1. Chapter 11 Statement of Cash Flows McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.

2. Part A Formatting the Statement of Cash Flows 11-2

3. Statement of Cash Flows Provides a summary of cash inflows and cash outflows during the reporting period E-GAMES, INC. Statement of Cash Flows For the Year Ended December 31, 2012 Cash Flows from Operating Activities Net income$42,000 Adjustments for noncash effects: Depreciation expense9,000 Loss on sale of land4,000 Increase in accounts receivable(7,000) Decrease in inventory10,000 Increase in prepaid rent(2,000) Decrease in accounts payable(5,000) Increase in interest payable1,000 Decrease in income tax payable(2,000) Net cash flows from operating activities$50,000 11-3

4. Statement of Cash Flows (continued) 11-4

5. LO1 Classification of Transactions Categories of Cash Flows Operating activities Investing activities Financing activities Include cash receipts and cash payments for transactions relating to revenue and expense activities Include cash transactions involving the purchase and sale of long-term assets and current investments Inflows and outflows of cash resulting from the external financing of a business 11-5

6. Part B Preparing the Statement of Cash Flows 11-6

7. Steps in Preparing the Statement of Cash Flows Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the comparative balance sheets. Step 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the comparative balance sheets. Step 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders’ equity accounts from the comparative balance sheets. Step 4. Combine the operating, investing, and financing activities, and make sure the total agrees with the net increase (decrease) in cash. 11-7

8. LO2 Operating Activities – Indirect Method oBoth net income and cash flows from operating activities represent the same operating activities. oThe income statement reports net income on an accrual basis. On the other hand, the statement of cash flows reports the very same activities on a cash basis. oWe remove the noncash components from net income so that what’s left is cash flows from operating activities. We can classify the noncash components as: (a)revenues and expenses that don’t affect cash at all (adjustments for noncash components of net income), and (b)revenues and expenses that do affect cash, but not by the amount reported as the revenue or expense (adjustments for changes in current assets and current liabilities). 11-8

9. Summary of All Adjustments Cash Flows from Operating Activities Net income Adjustments for noncash effects: For noncash components of income + Depreciation expense + Loss on sale of assets – Gain on sale of assets For changes in current assets and current liabilities – Increase in a current asset + Decrease in a current asset + Increase in a current liability – Decrease in a current liability = Net cash flows from operating activities 11-9

10. LO3 Investing Activities Cash Outflow Cash Inflow Noncash activity disclosed in the footnote 11-10

11. LO3 Financing Activities Cash Inflow Cash Outflow Retained earnings, beg. Balance $41,000 + Net income 42,000 – Dividends (12,000) Retained earnings, ending balance $71,000 11-11

12. Cash Flow Analysis Analysis 11-12

13. LO4 Cash Flow Analysis Analysis based on net cash flows from operating activities (CFFO) 11-13

14. Cash Return on Assets ($ in millions) CFFO ÷ Average Total Assets = Cash Return on Assets Apple$10,159÷($53,851 + $39,572)/2=21.8% Dell$ 1,894÷($26,500 + $27,561)/2=7.0% ($ in millions)Net Income ÷ Average Total Assets = Return on Assets Apple$5,704÷($53,851 + $39,572)/2=12.2% Dell$2,478÷($26,500 + $27,561)/2=9.2% Return on Assets Cash Return on Assets Cash Return on Assets is higher than the Return on Assets 11-14

15. Appendix Operating Activities-Direct Method 11-15

16. LO5 Operating Activities-Direct Method oWe report the cash inflows and cash outflows directly on the statement of cash flows. For instance, we report cash received from customers as the cash effect of sales activities, and cash paid to suppliers as the cash effect of cost of goods sold. oIncome statement items that have no cash effect—such as depreciation expense or gains and losses on the sale of assets—are simply not reported under the direct method. 11-16

17. Operating Activities-Direct Method Cash Flows from Operating Activities Cash Inflows: Cash received from customers$ Cash received from interest Cash received from dividends Cash Outflows: Cash paid to suppliers Cash paid for operating expenses Cash paid for interest Cash paid for income taxes Net cash flows from operating activities$ x,xxx 11-17

18. End of chapter 11 11-18