1. Statement of Cash Flows Purpose of the Statement of Cash Flows Reports cash flows – Cash flows from operating activities – transactions that affect net income. – Cash flows from investing activities – transactions that affect noncurrent assets. – Cash flows from financing activities – transactions that affect equity and debt of the entity. 1

2. Noncash Investing and Financing Activities Operating Activities, Investing Activities & Financing Activities Cash and Cash Equivalents Direct Method – Cash Received from Customers – Interest and Dividends Received – Cash Paid for Merchandise – Cash Payments for Expenses 2

3. STATEMENT OF CASH FLOWS –Indirect Method Chapter 13 3

4. Net Income Cash Flows from Operating Activities Indirect Method Changes in current assets and current liabilities as shown on the following table. + Losses and - Gains + Noncash expenses such as depreciation and amortization. 4

5. Use this table when adjusting Net Income to Operating Cash Flows. Indirect Method 5

6. 6

7. Balance Sheet Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity – Noncash Assets Cash Liabilities Stockholders’Equity NoncashAssets The Indirect Method 7

8. Cash Liabilities Stockholders’Equity Balance Sheet NoncashAssets Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash = Liabilities + Stockholders’ Equity – Noncash Assets 23 1 The cash flows are determined by analyzing liabilities, stockholders’ equity, and noncash assets. The Indirect Method 8

9. Start with the accrual basis net income (shown in the income statement, the Retained Earnings account, or the statement of stockholders’ equity). The Indirect Method 9

10. Find the net income. ACCOUNT Retained Earnings ACCOUNT NO. 32 Balance Date Item Debit Credit Debit Credit Jan.1Balance202,300 Dec.31Net income108,000310,300 31Cash dividends28,000282,300 To statement The Indirect Method 2006 10

11. Net income per income statement$108,000 Depreciation$ 7,000 Decrease in inventories8,000 Increase in accrued expenses 2,200 17,200 $125,200 Inc. in accounts receivable$ 9,000 Dec. in accounts payable3,200 Dec. in income taxes payable500 Gain on sale of land12,000 24,700 Net cash flow from operating activity.$100,500 Cash flows from operating activities: Operating Activities – Indirect Method Deduct: Add : 11

12. Next, we need to determine depreciation expense for the year. If it isn’t given on the income statement, sometimes it can be found by analyzing the Accumulated Depreciation account. The Indirect Method 12

13. Determine depreciation expense. ACCOUNT Accumulated Depreciation--Building ACCOUNT NO. 17 Balance Date Item Debit Credit Debit Credit Jan.1Balance58,300 Dec.31Depreciation for year7,00065,300 to statement 2006 The Indirect Method 13

14. Cash flows from operating activities: Operating Activities – Indirect Method Deduct: Add : Net income per income statement$108,000 Depreciation$ 7,000 Decrease in inventories8,000 Increase in accrued expenses 2,200 17,200 $125,200 Inc. in accounts receivable$ 9,000 Dec. in accounts payable3,200 Dec. in income taxes payable500 Gain on sale of land12,000 24,700 Net cash flow from operating activities$100,500 Because Depreciation Expense reduced net income but did not require an outflow of cash, it is added back to net income. 14

15. Select current assets and current liabilities that impact cash flow and determine the increases and decreases. The Indirect Method 15

16. Determine the debit or credit change of each item above. Changes in Current Accounts Change Accounts 2006 2005 DebitCredit Accounts receivable (net)$74,000$65,000 Inventories172,000180,000 Accounts payable (mdse.)43,50046,700 Accrued expenses payable26,50024,300 Income taxes payable7,9008,400 9,000 8,000 3,200 2,200 500 16

17. Changes in Current Accounts Change Accounts 2006 2005 DebitCredit Accounts receivable (net)$74,000$65,000 Inventories172,000180,000 Accounts payable (mdse.)43,50046,700 Accrued expenses payable26,50024,300 Income taxes payable7,9008,400 These debit changes are subtracted from net income in the operating activities section of the statement of cash flows. Think of these debits as deductions from net income in arriving at net cash flow from operations. 9,000 8,0003,200 2,200500 17

