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Learning Objectives
Power Notes
1. Purpose of the Statement of Cash Flows2. Reporting Cash Flows
3. Statement of Cash Flows The Indirect Method
4. Statement of Cash Flows The Direct Method
5. Financial Analysis and Interpretation
Chapter15
C15
Statement of Cash Flows
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Cash Flow Basics Statement of Cash Flows Two Methods
Changes in Current Accounts
Statement of Cash Flows Indirect Method
Statement of Cash Flows Direct Method Free Cash Flow
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Power NotesChapter15
Statement of Cash Flows
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Reporting Cash Flows
1. Operating activitiestransactions that affectnet income.
2. Investing activitiestransactions that affectnoncurrent assets.
3. Financing activitiestransactions that affectequity and debt of the entity.
The statement of cash flows reports a firms majorcash inflows and outflows for a period. Cash flowsare reported by three types of activities.
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Cash Flows
Increases in Cash Decreases in Cash
Cash
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Cash Flows
Increases in Cash
(receipts fromrevenues)
Decreases in Cash
Operating
Cash
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Cash Flows
Increases in Cash
(receipts fromrevenues)
(payments forexpenses)
Decreases in Cash
Operating Operating
Cash
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Cash Flows
Increases in Cash
(receipts fromrevenues)
(payments forexpenses)
(receipts from sales ofnoncurrent assets)
Decreases in Cash
Operating
Investing
Operating
Cash
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Cash Flows
Increases in Cash
(receipts fromrevenues)
(payments forexpenses)
(receipts from sales ofnoncurrent assets)
(payments for aquiringnoncurrent assets)
Decreases in Cash
Operating
Investing
Operating
InvestingCash
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Cash Flows
Increases in Cash
(receipts fromrevenues)
(payments forexpenses)
(receipts from sales ofnoncurrent assets)
(receipts from issuingequity and debt securities)
(payments for aquiringnoncurrent assets)
Decreases in Cash
Operating
Investing
Financing
Operating
InvestingCash
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Cash Flows
Increases in Cash
(receipts fromrevenues)
(payments for dividends, andredemption of debt securities)
(payments forexpenses)
(receipts from sales ofnoncurrent assets)
(receipts from issuingequity and debt securities)
(payments for aquiringnoncurrent assets)
Decreases in Cash
Operating
Investing
Financing
Operating
Investing
Financing
Cash
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Cash Flows Operating Activities
Typical cash inflows Typical cash outflows
What are someof the typicalcash inflowsfrom operatingactivities?
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Cash Flows Operating Activities
Typical cash inflows Typical cash outflows
Interest Revenue
Sales of goodsand services
Dividend Revenue
What are someof the typicalcash outflowsfrom operatingactivities?
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Cash Flows Operating Activities
Typical cash inflows Typical cash outflows
Sales of goodsand services
Merchandisepurchases
Payments ofwages & other
expenses
Tax payments
Interest Revenue
Dividend Revenue
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Cash Flows Investing Activities
Typical cash inflows Typical cash outflows
What are someof the typicalcash inflowsfrom investingactivities?
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Cash Flows Investing Activities
Typical cash inflows Typical cash outflows
Sales of fixed assetsand other long-term
investments
Sale of marketablesecurities andinvestments
What are someof the typicalcash outflowsfrom investingactivities?
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Cash Flows Investing Activities
Typical cash inflows Typical cash outflows
Sales of fixed assetsand other long-term
investments
Sale of marketablesecurities andinvestments
Purchase of fixedassets and other long-
term investments
Purchase ofmarketable securities
and investments
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Cash Flows Financing Activities
Typical cash inflows Typical cash outflows
What are someof the typicalcash inflowsfrom financingactivities?
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Cash Flows Financing Activities
Typical cash inflows Typical cash outflows
Sales (issuance)of stock
Sale (issuance) ofbonds and other
money market debt
Borrowing from banks
and other lendinginstitutions
What are someof the typicalcash outflowsfrom financingactivities?
