Cash Flow December

Slide 13-1
Chapter
13
STATEMENT OF CASH FLOWS
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
Slide 13-2
STATEMENT OF CASH FLOWS
Some investors believe that "
cash is
king".
The statement of cash flows is one of the
main financial statements. The other financial statements are the

balance sheet, income statement, and statement of stockholders' equity.
McGraw-Hill/Irwin
Slide 13-3
Cash flow versus Income Statement

The cash flow statement identifies the cash that
is flowing in and out of the company.

The
difference of Inflow and Outflow of the Cash is indentified
Because the income statement is prepared
under the accrual basis of accounting, the revenues reported may not have been collected. Similarly, the expenses reported on the income statement might not have been paid
McGraw-Hill/Irwin
Slide 13-4
Purpose of the Statement of Cash Flows

Provides information about the cash receipts and cash payments of a business entity during the accounting period.
Helps investors with questions about the companys: Ability to generate positive cash flows. Ability to meet its obligations and to pay dividends. Need for external financing. Investing and financing transactions for the period.
McGraw-Hill/Irwin
Slide 13-5
Format and structure of the cash flow statement

Cash flows from operating activities + Cash flows from investing activities + Cash flows from financing activities
Net change in cash during period

+ Beginning cash balance = Ending cash balance
McGraw-Hill/Irwin
Slide 13-6
Classification of Cash Flows

The Statement of Cash Flows must include the following three sections: Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities
McGraw-Hill/Irwin
Slide 13-7
Operating Activities
Inflows from:
Sales to customers. Interest and dividends received.
Cash flows from operating activities are cash flows from transactions that affect net income, Current Assets and Current Liabilities.
+ Outflows to: PAYMENTS to:

Suppliers of merchandise and services. Employees. Lenders for interest. McGraw-Hill/Irwin Governments for taxes.
Cash Flows from Operating Activities

Slide 13-8
1 Cash Flows from Investing Activities
Cash flows from investing activities are cash flows from

transactions that affect the investments in noncurrent assets of the company. Cash inflows from investing activities normally arise from selling fixed assets, investments, and intangible assets.
Cash outflows from investing activities normally include

payments to acquire fixed assets, investments, and intangible assets.
McGraw-Hill/Irwin
Slide 13-9
Investing Activities
Inflows from:
Selling investments and plant assets. Collecting of principal on loans.
Outflows to:

Payments to acquire investments and plant assets. Purchase debt or equity investments. Make loans.
Cash Flows from Investing Activities
McGraw-Hill/Irwin
Slide 13-10
Cash flows from financing activities

Cash flows from financing activities are cash flows from transactions that affect the equity and debt of the company.
Cash inflows from financing activities normally
arise from issuing debt or equity securities.

Cash outflows from financing activities normally
include paying cash dividends, repaying debt, and acquiring treasury stock.
McGraw-Hill/Irwin
Slide 13-11
Financing Activities
Inflows from:
long-term borrowing. Owners (for example, from issuing stock).
Outflows to:
Repayments of borrowed funds. Payment of dividends. Purchase treasury stock.
Cash Flows from Financing Activities
McGraw-Hill/Irwin
Related to the external The McGraw-Hill Companies, Inc., 2002 financing
Slide 13-12
McGraw-Hill/Irwin
Slide 13-13
Quiz Time
Classifying Cash Flows Identify whether each of the following would be reported as an operating, investing, or financing activity in the statement of cash flows. a. Purchase of patent i b. Payment of cash dividend f c. Disposal of equipment i
d. Cash sale o e. Purchase of treasury stock f f. Payment of wages expense o
McGraw-Hill/Irwin
Slide 13-14
Cash and Cash Equivalents

