©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter Three Accounting for Deferrals.
©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter Twelve Statement of Cash Flows.
Transcript of ©The McGraw-Hill Companies, Inc. 2006McGraw-Hill/Irwin Chapter Twelve Statement of Cash Flows.
Reporting Format for the Statement of Cash Flows
The Statement of Cash Flows must include the following three sections, as defined in FASB Statement 95:
The Statement of Cash Flows must include the following three sections, as defined in FASB Statement 95:
Operating Activities
Investing Activities
Financing Activities
Cash Flows from
Operating
Activities
Cash Flows from
Operating
Activities
Cash Flows from Operating Activities
Inflows Receipts from sales. Commissions and fees. Interest and dividends
received.
Inflows Receipts from sales. Commissions and fees. Interest and dividends
received.
Outflows Payments for inventory. Salaries and wages. Operating expenses Interest on liabilities. Taxes.
Outflows Payments for inventory. Salaries and wages. Operating expenses Interest on liabilities. Taxes.
Cash Flows from
Investing Activities
Cash Flows from
Investing Activities
Cash Flows from InvestingActivities
InflowsSelling property, plant, and
equipment.Selling investment
securities.Collecting loans.
InflowsSelling property, plant, and
equipment.Selling investment
securities.Collecting loans.
Outflows Purchasing property, plant, and
equipment. Purchasing investment
securities. Lending to others.
Outflows Purchasing property, plant, and
equipment. Purchasing investment
securities. Lending to others.
Cash Flows from
Financing Activities
Cash Flows from
Financing Activities
Cash Flows from Financing Activities
InflowsBorrowing. Issuing stock.
InflowsBorrowing. Issuing stock.
Outflows Repaying debt (excluding
interest). Purchasing treasury stock. Paying dividends.
Outflows Repaying debt (excluding
interest). Purchasing treasury stock. Paying dividends.
Significant noncash investing and financing transactions must be reported separately.
Example: issuing common stock in exchange for land.
Significant noncash investing and financing transactions must be reported separately.
Example: issuing common stock in exchange for land.
Noncash Investing and Financing Transactions
Cash flows from operating
activities can be prepared using either the direct method or the
indirect method.
Cash flows from operating
activities can be prepared using either the direct method or the
indirect method.Let’s look at the direct method
first.
Let’s look at the direct method
first.
Cash Flows from Operating Activities
Accrual basis revenue includes sales that did not result in cash inflows.
Cash received from customers can be computed as follows:
Cash received from customers
Cash received from customers
Decrease in receivablesDecrease in receivables
Increase in receivablesIncrease in receivables
+
–
=
=
Net salesNet sales
Converting from Accrual to Cash-Basis Accounting
Converting from Accrual to Cash-Basis Accounting
We will use T-accounts toanalyze changes in accounts.
Let’s look at an example.
We will use T-accounts toanalyze changes in accounts.
Let’s look at an example.
The Accounts Receivable balance was The Accounts Receivable balance was $27,000 on 12/31/04 and $35,000 on $27,000 on 12/31/04 and $35,000 on
12/31/05. If accrual Sales Revenue for 12/31/05. If accrual Sales Revenue for 2005 was $800,000, what were cash 2005 was $800,000, what were cash
receipts from sales?receipts from sales?
The Accounts Receivable balance was The Accounts Receivable balance was $27,000 on 12/31/04 and $35,000 on $27,000 on 12/31/04 and $35,000 on
12/31/05. If accrual Sales Revenue for 12/31/05. If accrual Sales Revenue for 2005 was $800,000, what were cash 2005 was $800,000, what were cash
receipts from sales?receipts from sales?
Converting from Accrual to Cash-Basis Accounting
27,000
800,000
35,000
12/31/04 Balance
12/31/05 Balance
Accrual Sales Revenue
Accounts Receivable
Cash receipts =
The Accounts Receivable balance was The Accounts Receivable balance was $27,000 on 12/31/04 and $35,000 on $27,000 on 12/31/04 and $35,000 on
12/31/05. If accrual Sales Revenue for 12/31/05. If accrual Sales Revenue for 2005 was $800,000, what were cash 2005 was $800,000, what were cash
receipts from sales?receipts from sales?
