Module 11 Cash Flow. SAP 2007 / SAP University Alliances Introductory Accounting Learning Objectives...

Module 11

Cash Flow

SAP 2007 / SAP University Alliances Introductory Accounting

Learning Objectives


Cash Flow Statement


Cash Equivalents


Classifications of Cash Flows

Outflows include: Salaries and wages. Payments to suppliers. Taxes and fines. Interest paid to lenders. Other.

Outflows include: Salaries and wages. Payments to suppliers. Taxes and fines. Interest paid to lenders. Other.

Inflows include: Receipts from customers. Cash dividends received. Interest from borrowers. Other.

Inflows include: Receipts from customers. Cash dividends received. Interest from borrowers. Other.

Operating Activities

Cash Flows from


Cash Flows from




Outflows to:• Purchase long-term productive

assets.• Purchase equity investments.• Purchase debt investments.• Make loans.

Outflows to:• Purchase long-term productive

assets.• Purchase equity investments.• Purchase debt investments.• Make loans.

Cash Flows from

Investing Activities

Cash Flows from



Inflows from:

•Selling long-term productive assets.

•Selling equity investments.

•Collecting of principal on loans.

•Other.

Inflows from:

•Selling long-term productive assets.

•Selling equity investments.

•Collecting of principal on loans.

•Other.

Financing Activities

Inflows from:

Issuing its own equity securities.

Issuing bonds and notes.

Issuing temporary and long-term liabilities.

Inflows from:

Issuing its own equity securities.

Issuing bonds and notes.

Issuing temporary and long-term liabilities.

Outflows to: Pay dividends to shareholders. Purchase treasury shares. Repay cash loans. Cover withdrawals by owners.

Outflows to: Pay dividends to shareholders. Purchase treasury shares. Repay cash loans. Cover withdrawals by owners.

Cash Flows from


Cash Flows from




Non Cash Investing and Financing Activities

Cash flows from operating activities:[List of individual inflows and outflows]Net cash provided (used) by operating activities $ ###

Cash flows from investing activities:[List of individual inflows and outflows]Net cash provided (used) by investing activities ###

Cash flows from financing activities:[List of individual inflows and outflows]Net cash provided (used) by financing activities ###

Net increase (decrease) in cash $ ###Cash (and equivalents) balance at beginning of period ###Cash (and equivalents) balance at end of period $ ###

COMPANY NAMEStatement of Cash Flows

Period Covered

Format of Statement of Cash Flows



Preparing the Cash Flow Statement


Direct Method of Reporting Operating Cash Flows

Revenueor

Expense

Adjustments for

Changes in Related

Balance Sheet Accounts

Cash Receipts

or

Cash Payments


Revenueor

Expense

Adjustments for

Changes in Related

Balance Sheet Accounts

Cash Receipts

or

Cash Payments

Cash received from customers

= Sales { - Increase in A/R + Decrease in A/R


Cash Received from Customers

Question:

The balance in A/R was $40,000 on 1/1/05 and the balance was $52,000 on 12/31/05. If total sales revenue for 2005 was $800,000, then how much cash was received from customers?

a. $800,000

b. $760,000

c. $812,000

d. $788,000


Answer:

The balance in A/R was $40,000 on 1/1/05 and the balance was $52,000 on 12/31/05. If total sales revenue for 2005 was $800,000, then how much cash was received from customers?

a. $800,000

b. $760,000

c. $812,000

d. $788,000

A/R increased $12,000 during 2005.

Subtract increases in A/R during 2005 from total revenues to arrive at cash collected from customers.

$800,000 - $12,000 = $788,000



Cash flows from operating activities:

Cash received from customers……………$788,000



Purchases = COGS { + Increase in inventory - Decrease in inventory

Cash paid for merchandise

= Purchases { + Decrease in A/P - Increase in A/P

Step 1

Step 2

Cash Paid for Merchandise


Question:

How much did the company pay for inventory in 2005?

a. $900,000

b. $923,000

c. $947,000

d. $877,000

Inventory, 1/1/05 $130,000 A/P, 1/1/05 $23,000Inventory, 12/31/05 $165,000 A/P, 12/31/05 $35,000COGS, 12/31/05 $900,000




Answer:

How much did the company pay for inventory in 2005?

a. $900,000

b. $923,000

c. $947,000

d. $877,000



Purchases for 2005 were $935,000.