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Cash Flows Financing Activities
Typical cash inflows Typical cash outflows
Sales (issuance)of stock
Sale (issuance) ofbonds and other
money market debt
Purchase oftreasury stock
Repayment andredemption of debt
(bonds, notes, other)
Payment of cashdividends
Borrowing from banks
and other lendinginstitutions
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Statement of Cash Flows
1. Generate cash flow from operations.
2. Maintain and expand operating capacity.3. Pay dividends.
4. Pay debts, including interest, when due.
5. Generate future profits.
The primary attention is the flow of cash ratherthan net income.
The statement of cash flows is invaluable inassessing the capacity of a firm to achieve goalssuch as:
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Preparing the Statement of Cash Flows
Net cash flows from operating activities will bethe difference between the operating cashreceipts and operating cash payments.
Net cash flows from operating activities isdetermined by adjusting the accrual net income
from operations to reflect a cash-based net incomefrom operations.
Direct Method
Indirect Method
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Advantages of Using the Direct Method
1. Reports the sources and uses of operatingcash receipts and payments.
2. Is easier to understand for many investors.3. Recommended by the Financial Accounting
Standards Board (FASB).Note: The total amount of net cash flow fromoperating activities will be the same for bothdirect and indirect methods.
Investing and Financing activities sections willbe identical for both methods.
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Advantages of Using the Indirect Method
1. Focuses on the differences between netincome and net cash flow from operations.
2. Reveals the relationship between the incomestatement, the balance sheet, and thestatement of cash flows.
3. Less costly to prepare.
4. Must be prepared as a supplemental reporteven if the direct method is used.
5. 98 percent of companies surveyed use theindirect method.
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Cash flows from operating activities:
Cash flows from investing activities:
Cash flows from financing activities:
NetSolutionsStatement of Cash Flows Direct MethodFor the Month Ended November 30, 2002
Cash received from customers $ 7,500Deduct cash payments for expenses
and payment to creditors 4,600
Net cash flow from operating activities $ 2,900
Cash payments for acquiring land (10,000)
Cash received as owners investment $15,000
Deduct cash withdrawal by owner 2,000Net cash flow from financing activities 13,000
Net cash flow and ending cash balance $ 5,900
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Cash flows from operating activities:
Cash flows from investing activities:
Cash flows from financing activities:
Net income, per income statement $ 3,050Add increase in accounts payable 400Deduct increase in supplies (550)
Net cash flow from operating activities $ 2,900
Cash payments for acquiring of land (10,000)
Cash received as owners investment $15,000
Deduct cash withdrawal by owner 2,000Net cash flow from financing activities 13,000
Net cash flow and ending cash balance $ 5,900
NetSolutionsStatement of Cash Flows Indirect MethodFor the Month Ended November 30, 2002
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Cash flows from operating activities:
NetSolutionsStatement of Cash Flows Direct MethodFor the Month Ended November 30, 2002
Cash flows from operating activities:
NetSolutionsStatement of Cash Flows Indirect MethodFor the Month Ended November 30, 2002
Cash received from customers $ 7,500Deduct cash payments for expenses
and payment to creditors 4,600Net cash flow from operating activities $ 2,900
Net income, per income statement $ 3,050Add increase in accounts payable 400Deduct increase in supplies (550)Net cash flow from operating activities $ 2,900
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Cash flows from operating activities:
NetSolutionsStatement of Cash Flows Direct MethodFor the Month Ended November 30, 2002
Cash flows from operating activities:
NetSolutionsStatement of Cash Flows Indirect MethodFor the Month Ended November 30, 2002
Cash received from customers $ 7,500Deduct cash payments for expenses
and payment to creditors 4,600Net cash flow from operating activities $ 2,900
Net income, per income statement $ 3,050Add increase in accounts payable 400Deduct increase in supplies (550)Net cash flow from operating activities $ 2,900
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Cash Relationships and Cash Flows
CashLiabilities
Stockholders
Equity
Balance Sheet
NoncashAssets
Assets = Liabilities + Stockholders Equity
Cash + Noncash Assets = Liabilities + Stockholders Equity
Cash = Liabilities + Stockholders Equity Noncash Assets
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CashLiabilities
Stockholders
Equity
Balance Sheet
NoncashAssets
Assets = Liabilities + Stockholders Equity
Cash + Noncash Assets = Liabilities + Stockholders Equity
Cash = Liabilities + Stockholders Equity Noncash Assets
Cash Relationships and Cash Flows
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CashLiabilities
Stockholders
Equity
Balance Sheet
NoncashAssets
The cash flows are determined by analyzingliabilities, stockholders equity, and noncash assets.