The Accounts Receivable balance was The Accounts Receivable balance was $27,000 on 12/31/04 and $35,000 on $27,000 on 12/31/04 and $35,000 on
12/31/05. If accrual Sales Revenue for 12/31/05. If accrual Sales Revenue for 2005 was $800,000, what were cash 2005 was $800,000, what were cash
receipts from sales?receipts from sales?
$792,000
$27,000 + $800,000 - $35,000$27,000 + $800,000 - $35,000
Converting from Accrual to Cash-Basis Accounting
The Salaries Payable balance was $7,000 on 12/31/04 and $5,000 on 12/31/05. If accrued Salaries Expense for 2005 was $80,000, what amount of cash was paid
for salaries?
The Salaries Payable balance was $7,000 on 12/31/04 and $5,000 on 12/31/05. If accrued Salaries Expense for 2005 was $80,000, what amount of cash was paid
for salaries?
Now let’s use T-account analysis for a liability account with anaccrued expense.
Now let’s use T-account analysis for a liability account with anaccrued expense.
Converting from Accrual to Cash-Basis Accounting
The Salaries Payable balance was $7,000 on 12/31/04 and $5,000 on 12/31/05. If accrual Salaries Expense for 2005 was
$80,000, what amount of cash was paid for salaries?
The Salaries Payable balance was $7,000 on 12/31/04 and $5,000 on 12/31/05. If accrual Salaries Expense for 2005 was
$80,000, what amount of cash was paid for salaries?
12/31/04 Balance
12/31/05 Balance
Accrued Salaries Expense
Salaries Payable
Cash payments =
7,000
80,000
5,000
$82,000
$7,000 + $80,000 - $5,000$7,000 + $80,000 - $5,000
Direct MethodNow that we have
seen the T-account method of analysis,
let’s use it to prepare a Direct Method
Statement of Cash Flows for Batson
Company.
We will begin with by analyzing changes in
balance sheet accounts.
Batson Company.
Comparative Balance Sheets - Assets
December 31,
2004 2005Cash 60,000$ 70,000$ Accounts Receivable, net 27,000 35,000 Inventory 230,000 200,000 Land 95,000 167,000 Buildings, net 300,000 325,000 Equipment, net 200,000 126,000
Total Assets 912,000$ 923,000$
Batson Company
Comparative Balance Sheets - Liabilities and Equity
December 31,
2004 2005
Liabilities Accounts Payable 15,000$ 12,000$ Salaries Payable 7,000 5,000 Interest Payable 11,950 14,450 Income Tax Payable 20,000 17,000 Notes Payable 70,000 60,000 Bonds Payable 250,000 150,000 Stockholders' Equity Common Stock 450,000 500,000 Retained Earnings 88,050 164,550 Total Liabilities and Equity 912,000$ 923,000$
Batson CompanyIncome Statement
For the Year Ending December 31, 2005
Sales Revenues 800,000$ Cost of Goods Sold 460,000 Gross Margin 340,000 Depreciation Expense 10,000$ Interest Expense 24,500 Salary Expense 80,000 Other Expenses 71,000 185,500 Operating Income 154,500 Gain on Sale of Equipment 3,000 Loss Due to Flood (30,000) Income Before Tax 127,500 Income Tax Expense 51,000 Net Income 76,500$
Direct MethodAdditional Information
Depreciation on buildings was $6,000 in 2005. Depreciation on equipment was $4,000 in 2005.
A building addition in 2005 cost $31,000, paid in cash.
Equipment with a book value of $40,000 was sold during the year for $43,000.
Equipment with a book value of $30,000 was destroyed during a flood in 2005. There was no insurance.
Batson had no noncash financing and investing activities.
