Statement of Cash Flows - UWCENTRE the Statement of Cash Flows McGraw-Hill /Irwin Copyright © 2009...
Transcript of Statement of Cash Flows - UWCENTRE the Statement of Cash Flows McGraw-Hill /Irwin Copyright © 2009...
13-1
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Management Accounting Lecture 2 (Chapter 13)
Statement of Cash Flows
Bangor University Transfer Abroad Programme
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Today’s Agenda
n Cash Flow Statements
n What Cash Flow Statements show us
n Building a Cash Flow Statement
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Statement of Cash Flows
Income Statement
Balance Sheet
Statement of Cash Flows
The statement of cash flows highlights the major activities that impact cash flows and ,hence, affect the overall cash
balance. McGraw-Hill /Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Cash Flow Statements
n Cash Flow Statements present a company’s n Changes in cash over a period of time n Sources and uses of its cash n Cash position
n Is the company generating sufficient cash? n To maintain operations? n To re-pay its debts? n Pay dividends
n Cash flows and net income differ
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Statement of Cash Flows
Are cash flows sufficient to
support ongoing operations?
Will the company be
able to repay its debts?
Why do net income and net
cash flow differ?
To what extent will the company have
to borrow money to make needed investments?
Will the company be
able to pay its usual
dividend?
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A Fundamental Principle
Δ Cash Balance = Δ 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.
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Constructing the Statement of Cash Flows
Net Cash Flows for a
Period
Net Income
Dividends Paid to
Stockholders
Changes in Noncash Assets
Changes in Liabilities
Changes in Capital Stock
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SourcesNet Income AlwaysNet LossChanges in noncash assets DecreasesChanges in liabilities* IncreasesChanges in capital stock accounts IncreasesDividends paid to stockholders
Total sources - Total uses = Net cash flow
Uses
AlwaysIncreases
* Contra asset accounts, such as the Accumulated Depreciation and Amortization account, follow the rules for liabilities.
Decreases
DecreasesAlways
Constructing the Statement of Cash Flows
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Organization of the Full-Fledged Statement of Cash Flows
Operating Activities
Investing Activities
Financing Activities
The beginning cash balance is reconciled with the ending cash
balance.
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Operating Activities
Includes those activities that enter into the determination of net income.
Net Income (Loss) $ XXX
Add: Decr. in Current Noncash Assets XXX Incr. in Current Liabilities XXX Depreciation Charges XXX Losses XXX
Less: Incr. in Current Noncash Assets (XXX)Decr. in Current Liabilities (XXX)Gains (XXX)
Net Cash Flows from Operating Activities $ XXX
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Operating Activities
Sources of cash are added to net income and uses of cash are subtracted from net income.
Impact on Net IncomeSources Uses
CurrentNoncash Assets
CurrentLiabilities
Decreases
Increases
Increases
Decreases
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Net Income (Loss) $ XXX
Add: Decr. in Current Noncash Assets XXX Incr. in Current Liabilities XXX Depreciation Charges XXX Losses XXX
Less: Incr. in Current Noncash Assets (XXX)Decr. in Current Liabilities (XXX)Gains (XXX)
Net Cash Flows from Operating Activities $ XXX
Operating Activities
Impact on Net IncomeSources Uses
CurrentNoncash Assets
CurrentLiabilities
Decreases
Increases
Increases
Decreases
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Net Income (Loss) $ XXX
Add: Decr. in Current Noncash Assets XXX Incr. in Current Liabilities XXX Depreciation Charges XXX Losses XXX
Less: Incr. in Current Noncash Assets (XXX)Decr. in Current Liabilities (XXX)Gains (XXX)
Net Cash Flows from Operating Activities $ XXX
Operating Activities
Impact on Net IncomeSources Uses
CurrentNoncash Assets
CurrentLiabilities
Decreases
Increases
Increases
Decreases
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Net Income (Loss) $ XXX
Add: Decr. in Current Noncash Assets XXX Incr. in Current Liabilities XXX Depreciation Charges XXX Losses XXX
Less: Incr. in Current Noncash Assets (XXX)Decr. in Current Liabilities (XXX)Gains (XXX)
Net Cash Flows from Operating Activities $ XXX
Depreciation and Amortization charges are added back to net income because they are
decreases in noncash assets.
Operating Activities
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Net Income (Loss) $ XXX
Add: Decr. in Current Noncash Assets XXX Incr. in Current Liabilities XXX Depreciation Charges XXX Losses XXX
Less: Incr. in Current Noncash Assets (XXX)Decr. in Current Liabilities (XXX)Gains (XXX)
Net Cash Flows from Operating Activities $ XXX
Losses are added back to net income.
