1. Financial Accounting:
Copyright 2004 The McGraw-Hill Companies, Inc. Permission required for reproduction or display.
PowerPoint Presentation Materials
For
Financial Accounting:
A New Perspective by
Paul Solomon

2. Statement of Cash Flows
CHAPTER 8
Statement of Cash Flows

3. PERFORMANCE OBJECTIVES
PO1: Explain purposes of budgets; prepare simple operating budget & simple cash budget
PO22: Prepare bank reconciliation & adjustments

4. USER FOCUS What to look for when analyzing statement of cash flows
How to prepare bank reconciliation

5. INSIGHTS
How cash flow provides more complete financial analysis

6. TOPICS Managing cash effectively: SCORE
Significance of cash in business decision making
How is cash managed?
What is statement of cash flows?
What are parts of statement of cash flows:
CMU cash flow statement

7. TOPICS (cont.) How is cash flow from operating activities reported?
Corporate examples of statements of cash flows

8. MANAGING CASH Susan’s business (CMU) 8 months old SCORE
Business increasing but still vulnerable
SCORE
Service Corps of Retired Executives
Volunteer organization sponsored by Small Business Administration (SBA) to counsel
Poor cash management leads to business failures

9. GUIDELINES FOR MANAGING CASH
Always ask: “How will this decision affect cash?
Plan use of cash with cash budget
Use cash budget
Spend cash only when you must
Expect cash inflow to be slow

10. SIGNIFICANCE OF CASH Cash is financial measure
Users can easily understand meaning of change in cash
Financial experts recognize importance of cash
Cash measures relative liquidity of company’s resources

11. HOW IS CASH MANAGED? CashBB + Cash Receipts – Cash payments = CashEB
Cash budgets
Schedule of expected cash receipts & payments
Reflects this equation
CashBB + Cash Receipts – Cash payments = CashEB
*BB is Beginning Balance
EB is Ending Balance

12. CASH BUDGET Cash balance 1/1 + Collections Owner contributions
Borrowing
Savings interest
$62,000
30,000
5,000
500 $0
97,500
- Purchases
Rent
Salaries & withdrawal
Miscellaneous
Cash balance 12/31
56,000
11,000
20,000
6,500
93,500
$4,000

13. CASH BUDGET: Cash Flow from Operating Activities
Collections from customers
Cash paid for inventory
Cash paid for rent
Cash paid for salary
Miscellaneous cash expenses
Interest received
Net cash provided by operations
$62,000
<40,000>
<11,000>
<10,000>
<6,500>
500
$<5,000>

14. CASH BUDGET: Cash Flow from Investing Activities
Acquisition of equipment
Net cash used in investing activities
$<16,000>

15. CASH BUDGET: Cash Flow from Financing Activities
Cash contribution of owner
Borrowing from line of credit
Owner withdrawals
Net cash provided by financing
$30,000
5,000
<10,000>
$25,000

16. CASH BUDGET: Cash Flows Budget
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net increase in cash
Cash at beginning of year
Cash at end of year
$<5,000>
<16,000>
25,000
4,000
$4,000

17. INTERNAL CONTROL OF CASH
Process to reduce inaccuracy in accounting information system
Discourages unethical behavior

18. INTERNAL CONTROL: CASH Key Features
Separate handling, accounting for cash
List, deposit cash receipts
Owner makes all cash payments
Reconcile bank statement

19. CASH BUDGET: Projected & Actual Operating Cash Flows
Actual Projected
Collected from customers
Cash paid for inventory
Cash paid for rent
Cash paid for salary
Cash paid for miscellaneous
Interest received
Interest paid
Net cash provided (used)
$84,200
<27,000>
<11,000>
<8,000>
<4,250>
275
<200>
$34,025
$62,000
<40,000>
<10,000>
<6,500>
500
$<5,000>

20. CASH BUDGET: Projected & Actual Investing Cash Flows
Actual Projected
Proceeds, sale equipment
Payment security deposit
Acquisition of equipment
Net cash used in investing activities
$1,350
<2,000>
<17,000>
$<17,650> $0
<16,000>
$<16,000>

21. CASH BUDGET: Projected & Actual Financing Cash Flows
Actual Projected
Owner Contributions
Proceeds from credit line
Repayment of credit line
Withdrawals by owner
Net cash provided by financing activities
$30,000
5,000
<5,000>
<8,100>
$21,900 NA
<10,000>
$25,000

22. CASH BUDGET: Projected & Actual Cash Flows
Actual Projected
Net cash provided (used) by operations
Net cash used: investing
Net cash provided: financing
Net increase in cash
Cash 1/1
Cash 12/31
$34,025
<17,650>
21,900
38,275
$38,275
$<5,000>
<16,000>
25,000
4,000
$4,000

23. BANK RECONCILIATION Schedule to show cash on hand Match
Balance per bank
Balance per books

24. WHAT IS STATEMENT OF CASH FLOWS?
Reports past cash flows
Helps users evaluate
Ability to produce future cash flows
Ability to meet obligations, dividends, finance growth internally
Need external financing
Differences between net income & cash flows
Cash, noncash aspects financing, investing

25. WHAT ARE CASH FLOWS FROM OPERATIONS?
Cash receipts
From sale of goods, services
From loan, investment income
Cash payments
To suppliers for inventory, expenses
To employees
To government (taxes)
To lenders

