1. C14 - 1 Learning Objectives Power Notes 1.Purpose of the Statement of Cash Flows 2.Reporting Cash Flows 3.Statement of Cash Flows – The Indirect Method 4.Statement of Cash Flows – The Direct Method 5.Financial Analysis and Interpretation Chapter F14 C14 Statement of Cash Flows Statement of Cash Flows

2. C14 - 2 Cash Flows Increases in Cash (receipts from revenues) (payments for dividends, and redemption of debt securities) (payments for expenses) (receipts from sales of noncurrent assets) (receipts from issuing equity and debt securities) (payments for aquiring noncurrent assets) Decreases in Cash Operating Operating Investing Investing Financing Financing Operating Operating Investing Investing Financing Financing Cash

3. C14 - 3 Cash Flows – Operating Activities Typical cash inflows Typical cash outflows Sales of goods and services Merchandise purchases Payments of wages & other expenses Tax payments Interest Revenue Dividend Revenue

4. C14 - 4 Cash Flows – Investing Activities Typical cash inflows Typical cash outflows Sales of fixed assets and other long-term investments Sale of marketable securities and investments Purchase of fixed assets and other long- term investments Purchase of marketable securities and investments

5. C14 - 5 Cash Flows – Financing Activities Typical cash inflows Typical cash outflows Sales (issuance) of stock Sale (issuance) of bonds and other money market debt Purchase of treasury stock Repayment and redemption of debt (bonds, notes, other) Payment of cash dividends Borrowing from banks and other lending institutions

6. C14 - 6 Cash flows from operating activities: Cash flows from investing activities: Cash flows from financing activities: NetSolutions Statement of Cash Flows – Direct Method For the Month Ended November 30, 2002 Cash received from customers$ 7,500 Deduct cash payments for expenses and payment to creditors4,600 Net cash flow from operating activities$ 2,900 Cash payments for acquiring land (20,000) Cash received as owner’s investment$25,000 Deduct cash withdrawal by owner2,000 Net cash flow from financing activities23,000 Net cash flow and ending cash balance$ 5,900

7. C14 - 7 Cash flows from operating activities: Cash flows from investing activities: Cash flows from financing activities: Net income, per income statement$ 3,050 Add increase in accounts payable400 Deduct increase in supplies (550) Net cash flow from operating activities$ 2,900 Cash payments for acquiring of land (20,000) Cash received as owner’s investment$25,000 Deduct cash withdrawal by owner2,000 Net cash flow from financing activities23,000 Net cash flow and ending cash balance$ 5,900 NetSolutions Statement of Cash Flows – Indirect Method For the Month Ended November 30, 2002

8. C14 - 8 Cash flows from operating activities: NetSolutions Statement of Cash Flows – Direct Method For the Month Ended November 30, 2002 Cash flows from operating activities: NetSolutions Statement of Cash Flows – Indirect Method For the Month Ended November 30, 2002 Cash received from customers$ 7,500 Deduct cash payments for expenses and payment to creditors4,600 $ 2,900 Net cash flow from operating activities$ 2,900 Net income, per income statement$ 3,050 Add increase in accounts payable400 Deduct increase in supplies (550) $ 2,900 Net cash flow from operating activities$ 2,900

9. C14 - 9 Cash Liabilities Stockholders’Equity Balance Sheet NoncashAssets The cash flows are determined by analyzing liabilities, stockholders’ equity, and noncash assets. Assets = Liabilities + Stockholders’ Equity Cash + Noncash Assets = Liabilities + Stockholders’ Equity Cash Cash = Liabilities + Stockholders’ Equity – Noncash Assets 1 23 1 2 3 Cash Relationships and Cash Flows

10. C14 - 10 Changes in Current Accounts Change Accounts 2003 2002 DebitCredit Trade receivables (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 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.

11. C14 - 11 Changes in Current Accounts Change Accounts 2003 2002 DebitCredit Trade receivables (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 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.

12. C14 - 12 Cash flows from operating activities: Operating Activities – Indirect Method Start with the accrual basis net income shown on the income statement. Net income, per income statement$108,000 Depreciation$ 7,000 Decrease in inventories8,000 Increase in accrued expenses2,20017,200 $125,200 Increase in accounts receivables$ 9,000 Decrease in accounts payable3,200 Decrease in income taxes payable500 Gain on sale of land12,00024,700 Net cash flow from operating activities$100,500 Deduct: Add:

13. C14 - 13 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 Cost of merchandise sold790,000 Gross profit$390,000 Operating expenses: Depreciation expense$ 7,000 Other operating expenses196,000 Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,000 Other expense: Interest expense8,0004,000 Income before income tax$ 191,000 Income tax83,000 Net income$ 108,000 Debit Credit Sales1,180,000 Receivables9,000 Cash 1,171,000 Changes Cash collected from customers Note: The changes in the current balance sheet accounts are determined by comparing the beginning and ending balances. Receivables increased by $9,000 during the period.