Operating Activities
Gains are subtracted from net
income. McGraw-Hill /Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Add: Proceeds from sale of land, buildings, equipment, or other noncurrent assets $ XXX Receipt of principal from investments XXX
Less: Payments to acquire land, buildings, equipment, or other noncurrent assets (XXX)Payments to acquire investments (XXX)
Net Cash Flows from Investing Activities $ XXX
Includes transactions that involve the acquisition or disposal of noncurrent assets.
Investing Activities
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Add: Proceeds from borrowings $ XXX Proceeds from issuing capital stock XXX Proceeds from sale of bonds XXX
Less: Principal payments on borrowed funds (XXX)Payments related to bond maturities (XXX)Dividend payments (XXX)
Net Cash Flows from Financing Activities $ XXX
Includes transactions involving receipts from or payments to creditors and owners.
Financing Activities
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Other Issues: Gross or Net?
For financing investing and
activities, items on the statement
of cash flows should be
presented in gross amounts
rather than in net amounts.
Example: Assume Macy’s
purchases $50 million in property during the year and sells other property for $30 million.
Instead of showing the net change of $20 million, the company must report the gross amounts of both transactions.
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Operating Activities: Direct or Indirect Method?
Two Formats for Reporting Operating Activities
Reports the cash effects of each operating
activity
Direct Method
Starts with accrual net income and converts to cash basis
Indirect Method
Note that no matter which format is used, the same amount of net cash flows from operating activities is generated.
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ChangeSource or Use?
Cash Flow Effect
Adjust-ments
Adjusted Effect
Classifi- cation
Accounts receivableInventory
LandEquipment
Accumulated depreciation
Accounts payableSalaries payable
Note payable
Common stock
Net lossDividends
Contra Assets, Liabilities, Contra assets
Total (net cash flow)
Retained earnings
Ed's Pizza HutStatement of Cash Flows Worksheet
Noncurrent liabilities
Stockholders' equity
Current liabilities
Assets (except cash and Current assets
Noncurrent assets
Preparing the Statement of Cash Flows: Step 1
List each account appearing on the
comparative balance sheets except for
cash and cash equivalents and
retained earnings.
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ChangeSource or Use?
Cash Flow Effect
Adjust-ments
Adjusted Effect
Classifi- cation
Accounts receivable (17,000)$ Inventory 50,000
Land (32,000) Equipment -
Accumulated depreciation 6,000
Accounts payable 11,000 Salaries payable (5,000)
Note payable (50,000)
Common stock 50,000
Net loss (27,000) Dividends 3,000
Total (net cash flow)
Retained earnings
Ed's Pizza HutStatement of Cash Flows Worksheet
Noncurrent liabilities
Stockholders' equity
Current liabilities
Assets (except cash and Current assets
Noncurrent assets
Contra Assets, Liabilities, Contra assets
Preparing the Statement of Cash Flows: Step 2
Compute the change from the
beginning balance to the ending
balance for each account.
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ChangeSource or Use?
Cash Flow Effect
Adjust-ments
Adjusted Effect
Classifi- cation
Accounts receivable (17,000)$ SourceInventory 50,000 Use
Land (32,000) SourceEquipment -
Accumulated depreciation 6,000 Source
Accounts payable 11,000 SourceSalaries payable (5,000) Use
Note payable (50,000) Use
Common stock 50,000 Source
Net loss (27,000) UseDividends 3,000 Use
Ed's Pizza HutStatement of Cash Flows Worksheet
Noncurrent liabilities
Stockholders' equity
Current liabilities
Assets (except cash and Current assets
Noncurrent assets
Contra Assets, Liabilities, Contra assets
Total (net cash flow)
Retained earnings
Preparing the Statement of Cash Flows: Step 3
Code each entry on the worksheet as a
source or use of cash.
Recall that the transaction involving the Note Payable and Common Stock was noncash. {
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ChangeSource or Use?
Cash Flow Effect
Adjust-ments
Adjusted Effect
Classifi- cation
Accounts receivable (17,000)$ Source 17,000$ Inventory 50,000 Use (50,000)
Land (32,000) Source 32,000 Equipment - -
Accumulated depreciation 6,000 Source 6,000
Accounts payable 11,000 Source 11,000 Salaries payable (5,000) Use (5,000)
Note payable (50,000) Use (50,000)
Common stock 50,000 Source 50,000
Net loss (27,000) Use (27,000) Dividends 3,000 Use (3,000)
(19,000)$
Contra Assets, Liabilities, Contra assets
Total (net cash flow)
Retained earnings
Ed's Pizza HutStatement of Cash Flows Worksheet
Noncurrent liabilities
Stockholders' equity
Current liabilities
Assets (except cash and Current assets
Noncurrent assets
Preparing the Statement of Cash Flows: Step 4
Code sources of cash as positive
numbers and uses of cash as negative
numbers.
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ChangeSource or Use?
