1. Purpose of the Statement of Cash Flows  Explains changes in cash over a period of time  Summarizes cash inflows and outflows from: Operating Activities Financing Activities Investing Activities LO1

2. Cash Equivalents  Readily convertible to cash  Little risk of price change  Original maturity to investor of three months or less Examples:  Commercial paper  U.S. Treasury bills  Certain money market funds LO2

3. Statement of Cash Flows Format Classified by: Operating activities Investing activities Financing activities outflows inflows Cash Increase or decrease in cash and cash equivalents + Beginning Cash and Cash Equivalents = Ending Cash and Cash Equivalents = LO3

4. Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $ xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Statement of Cash Flows Format from balance sheets

5. Cash transactions concerned with acquiring and selling products and services Payment of taxes Payment of wages Operating Activities Collection of customer accounts Payment to suppliers for inventory

6. Cash transactions concerned with acquiring and disposing of long- term assets Purchase/sale of another company Investing Activities Sale of property, plant and equipment Capital expenditures

7. Cash transactions concerned with the raising and repayment of funds in the form of debt and equity Issuance/retirement of bonds Financing Activities Issuance/repurchase of stock Payment of dividends Issuance/repayment of bank note

8. Categorizing Cash Flow Activities Current assets and current liabilities Operating Activities Long-term liabilities or stockholders’ equity Financing Activities Long-term assets Investing Activities

9. Noncash Investing and Financing Activities Disclose important financing and investing activities which do not require cash Exchange stock for assets Buy assets through debt financing from supplier

10. Methods to Report Cash from Operating Activities  Direct Method Reports major classes of gross cash receipts and cash payments The amount of cash provided by operating activities is the same under both methods  Indirect Method Adjusts net income to remove the effect of all accruals and deferrals LO4

11. Statement of Cash Flows Format Cash flows from operating activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by operating activities $xxx Cash flows from investing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by investing activities xxx Cash flows from financing activities: Inflows$ xxx Outflows (xxx) Net cash provided (used) by financing activities xxx Net increase (decrease) in cash and cash equivalents $xxx Cash and cash equivalents at beginning of year xxx Cash and cash equivalents at end of year $xxx Only section of statement that differs in form between direct and indirect method (net cash flow total is the same)

12. Preparing the Statement Cash Flows: Direct Method  Step 1: Set up 3 schedules with the following headings: Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities  Step 2: Determine the cash flows from operating activities  Step 3: Determine the cash flows from investing activities  Step 4: Determine the cash flows from financing activities LO5

13. Accounts Receivable, January 1 $ 57,000 + Sales revenue 670,000 -Cash collections ( ?????) = Accounts Receivable, Dec 31 $ 63,000 - Cash collections ????? Direct Method Operating Activities Consider each of the items on the Income Statement and any related current assets or liabilities from the Balance Sheet: From Balance Sheet

14. Cash collections $664,000 Direct Method Operating Activities Accounts Receivable, Jan. 1 $ 57,000 + Sales on account 670,000 - Accounts Receivable, Dec 31 ( 63,000)

15. Inventory, Jan. 1 $ 92,000 - Inventory, Dec. 31 84,000 From Balance Sheet + Purchases on account ???? Direct Method Operating Activities = Cost of goods sold $ 390,000

16. Inventory, Jan. 1 $ 92,000 - Cost of Goods Sold (390,000) - Inventory, Dec 31 (84,000) = Purchases on account $ 382,000 Direct Method Operating Activities

17. Accounts Payable, Jan 1 $ 31,000 - Accounts Payable, Dec 31 38,000 Direct Method Operating Activities + Purchases 382,000 = Cash payments for Purchases $ 375,000

18. Direct Method Operating Activities There is no effect on cash flow from depreciation. Review entries recorded during period: Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenues - Expenses = Net Equity Income Accumulated Depreciation Depreciation Expense (40,000) (40,000) (40,000) (40,000)

19. From Balance Sheet Prepaid Insurance, Jan 1 $18,000 + Cash payments ????? Direct Method Operating Activities -Insurance Expense (12,000) = Prepaid Insurance, Dec 31 $12,000

20. Prepaid Insurance, Jan 1 $18,000 - Insurance Expense 12,000 - Prepaid Insurance, Dec 31 12,000 Direct Method Operating Activities = Cash payments for Insurance $ 6,000

21. Cash Flows from Operating Activities Net Cash Inflows from Operating Activities $ 174,000 375,000 Inventory purchases 62,000 Salaries and wages 6,000 Insurance 15,000 Interest 47,000 Taxes Cash receipts from:Cash payments for: Sales on account 664,000 Interest 15,000 Schedule of Cash Flows from Operating Activities

22. Preparing the Statement of Cash Flows: Direct Method  Step 3: Determine the cash flows from investing activities

23. From Balance Sheet LT Investments, Jan 1 $ 90,000 + LT Investments purchased for cash ????? Direct Method Investing Activities - LT Investments sold ( 0) = LT Investments, Dec 31 $120,000

24. LT Investment, Jan 1 $ 90,000 - LT Investments sold 0 - LT Investments, Dec 31 120,000 Direct Method Investing Activities = Cash payments for LT Investments $ 30,000

25. Direct Method Investing Activities Review entries recorded during period: Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenues - Expenses = Net Equity Income Land = Notes Payable 50,000 No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the statement of cash flows.