Assets = Liabilities + Stockholders Equity
Cash + Noncash Assets = Liabilities + Stockholders Equity
Cash = Liabilities + Stockholders Equity Noncash Assets
1 2 3
1
2
3
Cash Relationships and Cash Flows
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Determine the debit or credit change of each item above.
Changes in Current Accounts
Change
Accounts 2003 2002 Debit CreditTrade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200500
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Changes in Current Accounts
Change
Accounts 2003 2002 Debit CreditTrade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200500
These debit changes are subtracted from net income in the
operating activities section of the statement of cash flows.Think of these debits as deductions from net income in arrivingat net cash flow from operations.
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Changes in Current Accounts
Change
Accounts 2003 2002 Debit CreditTrade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200500
These credit changes are added to net income in the operating
activities section of the statement of cash flows.Think of these credits as additions to net income in arriving atnet cash flow from operations.
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Cash flows from operating activities:
Operating Activities Indirect Method
Start with the accrual basis net incomeshown on the income statement.
Net income, per income statement $108,000Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000Decrease in accounts payable 3,200Decrease in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities Indirect Method
Because depreciation expense reduced net income but did notrequire an outflow of cash, it is added back to net income.
Net income, per income statement $108,000Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000Decrease in accounts payable 3,200Decrease in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities Indirect Method
These represent credit changes in the current accounts. Thinkof these credits as additional income from a cash perspective.Why do these represent an increased cash flow?
Net income, per income statement $108,000Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000Decrease in accounts payable 3,200Decrease in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities Indirect Method
These represent debit changes in the current accounts. Thinkof these debits as additional expense from a cash perspective.Why do these represent a reduced cash flow?
Net income, per income statement $108,000Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000Decrease in accounts payable 3,200Decrease in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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Cash flows from operating activities:
Operating Activities Indirect Method
This gain was included in net income but did not represent anoperating cash flow. The related cash inflow from the sale isreported in the cash flows from investing activities section.
Net income, per income statement $108,000Depreciation $ 7,000Decrease in inventories 8,000Increase in accrued expenses 2,200 17,200
$125,200
Increase in accounts receivables $ 9,000Decrease in accounts payable 3,200Decrease in income taxes payable 500Gain on sale of land 12,000 24,700
Net cash flow from operating activities $100,500
Deduct:
Add:
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These changes in current accounts were used to preparethe statement of cash flows with the indirect method.They will also be used for the direct method that follows.
Changes in Current Accounts
Change
Accounts 2003 2002 Debit CreditTrade receivables (net) $74,000 $65,000
Inventories 172,000 180,000
Accounts payable (mdse.) 43,500 46,700
Accrued expenses payable 26,500 24,300Income taxes payable 7,900 8,400
9,000
8,000
3,200
2,200500
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000Cost of merchandise sold 790,000Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000
Income from operations $ 187,000Other income:
Gain on sale of land $12,000
Other expense:Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000This is an accrual basis income statement.The direct method of reporting cash flows willessentially convert this to a cash basis statement.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $960,000Cost of merchandise sold 580,000Gross profit $380,000Operating expenses:
Depreciation expense $ 18,000
Other operating expenses 260,000Total operating expenses 278,000
Income from operations $102,000Other income:
Gain on sale of investments $30,000Other expense:
Interest expense 14,000 16,000Income before income tax $118,000Income tax 27,500Net income $ 90,500
Debit Credit
Sales 960,000
Receivables 9,000
Cash
ChangesCash collectedfrom customers
Note: All income statement accountbalances are zero at the beginningof a period. Therefore, the balanceshown represents the amount ofchange during the period.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000Cost of merchandise sold 790,000Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000
Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Sales 1,180,000
Receivables 9,000
Cash 1,171,000
ChangesCash collectedfrom customers
Note: The changes in the current balance sheetaccounts are determined by comparing thebeginning and ending balances. Receivablesincreased by $9,000 during the period.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000
Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Sales 1,180,000
Receivables 9,000
Cash 1,171,000
ChangesCash collectedfrom customers
The increase in receivablesrepresents a reduction in cash inflowrelative to the accrual revenuereported on the income statement.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000
Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Cost of mdse. sold 790,000Inventories 8,000
Accounts payable 3,200
Cash
ChangesCash payments for
merchandise
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 785,200Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000
Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Cost of mdse. sold 790,000Inventories 8,000
Accounts payable 3,200
Cash 785,200
ChangesCash payments for
merchandise
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 785,200Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Cost of mdse. sold 790,000Inventories 8,000
Accounts payable 3,200
Cash 785,200
ChangesCash payments for
merchandise
A decrease in inventories (creditchange) and an decrease in accountspayable (debit change) have theopposite effects.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000
Other operating expenses 196,000Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Depr. expense 7,000
Accum. depreciation 7,000
ChangesDepreciation
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Depr. expense 7,000
Accum. depreciation 7,000
ChangesDepreciation
There is no cash flow fordepreciation expense.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
ChangesDebit Credit
Operating expenses 196,000
Accrued expenses 2,200Cash
ChangesCash payments foroperating expenses
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
ChangesDebit Credit
Operating expenses 196,000
Accrued expenses 2,200Cash 193,800
ChangesCash payments foroperating expenses
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest. 12,000
ChangesGain on sale ofinvestments
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest. 12,000
ChangesGain on sale ofinvestments
Why isnt the cash inflowof $72,000 shown here?
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Cash 72,000
Investments 60,000
Gain on sale of invest. 12,000
ChangesGain on sale ofinvestments
The cash inflow of $72,000will be shown in theinvesting section of thestatement of cash flows.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Interest expense 8,000
Cash
ChangesCash paid forinterest expense
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000 (8,000)Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Interest expense 8,000
Cash 8,000
ChangesCash paid forinterest expense
There is no interest payableaccount at the end of the year.
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000 (8,000)Income before income tax $ 191,000Income tax 83,000Net income $ 108,000
Debit Credit
Income tax expense 83,000
Income tax payable 500
Cash
ChangesCash paid forincome taxes
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $187,000Other income:
Gain on sale of land $12,000Other expense:
Interest expense 8,000 4,000 (8,000)Income before income tax $ 191,000Income tax 83,000 (83,500)Net income $ 108,000
Debit Credit
Income tax expense 83,000
Income tax payable 500
Cash 83,500
ChangesCash paid forincome taxes
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $ 187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000 (8,000)Income before income tax $ 191,000Income tax 83,000 (83,500)Net income $ 108,000 $ 100,500
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $ 187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000 (8,000)Income before income tax $ 191,000Income tax 83,000 (83,500)Net income $ 108,000 $ 100,500
Two different views
of income from
operations
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Rundell Inc.Income Statement
For the Year Ended December 31, 2003 Cash Basis
Sales $1,180,000 $1,171,000Cost of merchandise sold 790,000 (785,200)Gross profit $ 390,000Operating expenses:
Depreciation expense $ 7,000 0
Other operating expenses 196,000 (193,800)Total operating expenses 203,000Income from operations $ 187,000Other income:
Gain on sale of land $12,000 0Other expense:
Interest expense 8,000 4,000 (8,000)Income before income tax $ 191,000Income tax 83,000 (83,500)Net income $ 108,000 $ 100,500
Accrual
Basis
$ 108,000
Two different views
of income from
operations
Cash
Basis
$ 100,500
O ti A ti iti Di t M th d
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Cash flows from operating activities:
Operating Activities Direct Method
Cash inflows:Cash received from customers $1,171,000
Cash outflows:
Cash payments for merchandise $785,200
Cash payments for operating expenses 193,800
Cash payments for interest 8,000
Cash payments for income tax 83,500 1,070,500
Net cash flow from operating activities $ 100,500
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Financial Analysis and Interpretation
Free Cash Flow
Use: To measure operating cash flow availablefor corporate purposes after providingsufficient fixed asset additions to maintaincurrent productive capacity and dividends.
Cash flow from operations $1,400,000Less: Cash invested in fixed
assets to maintain capacity (450,000)
Less: Cash used for dividends (100,000)Free cash flow $ 850,000
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Power NotesChapter15
Statement of Cash Flows