The Statement of Cash Flows Chapter 12. The statement of cash flows reports the entity’s cash...
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Transcript of The Statement of Cash Flows Chapter 12. The statement of cash flows reports the entity’s cash...
The statement of cash flowsreports the entity’s cash flows
(cash receipts and cash payments)during the period.
Used to be called Sources and Uses of Cash
Basic Concepts
Timing of the Financial Statements
December 31, 20x1(a point in time)
BalanceSheet
December 31, 20x2(a point in time)
BalanceSheet
For the Year Ended December 31, 20x1(a period of time)
IncomeStatement
Statement ofStockholders’
Equity
Statement ofCash Flows
Purposes of the Statementof Cash Flows
The statement of cash flows serves the following purposes:
1. Predict future cash flows
2. Evaluate management decisions
3. Determine the ability to pay dividends to stockholders’ and payments to creditors
4. Show the relationship of net incometo the business’s cash flows
Operating, Investing, and Financing Activities
A business engages in threetypes of business activities:
Operating activities
Investing activities
Financing activities
Operating, Investing, and Financing Activities
Operating activities create revenues,expenses, gains, and losses.
Investing activities increaseand decrease long-term assets.
Financing activities obtain cashfrom investors and creditors.
Two Formats forOperating Activities
Indirect method reconciles from net incometo net cash provided by operating activities.
Direct method reports all cash receipts andcash payments from operating activities.
The two methods have no effect oninvesting or financing activities.
Two Formats forOperating Activities
Indirect MethodNet income $XXXAdjustments:Depreciation, etc. XXXNet CASH provided by operating activities $XXX
Direct MethodCollection from customers $XXXDeductions:Payment to suppliers, etc. XXXNet CASH provided by operating activities $XXX
The Indirect Method:Operating Activities
Positive ItemsNet incomeDepreciation/amortizationLoss on sale of long-term assetsDecreases in current assets other than cashIncreases in current liabilities (ex: AP)
Negative ItemsNet lossGain on sale of long-term assetsIncreases in current assets other than cashDecreases in current liabilities
Investing Activities
Positive ItemsSale of plant assetsSale of investments that are not cash equivalentsCollections of loans receivable
Negative ItemsAcquisition of plant assetsPurchase of investments that are not cash equivalentsMaking loans to others
Financing Activities
Positive ItemsIssuing stockSelling treasury stockBorrowing money
Negative ItemsPayment of dividendsPurchase of treasury stockPayment of principal amounts of debts
Comparative Balance Sheets
AssetsCurrent: Cash Accounts receivable Interest receivable Inventory Prepaid expensesLong-term receivablePlant assets, net Total
$ 22 93 3 135 8 11 453$725
$ 42 80 1 138 7 – 219$487
$ (20) 13 2 (3) 1 11 234$238
(In thousands) 20x2 20x1 (Change)Anchor Corporation – December 31
Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
Cash flows from operating activities:Net Income $41Adjustments to reconcile net income tonet cash provided by operating activities:
A Depreciation 18B Gain on sale of plant (8)
Statement of Cash Flows:Operating Activities
C Increase in accounts receivable (13)C Increase in interest receivable (2)C Decrease in inventory 3C Increase in prepaid expenses (1)C Increase in accounts payable 34C Decrease is salary payable (2)C Decrease in accrued liabilities (2) 27Net cash provided by operating activities $68
Statement of Cash Flows: Operating Activities
Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
Depreciation, Depletion,and Amortization – A
Depreciation expense has no effect on cash.
However, it is deducted from revenuesin order to compute net income.
The addback cancels the earlier noncash deduction.
Gains and Losses on theSale of Assets – B
Gains are subtracted from net income andexcluded from cash flows from operations.
Changes in the Current Asset and Current Liability Accounts – C
1. An increase in a current asset other than cash indicates a decrease in cash.
2. A decrease in a current asset other than cash indicates an increase in cash.
3. A decrease in a current liability indicates a decrease in cash.
4. An increase in a current liability indicates an increase in cash.
Statement of Cash Flows
Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $ (20)Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22
Statement of Cash Flows (Indirect Method)Year Ended December 31, 20x2 (In thousands)
Computing Acquisition andSales of Plant Assets
Anchor had plant assets, net of depreciation,of $219,000 at the beginning of the year
and $453,000 at year end.The acquisition of plant assets amounted
to $306,000 during the year.
The income statement shows depreciation expenseof $18,000 and an $8,000 gain on sale of plant assets.
What is the book value of the assets sold?
Computing Acquisition andSales of Plant Assets
Plant Assets (Net)Beginning balance 219,000Acquisitions 306,000
Ending balance 453,000
Acc Depreciation 18,000Book value of assets sold 54,000
Computing Acquisition andSales of Plant Assets
How much are the CASH proceedsfrom the sale of plant assets?
Book value + Gain – Loss = Sale proceeds
Sale proceeds = $54,000 + $8,000 – 0 = $62,000
Computing Acquisition andSales of Investments
Beginning balance + Purchases– Book value of investment sold
= Ending balance
(Amounts assumed)$100,000 + $50,000 – X = $140,000
X = $10,000
Computing Loans andTheir Collections
Beginning balance + New loans made– Collections
= Ending balance
(Amounts assumed)$90,000 + $10,000 – X = $30,000
X = $70,000
Computing Issuances and Payments of Long-Term Debt
Beginning balance was $77,000.
New debt amounting to $94,000was incurred during the year.
The ending balance for the Long-TermDebt account was $160,000.
How much was the payment?
Computing Issuances and Payments of Long-Term Debt
Long-Term DebtBeginning balance 77,000Issuance of new debt 94,000Payments 11,000
Ending balance 160,000
Computing Dividend Payments
Retained earnings beginning balance +Net income – Dividends declared = Ending balance
$86,000 + $41,000 – X = $110,000
X = $17,000
(if div’s declared were paid in the CY, $17000 is the div payment)
Computing Cash Collectionsfrom Customers
Beginning accounts receivable balance+ Sales on account – Collections
= Ending accounts receivable balance
$80,000 + $284,000 – X = $93,000
X = $271,000
Computing Paymentsto Suppliers
Accounts Payable
Payments 113,000Beg. balance 57,000Purchases 147,000
End. balance 91,000
Noncash Investing andFinancing Activities
Suppose Anchor Corporation issued commonstock valued at $320,000 to acquire a warehouse.
Warehouse Building 320,000Common Stock 320,000
Noncash Investing andFinancing Activities
Noncash Investing and Financing Activities: (000)Acquisition of building by issuing common stock $320Acquisition of land by issuing note payable 72Payment of long-term debt by transferring investments to the creditor 104Acquisition of equipment by issuing short-term note payable 37Total noncash investing and financing activities $533
Cash flows from operating activities:Receipts:Collections from customers $271Interest received on notes receivable 10Dividends received on investments in stock 9Total cash receipts $290
Statement of Cash FlowsYear Ended December 31, 20x2 (In thousands)
The Direct Method
Payments:To suppliers $133To employees 58For interest 16For income tax 15Total payments 222Net cash provided by operating activities $ 68
The Direct Method
Statement of Cash FlowsYear Ended December 31, 20x2 (In thousands)
Net cash provided by operating activities $ 68Net cash used for investing activities (255)Net cash provided by financing activities 167Net decrease in cash $(20)Cash balance, December 31, 20x1 42Cash balance, December 31, 20x2 $ 22
The Direct Method
Statement of Cash FlowsYear Ended December 31, 20x2 (In thousands)