Unit 11 Cash Flows (New) (1)

8/13/2019 Unit 11 Cash Flows (New) (1)

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ACCT 5325 Intermediate FinancialAccounting I

Unit 11: Cash Flows

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Learning Objectives

1. Describe the purpose of the statement of cash flows.

2. Identify the major classifications of cash flows.

3. Differentiate between net income and net cash flowsfrom operating activities.

4. Contrast the direct and the indirect methods ofcalculating net cash flow from operating activities.

5. Determine net cash flows from investing and financingactivities.

6. Prepare a statement of cash flows.

7. Identify sources of information for a cash flowstatement.

8. Discuss special problems in preparing a statement of

cash flows.

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Purpose and Uses of the Statement ofCash Flows

Purpose

To provide information about the cash receipts andpayments of an entity during a period

To summarize the operating, investing, andfinancing activities of the business

Uses

Assess entitys ability to generate future cash flows

Assess entitys ability to pay dividends andobligations

Reconcile net income and net cash flow fromoperations

Cash and noncash investing and financing

transactions

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Classification of Cash Flows

Operating Activities

Income Statement Items

Investing Activities

GenerallyLong-Term Assets Financing Activities

Generally Long-Term Liability and Equity Items

Cash and Cash Equivalents

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Classification of Cash Flows - Operating

Operating Cash Inflows (+)

Sales of goods and services

Interest income *

Dividend income * Operating Cash Outflows (-)

Purchase of inventory

Salaries & wages paid

Taxes paid Interest expense paid **

Other expenses paid

* Not investing

** Not financing

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Classification of Cash Flows - Investing

Investing Cash Inflows (+)

Sale of property, plant, and equipment

Sale of debt or equity securities of other entities

Collection of principal on loans to others Investing Cash Outflows (-)

Purchase of property, plant, and equipment

Purchase of debt or equity securities of other

entities Loans to other entities (i.e. Notes Receivable)

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Classification of Cash Flows - Investing

Investing Cash Inflows (+)

Sale of property, plant, and equipment

Sale of debt or equity securities of other entities

Collection of principal on loans to others Investing Cash Outflows (-)

Purchase of property, plant, and equipment

Purchase of debt or equity securities of other

entities Loans to other entities (i.e. Notes Receivable)

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Classification of Cash Flows - Financing

Financing Cash Inflows (+)

Sale of the companys equity securities stock

Issuance of debt (bonds or notes)

Financing Cash Outflows (-) Dividends paid to stockholders

Purchase of treasury stock

Redeem long-term debt (i.e. payoff bonds or notes)

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Format of the Statement of Cash Flows

Presentation Order

Operating Activities

Direct Method, or

Indirect Method(start with Net Income and adjust)


Financing Activities

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Sources of Information Needed

Sources of Information

Comparative balance sheets

Current Income Statement

Selected Transaction Data Steps in Preparation

Determine change in cash

Determine net cash flow from operations

Determine net cash flow from investing Determine net cash flow from financing

(Sum of net cash flow from all three activities = Change in Cash)

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Indirect Method - Operating

COMPANY NAME

Statement of Cash Flows

_____________ Period Covered___ ___________Cash flows from Operating Activities:

Net income (from income statement) XXX

Adjustments to reconcile net income to

cash provided (used) by operating activities:

+ Depreciation Expense XX

+ Amortization Expense XX+ Loss on sale of plant assets XX

- Gain on sale of plant assets (XX)

+ (-) Change in current assets and liabilities XX XXX

Net cash provided (used) by operating activities XXX

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Other Adjustments to Net Income

Additions to Net Income

Amortization of Bond Discount

Loss on common stock investment (equity method) Loss on impairment of assets

Deductions to Net Income

Amortization of Bond Premium

Income on common stock investment (equity method)

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Change in Operating Current Assets andCurrent Liabilities - Adjustments to NI

Current Assets (Opposite Direction)

Increase in Current Assets (Subtract) Decrease in Current Assets (Add)

Current Liabilities (Same Direction)