Purchases = $900,000 + $35,000

Cash Paid for Merchandise in 2005 was $923,000.

Cash Paid = $935,000 - $12,000




Cash paid for merchandise..……………$923,000



The cash paid for wages and other operating expenses is affected by

(1)whether the expense was prepaid, and

(2) whether the expense was accrued.

The cash paid for wages and other operating expenses is affected by

(1)whether the expense was prepaid, and

(2) whether the expense was accrued.

{ {Cash paid for

wages and

other operating

expenses

=

Wages

and other

operating

expenses

+ Increase in

prepaid expenses

- Decrease in

prepaid expenses

+ Decrease in

accrued liabilities

- Increase in accrued liabilities

Wages and Operating Expenses


Interest

Taxes

Cash Paid =

InterestExpense{ + Decrease in interest payable

- Increase in inventory

Cash Paid =

Income TaxExpense { + Decrease in taxes payable

- Increase in taxes payable

Cash Paid for Interest and Taxes


Direct Method Amortization Expense


Cash Flows from Investing Activities


Illustration: Cash flows from investing activities

A company sells equipment costing $65,000 with accumulated amortization of $45,000 at a loss of $5,000. What is the cash receipt from the sale and how would this be reported on the statement of cash flows?

Loss on Disposal

Net Book Value Proceeds= -

$5,000 = ($65,000 - $45,000) - Proceeds

Proceeds = $15,000


Illustration: Cash flows from investing activities

Cash flows from investing activities:

Cash received from sale of equipment……$15,000


Cash Flows from Financing Activities


Illustration: Cash flows from financing activities

An analysis of the retained earnings account reveals that the company declared $27,000 in share dividends and paid $20,000 in cash dividends.

Share dividends do not involve cash and are recorded as a transfer from retained earnings to contributed capital.

The cash dividends do involve cash and appear on the statement of cash flows as follows:

Cash flows from financing activities:

Cash paid for dividends………………………$20,000


Cash Flows from Operating – Indirect Method


Indirect Method


Adjustments


A review of a company’s year-end financial statements revealed that Accounts Receivable was $123,000 in 2004 and $103,000 in 2005. Inventory was $290,000 in 2004 and $315,000 in 2005. Net income for 2005 was $250,000.

Illustration: Changes in non-cash current assets

This would be reported as:


Net income……………..………………………$250,000

Adjustments to reconcile net income to

net cash provided by operating activities:

Decrease in accounts receivable…………….20,000

Increase in inventory………………………….(25,000)


Adjustments


A review of a company’s year-end financial statements revealed that Accounts Payable was $150,000 in 2004 and $132,000 in 2005. Interest payable was $20,000 in 2004 and $36,000 in 2005. Net income for 2005 was $250,000.

Illustration: Changes in Non-cash Current Liabilities



Net income……………..………………………$250,000



Decrease in accounts payable…………..….(18,000)

Increase in interest payable…………………. 16,000


Adjustments


Amortization expense is an non-cash expense that is used in the computation of net income. In order to compute cash from operating activities we must add it to net income. Assume a company has a net income of $189,000 and amortization expense of $57,000.

Illustration: Operating items not providing or using cash



Net income……………..………………………$189,000



Amortization expense………..…………..…. .57,000


Adjustments


Net income may include gains or losses that are not operating activities. These items are removed from the operating section. Assume a company reported net income of $98,000 which included a $12,000 loss on the sale of a piece of equipment.

Illustration: Non-operating items



Net income……………..……………………….$98,000



Loss on the sale of equipment…………..… .12,000

Module 11 Cash Flow. SAP 2007 / SAP University Alliances Introductory Accounting Learning Objectives...

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