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Preparation of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Primary purpose:
To provide information about a companys cash receipts and
cash payments during a period.
Secondary objective:
To provide cash-basis information about the companys
operating, investing, and financing activities.
23-1
Usefulness
Usefulness of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Provides information to help assess:
1. Entitys ability to generate future cash flows.
2. Entitys ability to pay dividends and meet obligations.
3. Reasons for difference between net income and net cash flow
from operating activities.
4. Cash and noncash investing and financing transactions.
23-2
Classification
Classification of
of Cash
Cash Flows
Flows
Operating
Activities
Investing
Activities
Financing
Activities
Income Statement
Changes in
Investments and
Long-Term Asset
Items
Transactions
23-3
Classification
Classification of
of Cash
Cash Flows
Flows
The basis recommended by the FASB for the statement of cash
flows is actually cash and cash equivalents. Cash equivalents are
short-term, highly liquid investments that are both:
23-4
Format
Format of
of the
the Statement
Statement of
of Cash
Cash Flows
Flows
Presentation:
1. Operating activities.
2. Investing activities.
Direct Method
Indirect Method
3. Financing activities.
Report inflows and outflows from investing and financing
activities separately.
23-5
Steps
Steps in
in Preparation
Preparation
Three Sources of Information:
1. Comparative balance sheets.
2. Current income statement.
3. Selected transaction data.
23-6
Assets
Cash
Accounts Receivable
Total
Liabilities And Equities
Accounts Payable
$
Common Stock, 1.00 par
Retained Earnings
Total
$
Revenues
Operating expenses
Income before Taxes
Income Tax Expense
Net Income
5,000.00 $
60,000.00
20,000.00
85,000.00 $
Tax Consultants, Inc.
Income Statement
For the Year ended December 31, 2015
125,000.00
85,000.00
40,000.00
6,000.00
34,000.00
Increase/Decrease
$49,000.00 Increase
36,000.00 Increase
$ 5,000.00 Increase
60,000.00 Increase
20,000.00 Increase
$89,000.00
(125,000 - 36,000)
80,000.00
(85,000 - 5,000)
9,000.00
6,000.00
$ 3,000.00
$34,000.00
(36,000.00)
5,000.00
(31,000.00)
$ 3,000.00
23-10
Cash
Accounts Receivable
Total
49,000.00
January 1, 2015
$
36,000.00
Increase/Decrease
-
$49,000.00 Increase
36,000.00 Increase
85,000.00
5,000.00
$ 5,000.00 Increase
60,000.00
60,000.00 Increase
Retained Earnings
20,000.00
20,000.00 Increase
Total
85,000.00
Cash
Accounts Receivable
Total
49,000.00
January 1, 2015
$
36,000.00
Increase/Decrease
-
$49,000.00 Increase
36,000.00 Increase
85,000.00
5,000.00
$ 5,000.00 Increase
60,000.00
60,000.00 Increase
Retained Earnings
20,000.00
20,000.00 Increase
Total
23-12
85,000.00
Cash
Accounts Receivable
Total
49,000.00
January 1, 2015
$
36,000.00
Increase/Decrease
-
$49,000.00 Increase
36,000.00 Increase
85,000.00
5,000.00
$ 5,000.00 Increase
60,000.00
60,000.00 Increase
Retained Earnings
20,000.00
20,000.00 Increase
Total
23-13
85,000.00
LO 5
23-14
$34,000.00
(36,000.00)
5,000.00
(31,000.00)
3,000.00
60,000.00
(14,000.00)
46,000.00
49,000.00
$49,000.00
Operating
OperatingActivities
Activities
Indirect
Indirect Method
Method
Norman Companys financial statements for the year ended December 31, 2016,
contained the following condensed information.
Service Revenue
Operating Expenses
Depreciation Expense
Loss on Sale of Equipment
Income before tax
Income tax
Net Income
Accounts Receivable
Accounts Payable
Income Taxes Payable
23-15
2016
$ 840,000.00
624,000.00
60,000.00
26,000.00
130,000.00
40,000.00
$ 90,000.00
2016
37,000.00
46,000.00
4,000.00
Assume A/P
relates to
operating expense
2015
59,000.00
31,000.00
8,500.00
Change
(22,000.00)
15,000.00
(4,500.00)
LO 4
Operating
OperatingActivities
Activities
Indirect
Indirect Method
Method
Prepare the operating activities section of the statement of cash flows using the
indirect method.
23-16
$ 90,000.00
60,000.00
26,000.00
22,000.00
15,000.00
(4,500.00)
118,500.00
208,500.00
LO 4
Accounts Receivable
Accounts Payable
Income Taxes Payable
23-17
2016
$ 840,000.00
624,000.00
60,000.00
26,000.00
130,000.00
40,000.00
$ 90,000.00
2016
37,000.00
46,000.00
4,000.00
Assume accounts
payable relates to
operating expenses.
