Financial Accounting chapter 13

7/23/2019 Financial Accounting chapter 13

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The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

Slide

13-1

STATEMENT OF CASHFLOWS

Chapter

13


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Slide

13-2

Provides information about the cash receiptsand cash payments of a business entity

during the accounting period.

Provides information about the cash receiptsand cash payments of a business entity

during the accounting period.

Helps investors with questions about thecompanys:

Ability to generate positive cash flows.

Ability to meet its obligations and to pay

dividends. Need for external financing.

nvesting and financing transactions for theperiod.

Helps investors with questions about thecompanys:

Ability to generate positive cash flows.

Ability to meet its obligations and to pay

dividends. Need for external financing.

nvesting and financing transactions for theperiod.

Purpose of the Statement of CashFlows

Purpose of the Statement of CashFlows


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Slide

13-3


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Slide

13-4

!he "tatement of #ash $lows mustinclude the following three sections:

#ash $lows from %perating Activities#ash $lows from nvestingActivities

#ash $lows from $inancing Activities

!he "tatement of #ash $lows mustinclude the following three sections:

#ash $lows from %peratingActivities#ash $lows from nvestingActivities

#ash $lows from $inancingActivities

Classification of Cash Flows

Classification of Cash Flows


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Slide

13-5

%utflows to: Suppliers of merchandise

and services. Employees. Lenders for interest. Governments for taxes.

%utflowsto: Suppliers of merchandise

and services. Employees. Lenders for interest. Governments for taxes.

nflows from: Sales to customers. Interest and dividends

received.

nflows from: Sales to customers. Interest and dividends

received.

#ash$lowsfrom

%peratingActivities

#ash$lowsfrom

%peratingActivities

&

'

Operating Activities

Operating Activities


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Slide

13-6

#ash$lowsfrom

nvestingActivities

#ash$lowsfrom

nvestingActivities

&

'

nflows from: "elling investments and plant

assets. #ollecting of principal on loans.

nflowsfrom: "elling investments and plant

assets. #ollecting of principal on loans.

%utflows to: Payments to acquire

investments and plant assets. Purchase debt or equity

investments.

(a)e loans.

%utflowsto:

Payments to acquireinvestments and plant assets.

Purchase debt or equityinvestments.

(a)e loans.

Investing Activities

Investing Activities


7/59 The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

Slide

13-7

&

'

nflows from: "hort*term and long*term

borrowing.

%wners +for example, fromissuing stoc)-.

nflowsfrom: "hort*term and long*term

borrowing.

%wners +for example, fromissuing stoc)-.

%utflows to: epayments of borrowed

funds. %wners for dividends. Purchase treasury stoc).

%utflowsto: epayments of borrowed

funds. %wners for dividends. Purchase treasury stoc).

Financing ActivitiesFinancing Activities

#ash$lowsfrom

$inancingActivities

#ash$lowsfrom

$inancingActivities



Slide

13-8

#ash/quivalents

#ash#ash#urrency

"hort*term, highly liquid investments. eadily convertible into cash.

"o near maturity that mar)et value is unaffected byinterest rate changes.

"hort*term, highly liquid investments. eadily convertible into cash.

"o near maturity that mar)et value is unaffected byinterest rate changes.

Cash and Cash EquivalentsCash and Cash Equivalents



Slide

13-9

!he operatingcash flows section

can be prepared

using either thedirect method orthe indirect

method.

!he operatingcash flows section

can be prepared

using either thedirect method orthe indirect

method.

0ets loo) atthe 1irect(ethod for

preparing the"tatement of#ash $lows.



Slide

13-10

Accrual basis revenue includes sales thatdid not result in cash inflows.

#an be computed as:

#ash eceived from#ustomers


1ecrease inreceivables

1ecreaseinreceivables

ncrease inreceivables

ncreaseinreceivables

&

2

3

3

Net "alesNet "ales

irect !ethodCash "eceived from Customers




Slide

13-11

&

2

3

3

The A/R alance !as "#$%$$$ on &'/(&/$' and"&&$%$$$ on &'/(&/$(. If accrual sales revenue

for '$$( !as ")$$%$$$% !hat !as cash asis

revenue*



revenue*


1ecreaseinreceivables

ncrease inreceivables

ncreaseinreceivables

Net "ales

4566,666

Net "ales

4566,666







Slide

13-12

#ash eceived from#ustomers 3 4786,666

#ash eceived from#ustomers 3 4786,666



496,666ncrease inreceivables

496,666ncreaseinreceivables2

3

Net "ales

4566,666

Net "ales

4566,666



revenue*



revenue*





Slide

13-13

Now that weunderstand the

process, lets loo) atsome simplified

formulas forcomputing directmethod cash flows.



