. Part B - 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

31. Increase in Current Assets  It takes Cash to Acquire Current Assets – Decreases Cash 31

32. Decrease to Current Assets  A decrease in another current asset increases cash 32

33. Increases in Current Liabilities  Increases in current liabilities increase cash 33

34. Decreases in Current Liabilities  Payment of a current liability decreases cash 34

35. Cash Flow Template: Operating 35 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

36. Another way to look at this aspect of the Indirect Operating Section - Through AE __Assets=Liabilities+SH Equity Cash Impact

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 1.) adjusted net income and changes in 2.) 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