Cash Flow Effect
Adjust-ments
Adjusted Effect
Classifi- cation
Accounts receivable (17,000)$ Source 17,000$ - 17,000$ Inventory 50,000 Use (50,000) - (50,000)
Land (32,000) Source 32,000 - 32,000 Equipment - - - -
Accumulated depreciation 6,000 Source 6,000 - 6,000
Accounts payable 11,000 Source 11,000 - 11,000 Salaries payable (5,000) Use (5,000) - (5,000)
Note payable (50,000) Use (50,000) 50,000 -
Common stock 50,000 Source 50,000 (50,000) -
Net loss (27,000) Use (27,000) - (27,000) Dividends 3,000 Use (3,000) - (3,000)
(19,000)$ -$ (19,000)$ Total (net cash flow)
Retained earnings
Ed's Pizza HutStatement of Cash Flows Worksheet
Noncurrent liabilities
Stockholders' equity
Current liabilities
Assets (except cash and Current assets
Noncurrent assets
Contra Assets, Liabilities, Contra assets
Preparing the Statement of Cash Flows: Step 5
Make any necessary
adjustments, including
adjustments for gains and losses. The net effect of these should
equal zero. We need to make an adjustment
for the noncash transaction.
{
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Preparing the Statement of Cash Flows: Step 6
ChangeSource or Use?
Cash Flow Effect
Adjust-ments
Adjusted Effect
Classifi- cation
Accounts receivable (17,000)$ Source 17,000$ - 17,000$ OperatingInventory 50,000 Use (50,000) - (50,000) Operating
Land (32,000) Source 32,000 - 32,000 InvestingEquipment - - - -
Accumulated depreciation 6,000 Source 6,000 - 6,000 Operating
Accounts payable 11,000 Source 11,000 - 11,000 OperatingSalaries payable (5,000) Use (5,000) - (5,000) Operating
Note payable (50,000) Use (50,000) 50,000 -
Common stock 50,000 Source 50,000 (50,000) -
Net loss (27,000) Use (27,000) - (27,000) OperatingDividends 3,000 Use (3,000) - (3,000) Financing
(19,000)$ -$ (19,000)$
Ed's Pizza HutStatement of Cash Flows Worksheet
Noncurrent liabilities
Stockholders' equity
Current liabilities
Assets (except cash and Current assets
Noncurrent assets
Contra Assets, Liabilities, Contra assets
Total (net cash flow)
Retained earnings
Classify each
entry as operating, investing
or financing activity.
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Operating ActivitiesNet loss (27,000)$ Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000 Increase in depreciation charges 6,000
Less: Increase in inventory (50,000) Decrease in salaries payable (5,000)
Net cash flow from operations (48,000) Investing Activities
Proceeds from sale of land 32,000 Financing Activities
Dividends paid (3,000) Net change in cash (19,000)
Ed's Pizza HutStatement of Cash Flows
For the Period Ending 3/31/2007
Preparing the Statement of Cash Flows: Step 7
Copy the data from the
worksheet into the Statement of Cash Flows
section by section.
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Operating ActivitiesNet loss (27,000)$ Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000 Increase in depreciation charges 6,000
Less: Increase in inventory (50,000) Decrease in salaries payable (5,000)
Net cash flow from operations (48,000) Investing Activities
Proceeds from sale of land 32,000 Financing Activities
Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending 71,000$
Ed's Pizza HutStatement of Cash Flows
For the Period Ending 3/31/2007
Preparing the Statement of Cash Flows: Step 8
Prepare a cash reconciliation at
the bottom of the statement.
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Operating ActivitiesNet loss (27,000)$ Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000 Increase in depreciation charges 6,000
Less: Increase in inventory (50,000) Decrease in salaries payable (5,000)
Net cash flow from operations (48,000) Investing Activities
Proceeds from sale of land 32,000 Financing Activities
Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending 71,000$
Ed's Pizza HutStatement of Cash Flows
For the Period Ending 3/31/2007 In addition, on the face of the
statement or in a supplemental
schedule, disclose the issuance of
$50,000 of stock to a creditor, a
noncash financing activity.
Preparing the Statement of Cash Flows
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Interpretation of the Statement of Cash Flows
Examine the operating activities section carefully.
n Ed’s Pizza Hut generated a net cash flow from operations of ($48,000). This is usually a sign of fundamental difficulties.
n Ultimately, a positive cash flow is necessary to avoid liquidating assets or borrowing money to pay for day-to-day activities.
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T-Account Approach
Ed's Pizza HutComparative Balance Sheet Account Balances
3/31/2007 3/31/2006 ChangeDR (CR) DR (CR) Incr. (Decr.)