18. Changes in Current Accounts Change Accounts 2006 2005 DebitCredit Accounts receivable (net)$74,000$65,000 Inventories172,000180,000 Accounts payable (mdse.)43,50046,700 Accrued expenses payable26,50024,300 Income taxes payable7,9008,400 9,0008,000 3,2002,200 500 These credit changes are added to net income in the operating activities section of the statement of cash flows. Think of these credits as additions to net income in arriving at net cash flow from operations. 18

19. Cash flows from operating activities: Operating Activities—Indirect Method Add : Net income per income statement$108,000 Depreciation$ 7,000 Decrease in inventories8,000 Increase in accrued expenses 2,200 Increase in accrued expenses 2,200 17,200 $125,200 Inc. in accounts receivable$ 9,000 Dec. in accounts payable3,200 Dec. in income taxes payable500 Gain on sale of land12,000 24,700 Net cash flow from operating activities$100,500 19

20. Analyze the income statement to determine if there are any gains or losses from selling investments, equipment, etc. The Indirect Method 20

21. Rundell Inc. Income Statement For the Year Ended December 31, 2006 Sales$1,180,000 Cost of merchandise sold 790,000 Gross profit$ 390,000 Operating expenses: Depreciation expense$ 7,000 Other operating expenses196,000 Total operating expenses 203,000 Income from operations$ 187,000 Other income: Gain on sale of land$12,000 Other expense: Interest expense 8,000 4,0000 Income before income tax$ 191,000 Income tax 83,000 Net income$ 108,000 Gain on sale of land $12,000 21

22. Cash flows from operating activities: Operating Activities—Indirect Method Add : Net income, per income statement$108,000 Depreciation$ 7,000 Decrease in inventories8,000 Increase in accrued expenses 2,200 17,200 $125,200 Inc. in accounts receivable$ 9,000 Dec. in accounts payable3,200 Dec. in income taxes payable500 Gain on sale of land12,000 24,700 Net cash flow from operating activities$100,500 This gain was included in net income, but did not represent an operating cash flow. 22

23. If there had been a loss on this sale, the loss would have been added to net income. The Indirect Method 23

24. Cash Flows from Financing Activities ACCOUNT Dividends Payable ACCOUNT NO. 23 Balance Date Item Debit Credit Debit Credit Jan.1Balance10,000 10Cash paid10,000-- -- June 20Dividends declared14,00014,000 July10Cash paid14,000-- -- Dec.20Dividends declared14,00014,000 Total cash paid$24,000 Dividends 2006 24

25. Cash Flows from Financing Activities Because paying of dividends affects equity, it is a negative $24,000 cash flow from financing activities transaction. 25

26. Cash Flows from Financing Activities Balance Date Item Debit Credit Debit Credit Jan.1Balance16,000 Nov. 14,000 shares issued for cash8,00024,000 Sale of Common Stock 2006 ACCOUNT Common Stock ACCOUNT NO. 33 26

27. Cash Flows from Financing Activities ACCOUNT Paid-In Capital in Excess of Par--Common ACCT. NO. 34 Balance Date Item Debit Credit Debit Credit Jan.1Balance80,000 Nov. 14,000 shares issued for cash40,000120,000 Sale of Common Stock 2006 27

28. Cash Flows from Financing Activities Issuing common stock affects equity; therefore, we have a total positive cash flow of $48,000 from this financing activities transaction. 28

29. Cash Flows from Financing Activities ACCOUNT Bonds Payable ACCOUNT. NO. 25 Balance Date Item Debit Credit Debit Credit Jan.1Balance150,000 June30Retired by payment of cash at face amount50,000100,000 Retirement of Bonds Payable 2006 29

