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Chapter 11 Statement of Cash Flows McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.
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Chapter 11
Statement of Cash Flows
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.
Part A
Formatting the Statement of Cash Flows
11-2
Statement of Cash Flows
Provides a summary of cash inflows and cash outflows during the reporting period
Provides a summary of cash inflows and cash outflows during the reporting period
E-GAMES, INC.Statement of Cash Flows
For the Year Ended December 31, 2012
Cash Flows from Operating Activities
Net income $42,000
Adjustments for noncash effects:
Depreciation expense 9,000
Loss on sale of land 4,000
Increase in accounts receivable (7,000)
Decrease in inventory 10,000
Increase in prepaid rent (2,000)
Decrease in accounts payable (5,000)
Increase in interest payable 1,000
Decrease in income tax payable (2,000)
Net cash flows from operating activities $50,000
11-3
Statement of Cash Flows (continued)Cash Flows from Investing Activities
Purchase of investment (35,000)
Sale of land 6,000
Net cash flows from investing activities (29,000)
Cash Flows from Financing Activities
Issuance of common stock 5,000
Payment of cash dividends (12,000)
Net cash flows from financing activities (7,000)
Net increase (decrease) in cash 14,000
Cash at the beginning of the period 48,000
Cash at the end of the period $62,000
Note: Noncash Activities
Purchased equipment by issuing a note payable $20,000
11-4
LO1 Classification of Transactions
Categories of Cash FlowsCategories of Cash Flows
Operating activities
Investing activities
Financing activities
Include cash receipts and cash payments for transactions relating to revenue and expense
activities
Include cash transactions involving the purchase and sale
of long-term assets and current investments
Inflows and outflows of cash resulting from the external financing of a
business
11-5
Part B
Preparing the Statement of Cash Flows
11-6
Steps in Preparing the Statement of Cash Flows
Step 1. Calculate net cash flows from operating activities, using information from the income statement and changes in current assets (other than cash) and current liabilities from the comparative balance sheets.
Step 2. Determine the net cash flows from investing activities, by analyzing changes in long-term asset accounts from the comparative balance sheets.
Step 3. Determine the net cash flows from financing activities, by analyzing changes in long-term liabilities and stockholders’ equity accounts from the comparative balance sheets.
Step 4. Combine the operating, investing, and financing activities, and make sure the total agrees with the net increase (decrease) in cash.
11-7
LO2 Operating Activities – Indirect Method
o Both net income and cash flows from operating activities represent the same operating activities.
o The income statement reports net income on an accrual basis. On the other hand, the statement of cash flows reports the very same activities on a cash basis.
o We remove the noncash components from net income so that what’s left is cash flows from operating activities.
o Both net income and cash flows from operating activities represent the same operating activities.
o The income statement reports net income on an accrual basis. On the other hand, the statement of cash flows reports the very same activities on a cash basis.
o We remove the noncash components from net income so that what’s left is cash flows from operating activities.
We can classify the noncash components as:
(a) revenues and expenses that don’t affect cash at all (adjustments for noncash components of net income), and
(b) revenues and expenses that do affect cash, but not by the amount reported as the revenue or expense (adjustments for changes in current assets and current liabilities).
We can classify the noncash components as:
(a) revenues and expenses that don’t affect cash at all (adjustments for noncash components of net income), and
(b) revenues and expenses that do affect cash, but not by the amount reported as the revenue or expense (adjustments for changes in current assets and current liabilities).
11-8
Summary of All Adjustments
Cash Flows from Operating ActivitiesNet income
Adjustments for noncash effects:
For noncash components of income
+ Depreciation expense
+ Loss on sale of assets
– Gain on sale of assets
For changes in current assets and current liabilities– Increase in a current asset
+ Decrease in a current asset
+ Increase in a current liability
– Decrease in a current liability
= Net cash flows from operating activities 11-9
LO3 Investing Activities
Cash Outflow
Cash Inflow
Noncash activity disclosed in the footnote
Cash Flows from Investing ActivitiesPurchase of investment ($35,000)Sale of land 6,000
Net cash flows from investing activities ($29,000)Note: Noncash Activities
Purchased equipment by issuing a note payable $20,000
E-GAMES, INC.Statement of Cash Flows (partial)
11-10
LO3 Financing Activities
Cash Inflow
Cash Outflow
Retained earnings, beg. Balance $41,000+ Net income 42,000– Dividends (12,000)Retained earnings, ending balance $71,000
Cash Flows from Financing ActivitiesIssuance of common stock $5,000Payment of cash dividends (12,000)
Net cash flows from financing activities ($7,000)
E-GAMES, INC.Statement of Cash Flows (partial)
11-11
Cash Flow Analysis
Analysis
11-12
LO4 Cash Flow Analysis
Analysis based on net cash flows from operating activities (CFFO)
Analysis based on net cash flows from operating activities (CFFO)
($ in millions) 2009 2008
AppleNet sales $36,537 $32,479Net income 5,704 4,834Net cash flows from operating activities (CFFO) 10,159 9,596Total assets 53,851 39,572DellNet sales $61,101 $61,133Net income 2,478 2,947Net cash flows from operating activities (CFFO) 1,894 3,949Total assets 26,500 27,561
11-13
Cash Return on Assets
($ in millions)
CFFO ÷Average
Total Assets=
Cash Return on Assets
Apple $10,159 ÷ ($53,851 + $39,572)/2 = 21.8%
Dell $ 1,894 ÷ ($26,500 + $27,561)/2 = 7.0%
($ in millions) Net Income ÷
AverageTotal Assets =
Return on Assets
Apple $5,704 ÷ ($53,851 + $39,572)/2 = 12.2%
Dell $2,478 ÷ ($26,500 + $27,561)/2 = 9.2%
Return on AssetsReturn on Assets
Cash Return on AssetsCash Return on Assets
Cash Return on Assets is higher than the Return on Assets
11-14
Appendix
Operating Activities-Direct Method
11-15
LO5 Operating Activities-Direct Method
o We report the cash inflows and cash outflows directly on the statement of cash flows. For instance, we report cash received from customers as the cash effect of sales activities, and cash paid to suppliers as the cash effect of cost of goods sold.
o Income statement items that have no cash effect—such as depreciation expense or gains and losses on the sale of assets—are simply not reported under the direct method.
o We report the cash inflows and cash outflows directly on the statement of cash flows. For instance, we report cash received from customers as the cash effect of sales activities, and cash paid to suppliers as the cash effect of cost of goods sold.
o Income statement items that have no cash effect—such as depreciation expense or gains and losses on the sale of assets—are simply not reported under the direct method.
11-16
Operating Activities-Direct Method
Cash Flows from Operating Activities
Cash Inflows:
Cash received from customers $
Cash received from interest
Cash received from dividends
Cash Outflows:
Cash paid to suppliers
Cash paid for operating expenses
Cash paid for interest
Cash paid for income taxes
Net cash flows from operating activities $ x,xxx
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End of chapter 11
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