26. CASH FLOWS FROM OPERATIONS
Collected from customers
Cash paid for inventory
Cash paid for rent
Cash paid for salary
Cash paid for miscellaneous
Interest received
Interest paid
Net cash provided
$84,200
<27,000>
<11,000>
<8,000>
<4,250>
275
<200>
$34,025

27. WHAT ARE CASH FLOWS FROM INVESTING?
Cash receipts
From sales property, plant, equipment
From sale business unit
From sale investments
From collection of loans
Cash payments
To acquire property, plant, equipment
To acquire business, investments
To make loans

28. CASH FLOWS FROM INVESTING
Proceeds, sale equipment
Payment security deposit
Acquisition of equipment
Net cash used in investing activities
$1,350
<2,000>
<17,000>
$<17,650>

29. WHAT ARE CASH FLOWS FROM FINANCING?
Cash receipts
From sale capital stock
From issuance bonds, mortgages, notes, other borrowings
Cash payments
To acquire treasury stock
To pay dividends
To repay borrowings

30. CASH FLOWS FROM FINANCING
Owner Contributions
Proceeds from credit line
Repayment of credit line
Withdrawals by owner
Net cash provided by financing activities
$30,000
5,000
<5,000>
<8,100>
$21,900

31. STATEMENT OF CASH FLOWS
Net cash provided by operations
Net cash used: investing
Net cash provided: financing
Net increase in cash
Cash 1/1
Cash 12/31
$34,025
<17,650>
21,900
38,275
$38,275

32. NONCASH INVESTING, FINANCING ACTIVITIES: Example 1
By direct exchange, stock investment for equipment
Account
Equipment
Investment
Assets =
200,000
<200,000>
Liabilities +
Equity
Activity
Invest

33. NONCASH INVESTING, FINANCING ACTIVITIES: Example 2
By direct exchange, capital stock to pay liability
Account
Capital
stock
Notes
payable
Assets =
Liabilities +
<100,000>
Equity
100,000
Activity
Finance

34. NONCASH INVESTING, FINANCING ACTIVITIES: Example 3
By direct exchange, land for note payable
Account
Land
Notes
payable
Assets =
50,000
Liabilities +
Equity
Activity
Invest
Finance

35. CLASSIFYING TRANSACTIONS 1
Description
Activity E C2
F&K1 G H
Paid security deposit
Paid for equipment
Borrowed, repaid money
Acquired inventory
Acquired van
Operating
Investing
Financing

36. CLASSIFYING TRANSACTIONS 2
Description
Activity I J1 J2 L
Receiving cash advances
Paid for inventory
Refinance accounts payable with note payable
Direct exchange
Operating
Investing
Financing

37. CLASSIFYING TRANSACTIONS 3
Description
Activity M N O1
Cash sales goods, services
Credit sales goods, services
Interest revenue earned
Operating

38. CLASSIFYING TRANSACTIONS 4
Description
Activity P Q1 R S K2
Paid rent
Record depreciation
Cash sale equipment
Paid salaries
Paid interest expense
Operating
Investing

39. CLASSIFYING TRANSACTIONS 5
Description
Activity T U V W
Paid expenses NA
Collected cash from accounts receivable
Owner cash withdrawal
Operating
Financing

40. CLASSIFYING TRANSACTIONS 6
Description
Activity A2
O2, X, Y, Q2, Z
Owner contribution of inventory
Various revenue & expense accounts NA
Operating

41. REPORTING CASH FLOW FROM OPERATING ACTIVITIES
Direct method
Converts accrual to cash for revenues & expenses
Indirect method
Adjusts net income for revenues, expenses, gains, losses that do not affect cash

42. CASH FLOW OPERATIONS: Direct Method
Net income
+ Expenses, losses not using cash
Decreases in noncash current assets
Increases in noncash current liabilities
- Revenues, gains not providing cash
Increases in noncash current assets
Decreases in noncash current liabilities
= Net cash provided by operations

43. CASH FLOW OPERATIONS: Direct Increases to Net Income
+ Depreciation, loss
Decrease in noncash current assets (none)
Increases in noncash current liabilities (accounts, salaries, note payable, deferred revenue)
$2,950
9,100
$30,000
$12,050
$42,050

44. CASH FLOW OPERATIONS: Decreases to Net Income
Subtotal of increases
Deduct from net income
Revenues, gains not providing cash
Increases noncash current assets
Decreases noncash current liabilities
Net cash from operations $0
8,025
$42,050
$34,025

45. USER FOCUS 8-1: Analyzing Cash Flows
What is amount of cash flow from operations?
Can company pay bills?
Are cash receipts larger than cash payments?
Mix of investing, financing related to strength of operations

46. INSIGHT: Cash Flow Information More Complete
Use in combination with ratios for measuring liquidity
Helps evaluate cash flows in seasonal business cycles

47. USER FOCUS 8-2: Bank Reconciliations
Balance per bank
Adjusted for transactions known to company
+ Deposits in transit
- (Outstanding checks + bank error)
Balance per books
Adjusted for transactions known to bank
+ (Recording error + cash collections by bank)
- Service charge

48. CMU Bank Reconciliation
Balance per bank
+ Deposits in transit
Outstanding checks
Adjusted balance per bank
Balance per books
+ Error
-(NSF check + service charge)
Adjusted balance per books
620
$28,425
1,885
<310>
$30,000
$30,350
270