14. C14 - 14 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000 Gross profit$390,000 Operating expenses: Depreciation expense$ 7,000 Other operating expenses196,000 Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,000 Other expense: Interest expense8,0004,000 Income before income tax$ 191,000 Income tax83,000 Net income$ 108,000 Debit Credit Cost of mdse. sold790,000 Inventories8,000 Accounts payable3,200 Cash Changes Cash payments for merchandise

15. C14 - 15 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000(785,200) Gross profit$ 390,000 Operating expenses: Depreciation expense$ 7,000 Other operating expenses196,000 Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,000 Other expense: Interest expense8,0004,000 Income before income tax$ 191,000 Income tax83,000 Net income$ 108,000 Debit Credit Depr. expense7,000 Accum. depreciation7,000 ChangesDepreciation

16. C14 - 16 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000(785,200) Gross profit$ 390,000 Operating expenses: Depreciation expense$ 7,0000 Other operating expenses196,000(193,800) Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,000 Other expense: Interest expense8,0004,000 Income before income tax$ 191,000 Income tax83,000 Net income$ 108,000 Changes Debit Credit Operating expenses196,000 Accrued expenses2,200 Cash 193,800 Changes Cash payments for operating expenses

17. C14 - 17 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000(785,200) Gross profit$390,000 Operating expenses: Depreciation expense$ 7,0000 Other operating expenses196,000(193,800) Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,0000 Other expense: Interest expense8,0004,000 Income before income tax$ 191,000 Income tax83,000 Net income$ 108,000 Debit Credit Cash72,000 Investments60,000 Gain on sale of invest.12,000 Changes Gain on sale of investments The cash inflow of $72,000 will be shown in the investing section of the statement of cash flows.

18. C14 - 18 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000(785,200) Gross profit$ 390,000 Operating expenses: Depreciation expense$ 7,0000 Other operating expenses196,000(193,800) Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,000 0 Other expense: Interest expense8,0004,000 Income before income tax$ 191,000 Income tax83,000 Net income$ 108,000 Debit Credit Interest expense8,000 Cash Changes Cash paid for interest expense

19. C14 - 19 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000(785,200) Gross profit$ 390,000 Operating expenses: Depreciation expense$ 7,0000 Other operating expenses196,000(193,800) Total operating expenses203,000 Income from operations$187,000 Other income: Gain on sale of land$12,000 Other expense: Interest expense8,0004,000(8,000) Income before income tax$ 191,000 Income tax83,000(83,500) Net income$ 108,000 Debit Credit Income tax expense83,000 Income tax payable500 Cash83,500 Changes Cash paid for income taxes

20. C14 - 20 Rundell Inc. Income Statement For the Year Ended December 31, 2003 Cash Basis Sales$1,180,000 $1,171,000 Cost of merchandise sold790,000(785,200) Gross profit$ 390,000 Operating expenses: Depreciation expense$ 7,0000 Other operating expenses196,000(193,800) Total operating expenses203,000 Income from operations$ 187,000 Other income: Gain on sale of land$12,0000 Other expense: Interest expense8,0004,000(8,000) Income before income tax$ 191,000 Income tax83,000(83,500) Net income$ 108,000$ 100,500 Two different views of income from operations Two different views of income from operations

21. C14 - 21 Cash flows from operating activities: Operating Activities – Direct Method Cash inflows: Cash received from customers$1,171,000 Cash outflows: Cash payments for merchandise$785,200 Cash payments for operating expenses193,800 Cash payments for interest8,000 Cash payments for income tax83,5001,070,500 Net cash flow from operating activities$ 100,500

22. C14 - 22 Financial Analysis and Interpretation Free Cash Flow Free Cash Flow Use:To measure operating cash flow available for corporate purposes after providing sufficient fixed asset additions to maintain current productive capacity and dividends. Cash flow from operations$1,400,000 Less: Cash invested in fixed assets to maintain capacity(450,000) Less: Cash used for dividends(100,000) Free cash flow$ 850,000