Increase in Current Liabilities (Add)

Decrease in Current Liabilities (Subtract)

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Change in Operating Current Assets andCurrent Liabilities - Example

Current Assets (Opposite Direction)

2010__ __2009__ AdjustmentAccounts Receivable 10,000 13,000 3,000 +

Inventory 45,000 40,000 (5,000)

Prepaid Insurance 7,000 9,000 2,000 +

Current Liabilities (Same Direction)

Accounts Payable 44,000 40,000 4,000 +

Income Tax Payable 13,000 19,000 (6,000)

Accrued Liabilities 33,000 36,000 (3,000)

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Direct Method - Operating

COMPANY NAME

Statement of Cash Flows

_____________ Period Covered___ ___________Cash flows from Operating Activities:

Cash received from customers XXX

Cash received from interest income XXX

Cash paid to suppliers (XX)

Cash paid to employees (XX)

Cash paid for interest (XX)Cash paid for insurance (XX)

Cash paid for taxes (XX)

Cash disbursed for operating activities (XXX)

Net cash provided (used) by operating activities XXX

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Calculation of Cash Receipts from Customers

Cash receipts

from = Sales + Decrease in A/R

Customers Revenue - Increase in A/R

Calculation of Cash Payments for Operating

Expenses + Decrease in

+ Increase in accrued expense

Cash Payments prepaid expense payablefor Operating = Operating or or

Expenses Expenses - Decrease in - Increase in

prepaid expense accrued expense

payable

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Example: Increase

2010__ __2009__ (Decrease)

Accounts Receivable 10,000 13,000 (3,000)

Inventory 45,000 40,000 5,000

Prepaid Insurance 7,000 9,000 (2,000)

Accounts Payable 44,000 40,000 4,000

Income Tax Payable 13,000 19,000 (6,000)

Income Statement Cash Flow

Amounts____ Adjustments __AmountsSales Revenue 150,000 +3,000 = 153,000

Cost of Goods Sold 45,000 +5,000-4,000 = 46,000

Insurance Expense 15,000 -2,000 = 13,000

Income Tax Expense 25,000 +6,000 = 31,000

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Direct Versus Indirect Controversy

Pros for Direct Method

Shows actual operating receipts and payments

Information about cash receipts and payments

provides more information about companys abilityto:

Generate cash to pay debts,

Reinvest in operations, and

Make distributions to owners.

Pros for Indirect Method Focuses on differences between net income and

operating net cash flow.

Provides link between the income statement,

balance sheet, and statement of cash flows.

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+/- Plant and Equipment - Sale andAcquisition

+/- Notes Receivable Collection and

Issuance +/- Stock and Bond Sale and Acquisitions

(Investments in OTHER Companies)

Example: If the equipment account changed from $100,000 to$175,000 you need to analyze what caused the change related to

cash. Assume you purchased new equipment for $125,000, andsold old equipment with an original cost of $50,000 for $63,000.What items would appear on the cash flow statement?

Cash Inflow Sale of equipment $63,000

Cash Outflow Purchase of equipment ($125,000)

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Financing Activities

+/- Stock and Bond - Issuance andRetirement (Own Company Securities)

+/- Notes Payable to Vendors and Banks

Issuance and Payoff - Dividends Paid (of Own Company to its

shareholders reduction in retainedearnings)

Note: You need to look at the change in each accountand determine if any transactions were cash related.

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Special Problems in PreparingStatement of Cash Flows

Adjustments similar to depreciation

Accounts receivable, net

Other working capital changes

Net losses Gains

Stock options

Postretirement benefits

Extraordinary items

Significant noncash transactions

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Disclosures

Direct Method (at a minimum)

Cash collected from customers

Interest and dividends received

Other operating cash receipts

Cash paid to employees and suppliers of goods or services

Interest paid

Income taxes paid

Other operating cash payments

Indirect Method

Changes in inventory, receivables, and payables

Interest paid (net of amount capitalized)

Income taxes paid

Significant Noncash Transactions

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Unit 11 Cash Flows (New) (1)

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