26. From Balance Sheet Property and Equipment, Jan 1 $280,000 + Property and Equipment purchased 75,000 - Property and Equipment sold ????? Direct Method Investing Activities =Property and Equipment, Dec 31 $320,000

27. Property and Equipment, Jan 1 $280,000 +Property and Equipment purchased 75,000 - Property and Equipment, Dec 31 (320,000) Direct Method Investing Activities = Property and Equipment Sold $ 35,000

28. From Balance Sheet Accumulated Depreciation, Jan 1 $ 75,000 + Depreciation Expense 40,000 - Accumulated Depreciation on assets sold ????? Direct Method Investing Activities = Accumulated Depreciation, Dec 31 $100,000

29. Accumulated Depreciation, Jan 1 $ 75,000 + Depreciation Expense 40,000 - Accumulated Depreciation, Dec 31 (100,000) Direct Method Investing Activities = Accumulated Depreciation on Equipment Sold $ 15,000

30. Cash Flows from Investing Activities Net Cash Outflows from Investing Activities $80,000 30,000 Purchase of investments 75,000 Purchase of property and equipment Cash receipts from:Cash payments for: Sale of machine 25,000 Schedule of Cash Flows from Investing Activities

31. Preparing the Statement of Cash Flows: Direct Method  Step 4: Determine the cash flows from financing activities

32. Direct Method – Financing Activities Review entries recorded during period: Balance Sheet Income Statement Assets = Liabilities + Stockholders’ Revenues - Expenses = Net Equity Income Land = Notes Payable 50,000 No cash was involved in this transaction so it should be reported in a separate schedule instead of directly on the statement of cash flows.

33. From Balance Sheet Bonds Payable, Jan 1 $260,000 - Bonds Payable Retired ????? Direct Method Financing Activities = Bonds Payable, Dec 31 $200,000

34. Bonds Payable, Jan 1 $ 200,000 - Bonds Payable, Dec 31 (260,000) Direct Method Financing Activities = Bonds Payable Retired $ 60,000

35. From Balance Sheet Capital Stock, Jan 1 $ 75,000 + Capital Stock Sold ????? Direct Method Financing Activities = Capital Stock, Dec 31 $100,000

36. Capital Stock, Jan 1 $ 75,000 - Capital Stock, Dec 31 (100,000) Direct Method Financing Activities = Capital Stock Sold $ 25,000

37. From Balance Sheet Retained Earnings, Jan 1 $193,000 + Net income 120,000 - Cash Dividends ????? Direct Method Financing Activities =Retained Earnings, Dec 31 $246,000

38. Retained Earnings, Jan 1 $193,000 + Net income 120,000 - Retained Earnings, Dec 31 (246,000) Direct Method Financing Activities = Cash Dividends $ 67,000

39. Cash Flows from Financing Activities Net Cash Outflows from Financing Activities $105,000 63,000 Retirement of bonds 67,000 Payment of cash dividends Cash receipts from:Cash payments for: Issuance of stock 25,000 Schedule of Cash Flows from Financing Activities

40. Indirect Method Operating Activities Income Statement Cash Flows from Operating Activities Conversion of accrual to cash basis LO6

41. Bal. Jan. 1 57,000 Bal. Dec. 31 63,000 Accounts Receivable + Net increase 6,000 Indirect Method – Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease $6,000

42. Bal. Jan. 1 92,000 Bal. Dec. 31 84,000 Inventory - Net decrease 8,000 Indirect Method Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase $8,000

43. Bal. Jan. 1 $ 31,000 Bal. Dec. 31 $ 38,000 Accounts Payable +Net increase 7,000 Indirect Method – Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Increase $7,000

44. Bal. Jan. 1 $ 9,000 Bal. Dec. 31 $ 7,000 Salaries and Wages Payable - Net decrease 2,000 Indirect Method Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Increase $2,000

45. Bal. Jan. 1 $18,000 Bal. Dec. 31 $12,000 Prepaid Insurance - Net decrease 6,000 Indirect Method Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Decrease in prepaid insurance 6,000 Decrease $6,000

46. Bal. Jan. 1 $5,000 Bal. Dec. 31 $8,000 Income Taxes Payable +Net increase 3,000 Indirect Method – Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Decrease in prepaid insurance 6,000 Increase in income taxes payable 3,000 Increase $3,000

47. Indirect Method Operating Activities Net cash flows from operating activities: Net income xx,xxx Adjustments to reconcile net income to net cash: Increase in accounts receivable (6,000) Decrease in inventory 8,000 Increase in accounts payable 7,000 Decrease in salaries and wages payable (2,000) Decrease in prepaid insurance 6,000 Increase in income taxes payable 3,000 Gain on sale of machine (5,000) Depreciation expense 40,000 Loss on retirement of bonds 3,000 Add back noncash expense Gain is not part of operating activities Report entire outflow as a financing activity

48. Cash Flow Adequacy  Measures company’s ability to meet principal and interest obligations  Creditors concerned with cash available to repay debts after company has replaced and updated its existing base of long-term assets Cash Flow from Operating Activities – Capital Expenditures Average Amount of Debt Maturing over Next Five Years LO7

49. Appendix Accounting Tools: A Work-Sheet Approach to the Statement of Cash Flows

50. Indirect Method: Using a Work Sheet Enter account balances LO8 12/31/12 12/31/11

51. Indirect Method: Using a Work Sheet 12/31/12 12/31/11 Record investing and financing activities

52. Indirect Method: Using a Work Sheet Enter net income 12/31/12 12/31/11

53. Indirect Method: Using a Work Sheet Enter noncash revenues or expenses 12/31/12 12/31/11

54. Indirect Method: Using a Work Sheet Extend current assets and current liabilities 12/31/12 12/31/11

55. Indirect Method: Using a Work Sheet Total columns 12/31/12 12/31/11

56. Indirect Method: Using a Work Sheet Determine net cash inflow (outflow) 12/31/12 12/31/11

57. End of Chapter 12