Cash Equivalents
Cash
Currency
Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes.
McGraw-Hill/Irwin
Slide 13-15
Company Name Statement of Cash Flows Period Covered Cash flows from operating activities: [List of individual inflows and outflows] Net cash provided (used) by operating activities Cash flows from investing activities: The operating [List of individual inflows and outflows] cash section provided (used) by investing activities cash Net flows
$ #####
Lets look ##### at the In-Direct Cash from financing activities: canflows be prepared [List of individual inflows and outflows] Method for using either the Net cash provided (used) by financing activities ##### direct method or preparing the Net increase (decrease) in Cash $ ##### the indirect Statement of Cash (and equivalents) balance at beginning of period ##### method. Cash Flows. Cash (and equivalents) balance at end of period $ #####
McGraw-Hill/Irwin
Slide 13-16
Steps in Preparation
The statement of cash flows is prepared using the
following information: 1. Comparative balance sheets The changes between the beginning and ending balance sheets are analyzed to determine the sources of changes in cash flows. 2. Current income statement The current income statement provides the information required to determine the sources and uses of cash during the accounting period.
McGraw-Hill/Irwin
Slide 13-17
Comparative Balance Sheet

Shiner Corporation Dec 31, 2012 $54,000 Dec 31, 2011 $37,000 Change 17000 Cash Inflow
Assets Cash Accounts Receivable Inventories Prepaid Expenses Land

McGraw-Hill/Irwin
$18,000
$28,000
-10,000
Inflow
$54,000
$0
54,000
Cash outflow
$14,000 $45,000
$6,000 $70,000
8000
outflow
-25,000
inflow
Slide 13-18
Prepare a statement of cash flows, using the indirect method.
McGraw-Hill/Irwin
Slide 13-19
Usefulness and Format

Indirect and Direct Methods
Companies favor the indirect method for two reasons:
1. Easier and less costly to prepare. 2. Focuses on differences between net income and net cash flow from operating activities.
McGraw-Hill/Irwin
SO 3 Explain the impact of the product life cycle on a companys cash flows. The McGraw-Hill Companies, Inc., 2002
Slide 13-20
Preparing the Statement of Cash Flows

Illustration Indirect Method
Illustration 12-5
McGraw-Hill/Irwin
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-21

Illustration 12-5
McGraw-Hill/Irwin
Slide 13-22

Illustration 12-5
Additional information for 2012: 1. Depreciation expense was comprised of $6,000 for building and $3,000 for equipment. 2. The company sold equipment with a book value of $7,000 (cost $8,000, less accumulated depreciation $1,000) for $4,000 cash. 3. Issued $110,000 of long-term bonds in direct exchange for land. 4. A building costing $120,000 was purchased for cash. Equipment costing $25,000 was also purchased for cash. 5. Issued common stock for $20,000 cash. 6. The company declared and paid a $29,000 cash dividend.
McGraw-Hill/Irwin
SO 4.
Slide 13-23
Preparation of the Statement of Cash Flows Indirect Method

Step 1: Operating Activities
Determine net cash provided/used by operating activities by converting net income from accrual basis to cash basis.
Common adjustments to Net Income (Loss):
Add back non-cash expenses (depreciation, amortization, or depletion expense). Deduct gains and add losses. Changes in noncash current assets and current liabilities.
McGraw-Hill/Irwin
Slide 13-24

Depreciation Expense
Although depreciation expense reduces net income, it does not reduce cash. The company must add it back to net income.
Illustration 12-7
Cash flows from operating activities: Net income Adjustments : 9,000 $ 154,000 $ 145,000
Depreciation expense Net cash provided by operating activities
McGraw-Hill/Irwin
Slide 13-25