30. Cash Flows from Financing Activities This transaction is a negative cash flows from financing activities item because long- term debt is involved. 30

31. ACCOUNT Building ACCOUNT NO. 18 Balance Date Item Debit Credit Debit Credit Jan.1Balance200,000 Dec.27Purchased for cash 60,000260,000 2006 Cash Flows from Investing Activities Purchased a Building 31

32. Cash Flows from Investing Activities Purchasing a building involves a noncurrent asset, so this is a negative cash flows from investing activities item. Purchased a Building 32

33. Cash Flows from Investing Activities ACCOUNT Land ACCOUNT NO. 16 Balance Date Item Debit Credit Debit Credit Jan.1Balance125,000 June8Sold for $72,000 cash60,00065,000 Oct.12Purchased for $15,000 cash 15,00080,000 Land Transactions 2006 33

34. Cash Flows from Investing Activities The first transaction, the sale of land, results in a positive cash flow from investing activities because land is a noncash asset. Land Transactions 34

35. Cash Flows from Investing Activities The $12,000 gain was recorded earlier on previous slide as an operating activity. The purchase of land also is an investing activity. Land Transactions 35

36. Refer to Exhibit 6 in your textbook to see the formal statement of cash flows using the indirect approach. 36

37. Let’s prepare another Statement of Cash Flows using the Indirect Method. 37

38. Indirect Method - Example Joe’s Place has prepared the Balance Sheet as of March 31, 2003, and March 31, 2002. The Income Statement for the year ended 3/31/03 has also been prepared. Joe needs help preparing the Statement of Cash Flows. Joe’s Place 38

39. The $8,000 gain was the result of selling land costing $32,000 for $40,000 during the period. Indirect Method - Example 39

40. Indirect Method - Example 40

41. Joe’s Place issued $50,000 of no par common stock to settle the $50,000 note payable. Indirect Method - Example 41

42. Indirect Method - Example 42

43. With the indirect method, always start with the net income or net loss for the period. Indirect Method - Example 43

44. Indirect Method - Example 44

45. Accounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000) Accounts receivable decreased. 3/31/03 3/31/02 $23,000 - $40,000 = $(17,000) Indirect Method - Example 45

46. Accounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000 Accounts payable increased. 3/31/03 3/31/02 $38,000 - $27,000 = $11,000 Indirect Method - Example 46

47. Inventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000 Inventory increased. 3/31/03 3/31/02 $350,000 - $300,000 = $50,000 Indirect Method - Example 47

48. Salaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000) Salaries payable decreased. 3/31/03 3/31/02 $ 9,000 - $14,000 = $(5,000) Indirect Method - Example 48

49. Add back non-cash expenses. Indirect Method - Example 49

50. Subtract gains. Indirect Method - Example 50

51. The operating cash flows amount comes from the schedule just prepared. Indirect Method - Example 51

52. Land originally costing $32,000 was sold for $40,000. Indirect Method - Example 52

53. Dividends of $20,000 were paid to owners during the year. Indirect Method - Example 53

54. Compute the net change in cash for the period. Indirect Method - Example 54

55. Complete the Statement of Cash Flows by reconciling beginning cash to ending cash. Indirect Method - Example 55

56. Note that the ending cash amount ties back to the Joe’s Place Balance Sheet at 3/31/03. Indirect Method - Example 56

57. In addition, on the face of the statement or in a supplemental schedule, disclose the $50,000 noncash financing activity. Indirect Method - Example 57

58. In addition, cash interest payments and cash tax payments must also be disclosed separately. Indirect Method - Example 58

59. Cash Budgets are used by management to plan and forecast future cash flows. Managing Cash Flows 59

60. Managing Cash Flows Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash. 60

61. Cash Budgeting The ending cash balance of one month becomes the beginning cash balance of the next month. 61

62. Cash Budgeting Financing is needed in June because the company must maintain a minimum cash balance of $10,000. 62

63. End of Chapter 13 63