1. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater Statement of Cash Flows Statement of Cash Flows Chapter 21

2. Learning Objective 1 Understanding the purpose of a statement of cash flows © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

3. Comparative Balance Sheet Shows figures from two separate years side-by-side Good to compare increases/decreases in assets and liabilities © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

4. Statement of Cash Flows Financial report that summarizes the sources and uses of cash by a company during an accounting period Helps readers evaluate past performance Provides a basis for predicting future cash flows © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

5. Statement of Cash Flows Three main sections: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

6. Operating Activities Activities related to conducting the business for which the enterprise was established Cash inflows ◦ Cash collected from customers for goods/services ◦ Interest/dividends received Cash outflows ◦ Paying for Merchandise Inventory, taxes, interest ◦ Paying operating expenses © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

7. Investing Activities Purchase or sale of plant and equipment Buying stocks and bonds of other companies Making loans to others © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

8. Financing Activities Activities related to raising money from investors and creditors ◦ Issuing stock and bonds ◦ Repurchasing the company’s stock ◦ Paying cash dividends © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

9. Noncash Investing and Financing Activities Example: Issuing shares of stock in exchange for assets other than cash Listed in a footnote or separate schedule to statement of cash flows © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

10. Exercise 21-4 OA IA FA OA NC a.Sold merchandise to customers b.Purchase of equipment c.Buy stocks of another corporation d.Pay dividends to stockholders e.Paid salaries to employees f.Issue stock in exchange for equipment © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-1

11. Learning Objective 2 Preparing the operating activities section of the statement of cash flows using the indirect method © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

12. Preparing the Statement Two methods of preparing cash flow from operating activities: Direct Indirect © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

13. Indirect Method Converts accrual basis net income figure on the income statement from the accrual basis to the cash basis © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

14. Indirect Method Begin with net income reported on income statement. Add any noncash expenses or any losses. Deduct any noncash gains or revenues. Adjust for changes in current operating assets and liabilities. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

15. Indirect Method Adjusting for changes in current assets and liabilities: Add to net income if this account has: Deduct from net income if this account has: Current AssetsDecreasedIncreased Current Liabilities IncreasedDecreased © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

16. Exercise 21-2 Cash flow from operating activities: Net Income$17,000 Add (deduct) items to convert net income from accrual basis to cash basis: Depreciation Expense4,000 Increase in Accounts Receivable (2,000) Decrease in Prepaid Insurance50 Increase in Accounts Payable600 Increase in Salaries Payable1,000 Net cash provided by operating activities$20,650 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-2

17. Learning Objective 3 Preparing the operating activities section of the statement of cash flows using the direct method © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

18. Direct Method Lists major groups of operating cash receipts and cash payments Cash receipts are computed first Sales figure on income statement is not the same as total cash received Easier to understand by end users © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

19. Cash Received from Customers Sales © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Decrease in Accounts Receivable - Increase in Accounts Receivable LO-3

20. Cash Paid for Inventory Cost of Goods Sold © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Increase in Inventory - Decrease in Inventory + Decrease in Payables - Increase in Payables LO-3

21. Cash Paid for Other Expenses Expense © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Increase in Prepaid Asset - Decrease in Prepaid Asset + Decrease in Accrued Payables - Increase in Accrued Payables LO-3

22. Exercise 21-3 Cash Received from Customers Sales © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Decrease in Accounts Receivable - Increase in Accounts Receivable $9,000 – 600 = $8,400 LO-3

23. Exercise 21-3 Cash Paid for Inventory Cost of Goods Sold $4,400 +500 -100 $4,800 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Increase in Inventory - Decrease in Inventory + Decrease in Payables - Increase in Payables LO-3

24. Exercise 21-3 Cash Paid for Salaries Expense $1,600 +200 $1,800 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Increase in Prepaid Asset - Decrease in Prepaid Asset + Decrease in Accrued Payables - Increase in Accrued Payables

25. Exercise 21-3 Cash Paid for Insurance Expense $800 - 150 $650 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater + Increase in Prepaid Asset - Decrease in Prepaid Asset + Decrease in Accrued Payables - Increase in Accrued Payables

26. Exercise 21-3 Net Cash Flows from Operating Activities Cash Received from Customers$8,400 Cash Paid for Inventory$4,800 Cash Paid for Salaries1,800 Cash Paid for Insurance650 Cash Paid for Other Expenses1,000 Total Cash Paid for Operating Activities8,250 Net Cash Flows from Operating Activities$150 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

27. Problem 21B-1 – Cash Flows from Operating Activities Net Income $3,640 Add (deduct) items to convert net income from accrual basis to cash basis: Depreciation Expense, Equipment 800 Depreciation Expense, Machinery 500 Decrease in Accounts Receivable 230 Increase in Inventory (770) Increase in Short-term Notes Payable 100 Decrease in Accounts Payable (50) Net Cash Flows from Operating Activities $4,450 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

28. Problem 21B-1 – Cash Flows from Investing Activities Purchase of Equipment (4,530 – 800 + x = 6,030)($2,300) Purchase of Machinery (3,030 – 500 + x = 4,830)(2,300) Purchase of Land (1,180 – 480)(700) Net Cash Flows from Investing Activities($5,300) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

29. Problem 21B-1 – Cash Flows from Financing Activities Issuance of Mortgage Note$350 Issuance of Common Stock2,000 Net Cash Flows from Financing Activities$2,350 © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-3

30. Learning Objective 4 Preparing a statement of cash flows © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

31. Cash Flows From Investing Activities Activities reported in this section: Sale or purchase of equipment Sale or purchase of land Cash spent to invest in other companies’ stock and bonds Cash received from sales of stock or bond investments Loaning cash to borrowers Purchase of plant © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

32. Cash Flows From Financing Activities Activities reported in this section: Issuance of long-term notes and bonds Issuance of common stock Purchasing and reissuing treasury stock Payment of cash dividends Retirement of bonds © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO-4

33. Problem 21B-2 – Statement of Cash Flows (Direct Method) © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater LO- 1,3,4

34. © 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater End of Chapter 21