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Chapter
13
McGraw-Hill/Irwin
Slide 13-2
cash is
king".
The statement of cash flows is one of the
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
Slide 13-3
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
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McGraw-Hill/Irwin
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McGraw-Hill/Irwin
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Operating Activities
Inflows from:
Cash flows from operating activities are cash flows from transactions that affect net income, Current Assets and Current Liabilities.
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Slide 13-9
Investing Activities
Inflows from:
Outflows to:
Payments to acquire investments and plant assets. Purchase debt or equity investments. Make loans.
McGraw-Hill/Irwin
Slide 13-10
include paying cash dividends, repaying debt, and acquiring treasury stock.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
Slide 13-11
Financing Activities
Inflows from:
Outflows to:
McGraw-Hill/Irwin
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McGraw-Hill/Irwin
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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
McGraw-Hill/Irwin
Slide 13-14
Cash
Currency
Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected by interest rate changes.
The McGraw-Hill Companies, Inc., 2002
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 $ #####
The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide 13-16
Steps in Preparation
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
The McGraw-Hill Companies, Inc., 2002
Slide 13-17
$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
McGraw-Hill/Irwin
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McGraw-Hill/Irwin
SO 3 Explain the impact of the product life cycle on a companys cash flows. The McGraw-Hill Companies, Inc., 2002
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McGraw-Hill/Irwin
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-21
McGraw-Hill/Irwin
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-22
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
The McGraw-Hill Companies, Inc., 2002
SO 4.
Slide 13-23
Add back non-cash expenses (depreciation, amortization, or depletion expense). Deduct gains and add losses. Changes in noncash current assets and current liabilities.
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide 13-24
Cash flows from operating activities: Net income Adjustments : 9,000 $ 154,000 $ 145,000
McGraw-Hill/Irwin
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
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Operating Activities
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 gain on sale is deducted from net income in the operating section.
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
McGraw-Hill/Irwin
Slide 13-27
Operating Activities
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
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-28
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
Operating Activities
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
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-31
Operating Activities
Changes to Noncash Current Asset Accounts
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
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-32
Operating Activities
Changes to Noncash Current Asset Accounts
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
McGraw-Hill/Irwin
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-33
Operating Activities
Changes to Noncash Current Asset Accounts
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
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-34
Operating Activities
Changes to Noncash Current Asset Accounts
When the Prepaid Expense balance increases, cash paid for expenses has increased.= OUTFLOW OF CASH
McGraw-Hill/Irwin
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-35
Operating Activities
Changes to Noncash Current Asset Accounts
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
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-36
Operating Activities
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
SO 4 Prepare a statement of cash flows using the indirect method. The McGraw-Hill Companies, Inc., 2002
Slide 13-37
Operating Activities
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
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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
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McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
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
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16-53
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
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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
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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
The McGraw-Hill Companies, Inc., 2002
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
The McGraw-Hill Companies, Inc., 2002
Slide 13-47
Step 1
Purchases = COGS
Step 2
Cash paid for merchandise = Purchases
McGraw-Hill/Irwin
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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
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
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McGraw-Hill/Irwin
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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
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$0
$8,000 $0
= $8,000
McGraw-Hill/Irwin
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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
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McGraw-Hill/Irwin
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3
Exhibit 7
Statement of Cash FlowsDirect Method
(continued)
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
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3
Exhibit 7
Statement of Cash FlowsDirect Method (continued)
McGraw-Hill/Irwin
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Increase collection of accounts receivables. Keep inventory low. Delay payment of liabilities. Plan timing of major expenditures. Invest idle cash.
McGraw-Hill/Irwin
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Cash Budgeting
Cash Budget May June $ 27,500 $ 15,000 3,500 $ 31,000 16,000 July $ August $ -
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
The McGraw-Hill Companies, Inc., 2002
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
Less: Cash disbursements Excess (deficiency) of available cash over cash disbursements $ Financing needed Financing repayments Ending cash balance $
15,000 15,000
Financing is needed in June because the company must maintain a minimum cash balance of $10,000.
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
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
The McGraw-Hill Companies, Inc., 2002