1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Statement of Cash Flows Chapter 14 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 14-2 Purpose of the Statement of Cash Flows Are cash flows sufficient to support ongoing operations? Can we pay debts? Can we pay dividends? Why is there a difference between net income and net cash flow? Will the company have to borrow money to make needed investments?

3. 14-3 A Fundamental Principle  Cash Balance =  Noncash Balance Sheet Accounts This principle ensures that properly analyzing the changes in all noncash balance sheet accounts always quantifies the cash inflows and outflows that explain the change in the cash balance.

4. 14-4 A Review of Basic Equations Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance

5. 14-5 Organizing a Statement of Cash Flows Operating Activities Revenue and expense transactions that affect net income. Investing Activities Acquiring or disposing of noncurrent assets. Financing Activities Borrowing from and repaying principal to creditors and transactions with stockholders.

6. 14-6 Organizing a Statement of Cash Flows

7. 14-7 Operating Activities: Direct or Indirect Method? Reconstructs the income statement on a cash basis from top to bottom Direct Method Accrual net income is adjusted to a cash basis; Used by 99% Indirect Method Both methods result in the exact same amount of cash provided by operating activities.

8. 14-8 The Indirect Method: A Three-Step Process Step 1 Step 2 Step 3 Add depreciation charges to net income. Analyze net changes in noncash balance sheet accounts. Adjust for gains and losses.

9. 14-9 Summary of Key Concepts

10. 14-10 Summary of Key Concepts

11. 14-11 Apparel, Inc. Financial Statements

12. 14-12 Apparel, Inc. Financial Statements

13. 14-13 An Example of a Statement of Cash Flows In addition to the financial statements provided, assume the following: 1.The company sold a store that had an original cost of $15 million and accumulated depreciation of $10 million. The cash proceeds from the sale were $8 million. The gain on the sale was $3 million. 2.The company did not issue any new bonds during the year. 3.The company did not repurchase any of its own common stock during the year. 4.The company paid a cash dividend during the year.

14. 14-14 Operating Activities: Step 1 Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $561 million – $10 million + Credits = $654 million Credits = $654 million – $561 million + $10 million Credits = $103 million The first step in computing Apparel’s net cash provided by operating activities is to add depreciation to net income.

15. 14-15 Operating Activities: Step 2 The second step in computing Apparel’s net cash provided by operating activities is to analyze net changes in noncash balance sheet accounts that impact net income.

16. 14-16 Operating Activities: Step 3 The third step in computing Apparel’s net cash provided by operating activities is to adjust for gains and losses included in net income.

17. 14-17 Operating Activities

18. 14-18 Investing Activities Basic Equation for Asset Accounts Beginning balance + Debits – Credits = Ending balance $1,394 million + Debits – $15 million = $1,517 million Debits = $1,517 million – $1,394 million + $15 million Debits = $138 million (cash outflow) Report $8 million cash inflow. Report $138 million cash outflow.

19. 14-19 Financing Activities Basic Equation for Contra-Asset, Liability, and Stockholders’ Equity Accounts Beginning balance – Debits + Credits = Ending balance $897 million – Debits + $140 million = $1,009 million $1,037 million = $1,009 million + Debits Debits = $28 million (cash outflow)

20. 14-20 Statement of Cash Flows

21. 14-21 End of Chapter 14