Question
Which is an example of a cash flow from an operating activity? a. Payment of cash to lenders for interest. b. Receipt of cash from the sale of capital stock. c. Payment of cash dividends to the companys stockholders. d. Dividend Payable Dividend Payables are not e. None of the above. considered in Cash Flow SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002 Analysis McGraw-Hill/Irwin
Slide 13-26
Loss on Sale of Equipment
Companies report as a source of cash in the investing activities section the actual amount of cash received from the sale. For the sake of operating section, reverse treatments are made:
Any loss on sale is added to net income in the
operating section (non-cash expense).
Any gain on sale is deducted from net income in the operating section.
McGraw-Hill/Irwin
Slide 13-27
Loss on Sale of Equipment
Illustration 12-8
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Net cash provided by operating activities $ 9,000 3,000 157,000 $ 145,000
McGraw-Hill/Irwin
Slide 13-28
Adjustments to Net IncomeIndirect Method
Omni Corporations accumulated depreciation increased by $12,000, while patents decreased by $3,400 between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $4,100 from sale of land. Reconcile a net income of $50,000 to net cash flow from operating activities.
McGraw-Hill/Irwin
Slide 13-29
Net income. $50,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation. 12,000 Amortization of patents. 3,400 Gain on sale of land... (4,100) Net cash flow from operating activities.. $61,300
McGraw-Hill/Irwin
Slide 13-30
Changes to Noncash Current Asset Accounts
When the Accounts Receivable balance decreases,
Illustration 12-9
Accounts Receivable 1/1/012 Balance 30,000 A/R Received During the year 10,000 12/31/12 Balance 20,000
Company adds to net income the amount of the decrease in accounts receivable because the difference has been received in form of cash.
McGraw-Hill/Irwin
Slide 13-31
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Net cash provided by operating activities $ 9,000 3,000 10,000 167,000 $
Illustration 12-10
145,000
McGraw-Hill/Irwin
Slide 13-32
When the Inventory balance increases, cash has been paid to purchase the inventory.
Inventory 1/1/12 Balance Purchases 10,000 5,000 15,000
12/31/12 Balance
The company deducts from net income this inventory increase.
McGraw-Hill/Irwin
Slide 13-33
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Net cash provided by operating activities $ 9,000 3,000 10,000 (5,000) 162,000 $
Illustration 12-10
145,000
McGraw-Hill/Irwin
Slide 13-34
When the Prepaid Expense balance increases, cash paid for expenses has increased.= OUTFLOW OF CASH
If prepaid expenses decrease:

December 2011 prepaid Expenses: 20,000 December 2012 prepaid Expenses: 12,000 Change= -8000 (non-cash change)
McGraw-Hill/Irwin
Slide 13-35
Illustration 12-10
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Net cash provided by operating activities $ 9,000 3,000 10,000 (5,000) (4,000) 158,000 $ 145,000
McGraw-Hill/Irwin
Slide 13-36
Changes to Noncash Current Liability Accounts
When Accounts Payable increases, the company received more in goods than it actually paid for. The increase is added to net
income to determine net cash provided by operating activities. When Income Tax Payable decreases, the income tax expense reported on the income statement was less than the amount of taxes paid during the period. The decrease is subtracted from net income to determine net cash provided by operating activities.
McGraw-Hill/Irwin
Slide 13-37
Changes to Noncash Current Liability Accounts
Illustration 12-11
Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Loss on sale of equipment Decrease in accounts receivable Increase in inventory Increase in prepaid expenses Increase in accounts payable Decrease in income taxes payable Net cash provided by operating activities
McGraw-Hill/Irwin
145,000
9,000 3,000 10,000 (5,000) (4,000) 16,000 (2,000) $ 172,000

SO 4
Slide 13-38
Changes in Current Operating Assets and Liabilities Indirect Method Victor Corporations comparative balance sheet for current assets and current liabilities was as follows:
Dec. 31, 2011 Accounts receivable Inventory Accounts payable Dividends payable $ 6,500 12,300 4,800 5,000 Dec. 31, 2010 $ 4,900 15,000 5,200 4,000
Adjust net income of $70,000 for changes in operating assets and liabilities to arrive at cash flows from operating activities.
McGraw-Hill/Irwin
Slide 13-39
Net income.. Adjustments to reconcile net income to net cash flow from operating activities: Increase in accounts receivable. Decrease in inventory... Decrease in accounts payable Net cash flow from operating activities .....
$70,000
(1,600) 2,700 (400) $70,700
16-38
McGraw-Hill/Irwin
Slide 13-40
2
Cash Flows from Operating ActivitiesIndirect Method Omicron, Inc. reported the following data:
Net income Depreciation expense Loss on disposal of equipment Increase in Accounts receivable Decrease in Accounts payable $120,000 12,000 15,000 5,000 (2,000)
Prepare the cash flows for operating activities section of the statement of cash flows using the indirect method.
McGraw-Hill/Irwin
Slide 13-41
Cash flows from operating activities: Net income.. $120,000 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation.. 12,000 Loss from disposal of equipment... 15,000 Changes in current operating assets and liabilities: Increase in accounts receivable.. (5,000) Decrease in accounts payable.. (2,000) Net cash flow from operating activities... $140,000
McGraw-Hill/Irwin
Slide 13-42
Prepare a statement of cash flows, using the direct method.
16-53
McGraw-Hill/Irwin
Slide 13-43
The Direct Method