2015
59,000.00
31,000.00
8,500.00
Change
(22,000.00)
15,000.00
(4,500.00)
LO 4
Accounts Receivable
1/1/12
Balance 59,000
Revenues 840,000
12/31/12
23-18
Balance 37,000
862,000
Accounts Payable
1/1/12
Payments to suppliers 609,000
Operating expenses
12/31/12
23-19
Balance 31,000
624,000
Balance 46,000
44,500
23-20
Balance 8,500
40,000
Balance 4,000
Direct Method
Cash Collected from Customers
Cash Payments for Operating Expenses
Cash Paid for Income Taxes
Net Cash Provided by Operating Activities
23-21
$ 862,000.00
(609,000.00)
(44,500.00)
$ 208,500.00
15,000.00
10,000.00
Sale Proceeds
23-22
$ 25,000.00
Loss on Sale
5,300.00
$ 4,700.00
$(50,000.00)
4,700.00
22,000.00
(9,000.00)
17,700.00
(32,300.00)
5,300.00
39,000.00
44,300.00
330,000.00
(47,000.00)
283,000.00
295,000.00
Sources
Sources of
of Information
Information for
for the
the Statement
Statement of
of Cash
Cash Flows
Flows
23-25
Net
Net Cash
Cash Flow
Flow from
from Operating
OperatingActivitiesIndirect
ActivitiesIndirect
Versus
Versus Direct
Direct Method
Method
Indirect Method
23-26
LO 7
Net
Net Cash
Cash Flow
Flow from
from Operating
OperatingActivitiesIndirect
ActivitiesIndirect
Versus
Versus Direct
Direct Method
Method
Direct Method
23-27
LO 7
Net
Net Cash
Cash Flow
Flow from
from Operating
OperatingActivitiesIndirect
ActivitiesIndirect
Versus
Versus Direct
Direct Method
Method
Direct Versus Indirect Considerations
In Favor of the Direct Method
23-28
2.
3.
Net
Net Cash
Cash Flow
Flow from
from Operating
OperatingActivitiesIndirect
ActivitiesIndirect
Versus
Versus Direct
Direct Method
Method
Direct Versus Indirect Considerations
In Favor of the Indirect Method
23-29
Focuses on the differences between net income and net cash flow
from operating activities.
Provides link between the statement of cash flows and the income
statement and statement of financial position.
Adjustments
Adjustments to
to Net
Net Income
Income
Depreciation and Amortization
23-30
Adjustments
Adjustments to
to Net
Net Income
Income
Loss and Gains
23-31
Adjustments
Adjustments to
to Net
Net Income
Income
Extraordinary Items
Companies should report either as investing activities or as
financing activities cash flows from extraordinary transactions
and other events whose effects are included in net income, but
which are not related to operations.
23-32
Accounts
Accounts Receivable
Receivable (Net)
(Net)
Indirect Method
Because an increase in Allowance for Doubtful Accounts results from
a charge to bad debt expense, a company should add back an increase
in Allowance for Doubtful Accounts to net income to arrive at net cash
flow from operating activities.
23-33
Accounts
Accounts Receivable
Receivable (Net)
(Net)
Indirect Method
One method of presenting this information in the statement of cash
flows:
23-34
Accounts
Accounts Receivable
Receivable (Net)
(Net)
Indirect Method
Alternate method (net approach) of presenting this information in
the statement of cash flows:
23-35
Accounts
Accounts Receivable
Receivable (Net)
(Net)
Direct Method
Company should not net Allowance for Doubtful Accounts against
Accounts Receivable.
23-36
Accounts
Accounts Receivable
Receivable (Net)
(Net)
Direct Method
Company should not net Allowance
for Doubtful Accounts against
Accounts Receivable.
LO 8
Other
Other Working
Working Capital
Capital Changes
Changes
Some changes in working capital, although they affect cash, do
not affect net income.
23-38
Net
Net Loss
Loss
If the net loss is $50,000 and the total amount of charges to add back
is $60,000, then net cash provided by operating activities is $10,000.
23-39
Significant
Significant Non-Cash
Non-Cash Transactions
Transactions
Common non-cash transactions that a company should disclose:
23-40
1.
2.
3.
4.
5.
Use
Use of
of aa Worksheet
Worksheet
A worksheet involves the following steps.
Step 1. Enter the balance sheet accounts and their beginning and ending
balances in the balance sheet accounts section.
Step 2. Enter the data that explain the changes in the balance sheet
accounts and their effects on the statement of cash flows in the
reconciling columns of the worksheet.
Step 3. Enter the increase or decrease in cash on the cash line and at the
bottom of the worksheet. This entry should enable the totals of the
reconciling columns to be in agreement.
23-41