Additional Information Depreciation on buildings was $6,000 in
2005. Depreciation on equipment was $4,000 in 2005.
A building addition in 2005 cost $31,000, paid in cash.
Equipment with a book value of $40,000 was sold during the year for $43,000.
Equipment with a book value of $30,000 was destroyed during a flood in 2005. There was no insurance.
Batson had no noncash financing and investing activities.
Direct MethodAdditional Information
Batson’s tax rate is 40%. Interest Expense on Notes Payable was $6,500. Interest Expense on Bonds Payable was $18,000. Issued Common Stock during 2005 for $50,000. Other Expenses of $71,000 were paid in cash.
Additional Information Batson’s tax rate is 40%. Interest Expense on Notes Payable was $6,500. Interest Expense on Bonds Payable was $18,000. Issued Common Stock during 2005 for $50,000. Other Expenses of $71,000 were paid in cash.
Let’s get started analyzing the accounts. First, we willreview the T-account analysis that we completed earlier.
Then we will analyze the remaining balance sheet accounts starting with the current accounts.
12/31/04 Balance
12/31/05 Balance
Accrual sales revenue
Accounts Receivable
Cash receipts = $792,000
27,000
800,000
35,000
12/31/04 Balance
12/31/05 Balance
Accrued salaries expense
Salaries Payable
Cash Payments = $82,000
7,000
80,000
5,000
12/31/04 Balance
12/31/05 Balance
Cost of Goods Sold
Inventory
Purchases =
230,000
460,000
200,000
12/31/04 Balance
12/31/05 Balance
Purchases
Accounts Payable
Cash Payments =
15,000
430,000
12,000
$430,000
$433,000
12/31/04 Balance
12/31/05 Balance
Interest Expense
Interest Payable
Cash payments =
11,950
24,500
14,450
12/31/04 Balance
12/31/05 Balance
Income Tax Expense
Income Taxes Payable
Cash payment =
20,000
51,000
17,000
$22,000
$54,000
Direct MethodNow, that we have
analyzed the current accounts and found
the cash receipts and cash payments related to operations, we are ready to prepare the
Cash Flows from Operating Activities
portion of the Statement of Cash
Flows.
Now, Let’s continue to use the T-account analysis for the
remaining noncurrent balance sheet
accounts.
Direct Method
12/31/04 Balance
12/31/05 Balance
Depreciation
Buildings, Net
Cash paid for addition =
300,000
6,000
325,000
12/31/04 Balance
12/31/05 Balance
Depreciation
Equipment, Net40,000
200,000 30,000
4,000
126,000
Flood loss
Equipment sale
$31,000
12/31/04 Balance
12/31/05 Balance
Land
Cash paid for land purchase =
95,000
167,000
After completing the analysis of noncurrent assets,we are ready to prepare the Cash Flow from
Investing portion of the Statement of Cash flows.
$72,000
Cash Flow from Investing Activities
Next, we will analyze noncurrent liabilities and equity so that we can
prepare the Cash Flow from Financing portion of the Statement
of Cash flows.
12/31/04 Balance
12/31/05 Balance
Notes Payable
Cash paid to retire notes =
70,000
60,000
12/31/04 Balance
12/31/05 Balance
Bonds Payable
Cash paid to retire bonds =
250,000
150,000
$10,000
$100,000
12/31/04 Balance
12/31/05 Balance
Common Stock
Cash received from stocksale =
450,000
50,000
After completing the analysis of noncurrent liabilitiesand equity, we are ready to prepare the Cash Flow
from Financing portion of the Statement of Cash flows.
$50,000
Cash Flow from Financing Activities
Next, we will put the three sections together to completethe Statement of Cash Flows.
Batson Company.Statement of Cash Flows
For the Period Ending December 31, 2005
Cash Fows from Operating Activities 130,000$
Cash flows from Investing Activities (60,000)
Cash flows from Financing Activities (60,000)
Net Cash Flows for the Period 10,000$
Add: Beginning Cash Balance 60,000
Ending Cash Balance 70,000$
Notice that the Ending Cash Balance on the Statement of Cash Flows agrees with
the 12/31/05 Cash balance on the Balance Sheet.