The final amount reported in the Cash Flows from Operating Activities section will be the same whether the direct or indirect approach is used. The methods differ in how the data are obtained, analyzed, and reported. Direct method starts with Cash Sales.
McGraw-Hill/Irwin
Slide 13-44
Cash Received from Customers
Rundell, Inc. reports sales of $350,000for 2010. To determine the cash received from customers, sales are adjusted by any increase or decrease in accounts receivable.
McGraw-Hill/Irwin
Slide 13-45
Example
Cash Received from CustomersDirect Method Sales reported on the income statement were $350,000. The accounts receivable balance declined $8,000 over the year. Determine the amount of cash received from customers.
Sales $350,000 Add decrease in accounts receivable 8,000 Cash received from customers $358,000
16-57
McGraw-Hill/Irwin
Slide 13-46
Cash Payments for Merchandise Rundell, Inc. reports purchase of merchandise of $790,000. To determine the cash payment for merchandise, the $790,000 is adjusted for any increase or decrease in inventories and accounts payable (assuming the accounts payable are owed to merchandise suppliers).
McGraw-Hill/Irwin
Slide 13-47
Direct Method Cash Paid for Merchandise
Step 1
Purchases = COGS
+ Increase in inventory - Decrease in inventory
Step 2
Cash paid for merchandise = Purchases
+ Decrease in A/P - Increase in A/P
McGraw-Hill/Irwin
Slide 13-48
3
Cash Payment for MerchandiseDirect Method Purchase of Merchandise reported on the income statement was $145,000. The accounts payable balance increased $4,000, and the inventory balance increased by $9,000 over the year. Determine the amount of cash paid for merchandise.
Cost of merchandise sold Add increase in inventory Deduct increase in accounts payable.. Cash paid for merchandise.
16-60
McGraw-Hill/Irwin
$145,000 9,000 (4,000) $150,000
Slide 13-49
Cash Payments for Operating Expenses Rundell, Inc. reports total operating expenses of $203,000, which includes depreciation expense of $7,000. To determine cash payments for operating expenses, the other operating expenses (excluding depreciation) of $196,000 are adjusted for any increase or decrease in accrued expenses payable.
McGraw-Hill/Irwin
Slide 13-50
$0 $196,000 $(2,200) = $193,800
McGraw-Hill/Irwin
Slide 13-51
Interest Expense
Rundell, Inc. reports interest expense of 8,000. To determine the cash payments for interest, the $8,000 is adjusted for any increases or decreases in interest payable.
McGraw-Hill/Irwin
Slide 13-52
$0
$8,000 $0
= $8,000
McGraw-Hill/Irwin
Slide 13-53
3 Cash Payments for Income Taxes
Rundell, Inc. reports income tax expense of $83,000. To determine the cash payments for income taxes, the $83,000 is adjusted for any increases or decreases in income taxes payable.
McGraw-Hill/Irwin
Slide 13-54
$500 $83,000 $0 = $83,500
McGraw-Hill/Irwin
Slide 13-55
3
Exhibit 7
Statement of Cash FlowsDirect Method
(continued)
McGraw-Hill/Irwin
Slide 13-56
3
Exhibit 7
Statement of Cash FlowsDirect Method (continued)
McGraw-Hill/Irwin
Slide 13-57
Managing Cash Flows

Cash Budgets are used by management to plan and forecast future cash flows.
A Cash Budget can be used to:
Force management to coordinate activities. Provide managers with advance notice of available resources. Provide targets useful in evaluating performance. Provide advance warnings of potential cash shortages.
McGraw-Hill/Irwin
Slide 13-58
Managing Cash Flows

Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash.
McGraw-Hill/Irwin
Slide 13-59
Cash Budgeting
Cash Budget May June $ 27,500 $ 15,000 3,500 $ 31,000 16,000 July $ August $ -
Beginning cash balance Add: Cash receipts Total available cash
Less: Cash disbursements Excess (deficiency) of available cash over cash disbursements $ Financing needed Financing repayments Ending cash balance $
15,000 15,000
The ending cash balance of one month becomes the beginning cash balance of the next month.
McGraw-Hill/Irwin
Slide 13-60
Cash Budgeting
Cash Budget May June $ 27,500 $ 15,000 3,500 2,000 $ 31,000 $ 17,000 16,000 18,000 July $ 10,000 9,000 $ 19,000 6,000 August $ 10,000 14,000 $ 24,000 8,000
Beginning cash balance Add: Cash receipts Total available cash
Less: Cash disbursements Excess (deficiency) of available cash over cash disbursements $ Financing needed Financing repayments Ending cash balance $
15,000 15,000
(1,000) $ 11,000 10,000 $
13,000 3,000 10,000
16,000 6,000 10,000
Financing is needed in June because the company must maintain a minimum cash balance of $10,000.
McGraw-Hill/Irwin
Slide 13-61
End of Chapter 13 Chester, ol buddy, I wonder if you could help me with a little cash flow problem Im having?
McGraw-Hill/Irwin

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Slide 13-1

STATEMENT OF CASH FLOWS

The McGraw-Hill Companies, Inc., 2002

STATEMENT OF CASH FLOWS

Some investors believe that "

main financial statements. The other financial statements are the

Cash flow versus Income Statement

is flowing in and out of the company.

difference of Inflow and Outflow of the Cash is indentified

Because the income statement is prepared

The McGraw-Hill Companies, Inc., 2002

Purpose of the Statement of Cash Flows

The McGraw-Hill Companies, Inc., 2002

Format and structure of the cash flow statement

Net change in cash during period

Classification of Cash Flows

The McGraw-Hill Companies, Inc., 2002

Sales to customers. Interest and dividends received.

+ Outflows to: PAYMENTS to:

Cash Flows from Operating Activities

1 Cash Flows from Investing Activities

Cash flows from investing activities are cash flows from

Cash outflows from investing activities normally include

Selling investments and plant assets. Collecting of principal on loans.

Cash Flows from Investing Activities

The McGraw-Hill Companies, Inc., 2002

Cash flows from financing activities

Cash inflows from financing activities normally

arise from issuing debt or equity securities.

long-term borrowing. Owners (for example, from issuing stock).

Repayments of borrowed funds. Payment of dividends. Purchase treasury stock.

Cash Flows from Financing Activities

Related to the external The McGraw-Hill Companies, Inc., 2002 financing

The McGraw-Hill Companies, Inc., 2002

d. Cash sale o e. Purchase of treasury stock f f. Payment of wages expense o

The McGraw-Hill Companies, Inc., 2002

Cash and Cash Equivalents

The statement of cash flows is prepared using the

Comparative Balance Sheet

Assets Cash Accounts Receivable Inventories Prepaid Expenses Land

The McGraw-Hill Companies, Inc., 2002

Prepare a statement of cash flows, using the indirect method.

The McGraw-Hill Companies, Inc., 2002

Usefulness and Format

Preparing the Statement of Cash Flows

Preparing the Statement of Cash Flows

Preparing the Statement of Cash Flows

Preparation of the Statement of Cash Flows Indirect Method

Common adjustments to Net Income (Loss):

Step 1: Operating Activities

Depreciation expense Net cash provided by operating activities

Step 1: Operating Activities

Any loss on sale is added to net income in the

operating section (non-cash expense).

Adjustments to Net IncomeIndirect Method

The McGraw-Hill Companies, Inc., 2002

The McGraw-Hill Companies, Inc., 2002

The company deducts from net income this inventory increase.

If prepaid expenses decrease:

9,000 3,000 10,000 (5,000) (4,000) 16,000 (2,000) $ 172,000

The McGraw-Hill Companies, Inc., 2002

The McGraw-Hill Companies, Inc., 2002

(1,600) 2,700 (400) $70,700

The McGraw-Hill Companies, Inc., 2002