Cash 71,000$ 90,000$ (19,000)$ Accounts Receivable 23,000 40,000 (17,000) Inventory 350,000 300,000 50,000 Land 68,000 100,000 (32,000) Equipment 84,000 84,000 - Accumulated Depr. (45,000) (39,000) 6,000 Accounts Payable (38,000) (27,000) 11,000 Salaries Payable (9,000) (14,000) (5,000) Note Payable - Joe Doe - (50,000) (50,000) Common Stock (500,000) (450,000) 50,000 Retained Earnings (4,000) (34,000) (30,000)
-$ -$
13-6
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T-Account Approach
Additional Information: n There was a net loss for the year of $27,000. n Depreciation charges for the year were
$6,000. n During the year, Ed sold land originally
costing $32,000 for $32,000. n During the year, Ed paid dividends of $3,000
to the stockholders. n Ed issued $50,000 of common stock to settle
the note due to Joe Doe. McGraw-Hill /Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
T-Account Approach
Decrease in A/R 17,000$ Decrease in Land 32,000 Increase in A/P 11,000 Depreciation charges 6,000 Total sources of cash 66,000$
Ed's Pizza HutSources of Cash
Here is a summary of the sources of cash for Ed’s Pizza Hut.
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T-Account Approach
Here is a summary of the uses of cash for Ed’s Pizza Hut.
Net loss 27,000$ Increase in Inventory 50,000 Decrease in Salaries Payable 5,000 Dividends paid 3,000 Total uses of cash 85,000$
Ed's Pizza HutUses of Cash
The net cash flow for Ed’s Pizza Hut is ($19,000): $66,000 in sources minus $85,000 in uses.
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The Journal Entries
Description Debit CreditRetained Earnings - Net Loss 27,000 Cash - Used 27,000
Retained Earnings - Dividends 3,000 Cash - Used 3,000
27,000 Net loss
3,000 Cash dividends paid
CashProvided Used
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T-Account Approach
Description Debit CreditCash - Provided 17,000 Accounts Receivable 17,000
Inventory 50,000 Cash - Used 50,000
Decrease in accounts receivable 17,000 27,000 Net loss50,000 Increase in inventory
3,000 Cash dividends paid
CashProvided Used
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T-Account Approach
Description Debit CreditCash - Provided 32,000 Land 32,000
Cash - Provided 6,000 Accumulated Depreciation 6,000
Decrease in accounts receivable 17,000 27,000 Net lossDepreciation charges 6,000 50,000 Increase in inventory
Proceeds from sale of land 32,000 3,000 Cash dividends paid
CashProvided Used
13-7
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T-Account Approach
Description Debit CreditCash - Provided 11,000 Accounts Payable 11,000
Salaries Payable 5,000 Cash - Used 5,000
Decrease in accounts receivable 17,000 27,000 Net lossDepreciation charges 6,000 50,000 Increase in inventoryIncrease in accounts payable 11,000 5,000 Decrease in salaries payable
48,000 Net cash used by operating activitiesProceeds from sale of land 32,000 3,000 Cash dividends paid
CashProvided Used
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T-Account Approach
Description Debit Credit
No Effect in the Cash account.
Decrease in accounts receivable 17,000 27,000 Net lossDepreciation charges 6,000 50,000 Increase in inventoryIncrease in accounts payable 11,000 5,000 Decrease in salaries payable
48,000 Net cash used by operating activitiesProceeds from sale of land 32,000 3,000 Cash dividends paid
CashProvided Used
What about the $50,000 issuance of common stock?
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T-Account Approach
Decrease in accounts receivable 17,000 27,000 Net lossDepreciation charges 6,000 50,000 Increase in inventoryIncrease in accounts payable 11,000 5,000 Decrease in salaries payable
48,000 Net cash used by operating activitiesProceeds from sale of land 32,000 3,000 Cash dividends paidTotal sources 66,000 85,000 Total uses
19,000 Net decrease in cash and cash equivalents
CashProvided Used
The net effect of these transactions on the cash account is as shown.
Notice, the net decrease in cash is $19,000.
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The technique used to gather and organize data does not affect the format of the statement of cash
flows. The final statement of cash flows prepared
using the T-account method would appear as shown. Each transaction
has been properly disclosed in the
operating, investing, and financing sections of the
statement.
Preparing the Statement of Cash Flows
Operating ActivitiesNet loss (27,000)$ Add: Decrease in accounts receivable 17,000
Increase in accounts payable 11,000 Increase in depreciation charges 6,000
Less: Increase in inventory (50,000) Decrease in salaries payable (5,000)
Net cash flow from operations (48,000) Investing Activities
Proceeds from sale of land 32,000 Financing Activities
Dividends paid (3,000) Net change in cash (19,000) Cash, beginning 90,000 Cash, ending 71,000$
Ed's Pizza HutStatement of Cash Flows
For the Period Ending 3/31/2007
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Tutorial
n Review of today’s lecture n Complete Problems
n 13-3 n 13-7 n 13-6