Notice that the Ending Cash Balance on the Statement of Cash Flows agrees with
the 12/31/05 Cash balance on the Balance Sheet.
A Comparison of the Direct and Indirect Methods
Net cash flow is the same for both methods. The Direct Method provides more detail
about cash from operating activities. The investing and financing sections for the
two methods are identical.
Net cash flow is the same for both methods. The Direct Method provides more detail
about cash from operating activities. The investing and financing sections for the
two methods are identical.
Net Income
Net Income
Cash Flows from
Operating Activities
Cash Flows from
Operating Activities
Indirect Method
Changes in current assets and current liabilities as shown on the following table.
Changes in current assets and current liabilities as shown on the following table.
+ Losses and - Gains
+ Losses and - Gains
+ Noncash expenses such as depreciation and
amortization.
+ Noncash expenses such as depreciation and
amortization.
Use this table when adjusting Net Income
to Cash Flow form Operations.
Use this table when adjusting Net Income
to Cash Flow form Operations.
Indirect Method
We will use the Indirect Method to prepare the
Cash Flows from Operating Activities for the Batson Company.
First, we will review the Balance Sheet and
Income Statement for Batson Company.
Indirect Method
Batson Company.
Comparative Balance Sheets - Assets
December 31,
2004 2005Cash 60,000$ 70,000$ Accounts Receivable, net 27,000 35,000 Inventory 230,000 200,000 Land 95,000 167,000 Buildings, net 300,000 325,000 Equipment, net 200,000 126,000
Total Assets 912,000$ 923,000$
Batson Company
Comparative Balance Sheets - Liabilities and Equity
December 31,
2004 2005
Liabilities Accounts Payable 15,000$ 12,000$ Salaries Payable 7,000 5,000 Interest Payable 11,950 14,450 Income Tax Payable 20,000 17,000 Notes Payable 70,000 60,000 Bonds Payable 250,000 150,000 Stockholders' Equity Common Stock 450,000 500,000 Retained Earnings 88,050 164,550 Total Liabilities and Equity 912,000$ 923,000$
Batson CompanyIncome Statement
For the Year Ending December 31, 2005
Sales Revenues 800,000$ Cost of Goods Sold 460,000 Gross Margin 340,000 Depreciation Expense 10,000$ Interest Expense 24,500 Salary Expense 80,000 Other Expenses 71,000 185,500 Operating Income 154,500 Gain on Sale of Equipment 3,000 Loss Due to Flood (30,000) Income Before Tax 127,500 Income Tax Expense 51,000 Net Income 76,500$
The Indirect Method begins with Net Income, which is then adjusted for the non-cash items
included in net income.
For Batson, the only non-cash items are depreciation, and gains and losses.
The Indirect Method begins with Net Income, which is then adjusted for the non-cash items
included in net income.
For Batson, the only non-cash items are depreciation, and gains and losses.
(Remember, we showed the balance sheets a few slides earlier.)
To complete the Cash flows from operating activities section, we must examine comparative balance sheets
to determine the changes in current assets and current liabilities from the beginning of the period to
the end of the period.
To complete the Cash flows from operating activities section, we must examine comparative balance sheets
to determine the changes in current assets and current liabilities from the beginning of the period to
the end of the period.
Remember that when we prepared the operating section using the Direct Method, we also arrived at
Net Cash flows from Operating Activities of $130,000.
Remember that when we prepared the operating section using the Direct Method, we also arrived at
Net Cash flows from Operating Activities of $130,000.
Because the investingand financing sections
are identical with eithermethod of preparation,
we will not repeatthose sections of the
statement.
Indirect Method
The Financial Analyst
The statement focusesattention on:
Ability to generate cashfrom its operations.
Management of currentassets and current liabilities.
Expenditures forlong-term assets.
Amount received fromexternal financing.