1. Prepared by Debby Bloom-Hill CMA, CFM

2. Slide 13-2 CHAPTER 13 Statement of Cash Flows

3. Learning objective 1: Explain the need for the statement of cash flows Slide 13-3 Need for a Statement of Cash Flows  Stakeholders want to know how a company generates and spends cash  Can the company  Generate enough cash to pay its wages and bills, including debt payments  Generate cash in order to earn a reasonable return and pay dividends  Generate enough cash to avoid bankruptcy

4. Learning objective 1: Explain the need for the statement of cash flows Slide 13-4 Need for a Statement of Cash Flows  Cash flow is not the same as net income  Under GAAP, income is calculated using the accrual method  The income statement does little to inform managers and other company stakeholders of the sources and uses of cash

5. Learning objective 1: Explain the need for the statement of cash flows Slide 13-5 Need for a Statement of Cash Flows  For the purposes of the cash flow statement, cash includes both cash and cash equivalents  Cash equivalents are short term investments that can be readily converted into cash  Examples include 90 day US Treasury Bills and money market funds

6. Learning objective 2: Identify the three types of business activities presented in a statement of cash flows Slide 13-6 Types of Business Activities  Operating activities  Cash flows related to production and delivery of goods and services  Reflect the day to day profit oriented activities of a business  Principal cash inflows are cash sales and collection of accounts receivable  Major sources of cash outflows include payments to suppliers, employees and taxing authorities

7. Slide 13-7 Examples of Operating Activities Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

8. Slide 13-8 Types of Business Activities  Investing activities  Cash flows related to buying and selling of long-term assets  Examples include collections from long term loans, collections from the sale of equipment no longer in use, payments to buy securities of other companies, buying a building and buying a business

9. Examples of Investing Activities Learning objective 2: Identify the three types of business activities presented in a statement of cash flows Slide 13-9

10. Slide 13-10 Types of Business Activities  Financing activities  Cash inflows related to issuing stock and issuing long-term debt  Cash outflows related to repurchasing stock, paying off loans and making dividend payments Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

11. Slide 13-11 Examples of Financing Activities Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

12. Slide 13-12 Which of the following would be a cash outflow from operating activities? a.Acquisition of operating equipment b.Retirement of bonds c.Collection of accounts receivable d.Payments to suppliers for raw materials Answer: d Payments to suppliers for raw materials Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

13. Slide 13-13 Which of the following would be a cash outflow from investing activities? a.Payments to suppliers b.Payments to employees c.Purchase of land d.Payment of dividends Answer: c Purchase of land Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

14. Slide 13-14 Which of the following would be a cash outflow from financing activities? a.Payment of dividends b.Payments to taxing authorities c.Purchase of land d.Cash sales Answer: a Payment of dividends Learning objective 2: Identify the three types of business activities presented in a statement of cash flows

15. Slide 13-15 Statement of Cash Flows General Format Learning objective 3: Prepare a statement of cash flows using the direct method

16. Slide 13-16 Preparing the Statement of Cash Flows  Two acceptable methods  Direct method  Like an income statement prepared using the cash basis  Indirect method  Reconciles net income to cash flow from operations  Preferable under GAAP  Most used in financial statements Learning objective 3: Prepare a statement of cash flows using the direct method

17. Slide 13-17 Preparing the Statement of Cash Flows  Cash flows from operating activities  Cash collected on sale of merchandise  Cash received (paid) related to interest income (expense)  Cash received related to dividend income  Cash paid to purchase merchandise  Cash paid for general and administrative expenses  Cash paid for income taxes Learning objective 3: Prepare a statement of cash flows using the direct method

18. Slide 13-18 Preparing the Statement of Cash Flows  Cash flows from investing activities  Cash received on the sale of a machine no longer in use  Cash paid to buy a machine  Cash paid to buy a building  Cash received from selling a building  Cash paid to buy a business Learning objective 3: Prepare a statement of cash flows using the direct method

19. Slide 13-19 Preparing the Statement of Cash Flows  Cash flows from financing activities  Cash received from selling bonds  Cash received from using a line of credit  Cash received from issuing common stock  Cash paid to retire long term debt  Cash dividends paid Learning objective 3: Prepare a statement of cash flows using the direct method

20. Slide 13-20 Preparing the Statement of Cash Flows  Direct method  Lists specific cash inflows and outflows from operating activities  Similar to cash-basis income statement within the operating activities section  FASB requires separate schedule to reconcile cash flows from operating activities and net income Learning objective 3: Prepare a statement of cash flows using the direct method

21. Slide 13-21 Cash Flows from Operating Activities (Direct Method)  To determine cash flows using the direct method  Analyze all balance sheet accounts, other than cash, to determine how their changes were affected by cash flows  This analysis will involve information from the income statement Learning objective 3: Prepare a statement of cash flows using the direct method

22. Slide 13-22 Cash Flows from Operating Activities (Direct Method)  Current asset and current liability accounts  The first account is cash received from customers  Solving the following equation yields cash receipts of $10,004,825 Learning objective 3: Prepare a statement of cash flows using the direct method Beginning balance receivables$879,053 Plus sales10,548,640 Less cash collected? Equals ending balance receivables$1,422,868

23. Slide 13-23 Cash Flows from Operating Activities (Direct Method)  Current asset and current liability accounts  The next item is cost of merchandise sold  The following formula yields purchases of $8,286,993 Learning objective 3: Prepare a statement of cash flows using the direct method Beginning inventory$988,935 Plus purchases? Less cost of goods sold7,911,480 Equals ending balance inventory$1,364,448

24. Slide 13-24 Cash Flows from Operating Activities (Direct Method)  Current asset and current liability accounts  Purchases of $8,286,993 are used in the next calculation, which solves for cash payments for purchases of inventory of $8,202,703 Learning objective 3: Prepare a statement of cash flows using the direct method Beginning balance accounts payable$575,000 Plus purchases8,286,993 Less cash paid for inventory purchases? Equals ending balance accounts payable$659,290

25. Slide 13-25 Cash Flows from Operating Activities (Direct Method)  Analyze other current asset and liability accounts  Use prepaid insurance and insurance expense to solve for cash payments for insurance  Use accrued wages and salaries and wages and salaries expense to solve for cash payments for wages and salaries  Use income taxes payable and income tax expense to solve for cash payments for income taxes Learning objective 3: Prepare a statement of cash flows using the direct method

26. Slide 13-26 Cash Flows from Operating Activities (Direct Method)  Long term asset accounts  Use accumulated depreciation, depreciation expense, book value of equipment sold, and loss on sale to solve for  Cash proceeds related to sale of equipment, and  Cash paid for purchases of equipment Learning objective 3: Prepare a statement of cash flows using the direct method

27. Slide 13-27 Cash Flows from Operating Activities (Direct Method)  Long term liabilities and stockholders’ equity  Cash paid to reduce debt (or cash proceeds from borrowing) is the difference between the beginning and ending balance of long term debt  Use beginning and ending retained earnings plus net income to solve for cash payments for dividends Learning objective 3: Prepare a statement of cash flows using the direct method

28. Operating Activities – Direct Method

29. Slide 13-29Learning objective 3: Prepare a statement of cash flows using the direct method RS Inc. has the following information:  Taxes payable 12/31/2013: $171,000  Income tax expense 2014: $585,000  Taxes payable 12/31/2014: $150,000 Calculate cash paid for taxes in 2014 Answer: $171,000 + ? - $150,000 = $585,000 ? = 564,000

30.  The indirect method is much more common  The two methods differ only in terms of the presentation of cash flows related to operating activities  There are no differences for inventing activities and financing activities Preparing the Statement of Cash Flows (Indirect Method)

31.  5 step approach to calculate cash flows from operating activities – indirect 1.Start with net income 2.Add non-cash expenses such as depreciation and amortization 3.Subtract gains and add back losses 4.Subtract (add) increases (decreases) in current assets other than cash 5.Add (subtract) increases (decreases) in current liabilities Preparing the Statement of Cash Flows (Indirect Method)

32.  The operating activities section is a reconciliation of net income to cash flows from operating activities  Current assets  Increases in current assets indicate we must reduce income to convert to cash basis  Decreases indicate we must increase income to convert to cash basis Preparing the Statement of Cash Flows (Indirect Method)

33.  Current liabilities  Increases in current liabilities indicate we must increase income to convert to cash basis  Decreases in current liabilities indicate we must reduce income to convert to cash basis Preparing the Statement of Cash Flows (Indirect Method)

34. Slide 13-34 Indirect Method part 1 Learning objective 4: Prepare a statement of cash flows using the indirect method

35. Slide 13-35 Indirect Method part 2 Learning objective 4: Prepare a statement of cash flows using the indirect method

36. Slide 13-36 Using the indirect method, changes in current assets other than cash and current liabilities are used to adjust net income to determine: a.Income from operations b.Net cash from investing activities c.Net cash provided by operating activities d.None of the above Answer: c Net cash provided by operating activities Learning objective 4: Prepare a statement of cash flows using the indirect method

37. Learning objective 5: Interpret information in the statement of cash flows Slide 13-37 Interpreting the Statement of Cash Flows  In general, the most important part is the cash flows from operating activities  Unless a company is able to generate cash from its core operations, it is unlikely to succeed  If cash flows in this section are low, this implies that a company must offset them by changes in investing and financing decisions

38. Slide 13-38 Statement of Cash Flows Learning objective 5: Interpret information in the statement of cash flows

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