Slide

13-14

irect !ethodInterest and ividends "eceived

irect !ethodInterest and ividends "eceived



Slide

13-15

"tep

"tep ;

irect !ethodCash Paid for !erchandise



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13-16

How much did 0ug 0ite pay for inventory in;669>69 96,6664 A>P, >>69 ;9,6664nventory, ;>9>69 ?@,6664 A>P, ;>9>69 9@,6664

#%", ;>9>69 566,6664



Purchases for ;669 were 459@,666.

Purchases 3 4566,666 & 49@,666

#ash Paid for (erchandise in ;669was 45;9,666.

#ash Paid 3 459@,666 * 4;,666

Purchases for ;669 were 459@,666.

Purchases 3 4566,666 & 49@,666

#ash Paid for (erchandise in ;669was 45;9,666.

#ash Paid 3 459@,666* 4;,666


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Slide

13-17

After deducting depreciation and othernoncash expenses, the cash paid for expenses

is affected by

+- whether the expense was prepaid, and

+;- whether the expense was accrued.

After deducting depreciation and othernoncash expenses, the cash paid for expenses

is affected by

+- whether the expense was prepaid, and

+;- whether the expense was accrued.

#ash Paid for

/xpenses3 /xpenses

&ncreasein

prepaid expenses

* 1ecreasein

prepaid expenses

&1ecreasein

accrued liabilities

* ncreasein

accrued liabilities+ +

irect !ethodCash Pa#ments for E$penses

irect !ethodCash Pa#ments for E$penses


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Slide

13-18

Now, lets

prepare a directmethod"tatement of

#ash $lows forrate Big#ompany.

Slid


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Slide

13-19

rate Big #ompany#omparative Balance "heets * Assets

1ecember 9,

;66; ;669#ash ?6,6664 86,9864

Accounts eceivable, net ;8,666 9@,666

nventory ;96,666 ;66,666

!rading "ecurities * ;@,666/quipment, net @66,666 =;@,666

nvestment in !iny #o. 66,666 96,666

!otal Assets 58,6664 77@,9864

irect !ethod % E$ampleirect !ethod % E$ample

Slid


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Slide

13-20

rate Big #ompany#omparative Balance "heets * 0iabilities and /quity

1ecember 9,

;66; ;669

Accounts Payable @,6664 ;,6664

"alaries Payable 8,666 @,666

nterest Payable ,5@6 8,9@6

ncome !ax Payable ;6,666 8,666

Notes Payable, BobCs Ban) 86,666 ?6,666

Bonds Payable ;@6,666 @6,666

Premium on Bonds Payable @,666 =,666

#ommon "toc) =@6,666 @66,666

.etained /arnings 77,6@6 96,6;6

!otal 0iabilities and /quity 58,6664 77@,9864


Slid


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Slide

13-21

rate Big #ompanyncome "tatement Amounts

$or the Dear /nding 1ecember 9, ;669

"ales evenues 766,6664

#ost of oods "old @?6,666

1epreciation /xpense @,666

nterest /xpense ;7,6@6

ncome !ax /xpense ;8,576

"alary /xpense 76,666

%ther /xpenses 8,666

AmortiEation of Bond Premium ,666ain on "ale of /quipment 9,666

/xtraordinary 0oss 96,666

/quity in nvestee ncome =6,666

Net ncome =,5864


Slide


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Slide

13-22


Additional nformationTradin, Securities !ere purchased durin, '$$(

at a cost of "'-%$$$.

Euipment !ith a oo value of "0$%$$$ !assold durin, the year for "0(%$$$.

Euipment !ith a oo value of "($%$$$ !asdestroyed durin, a frea flood in '$$(. There

!as no insurance.Grate 1i, holds a '-2 investment in Tiny Co.

and accounts for it usin, the Euity 3ethod.

Additional nformationTradin, Securities !ere purchased durin, '$$(

at a cost of "'-%$$$.

Euipment !ith a oo value of "0$%$$$ !assold durin, the year for "0(%$$$.

Euipment !ith a oo value of "($%$$$ !asdestroyed durin, a frea flood in '$$(. There

!as no insurance.Grate 1i, holds a '-2 investment in Tiny Co.

and accounts for it usin, the Euity 3ethod.

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Slide

13-23


Additional nformationGrate 1i,4s tax rate is 0$2.

The 5otes 6ayale to 1o4s 1an carry a &'2

rate. The payments are due on the first day ofeach month.

The 1onds 6ayale carry a )2 rate. Interest ispayale semiannually on 7uly & 8 7an. &.

Grate 1i, sold stoc durin, '$$& for "-$%$$$.Grate 1i, received "&$%$$$ dividends from Tiny

Co.

Additional nformationGrate 1i,4s tax rate is 0$2.

The 5otes 6ayale to 1o4s 1an carry a &'2

rate. The payments are due on the first day ofeach month.

The 1onds 6ayale carry a )2 rate. Interest ispayale semiannually on 7uly & 8 7an. &.

Grate 1i, sold stoc durin, '$$& for "-$%$$$.Grate 1i, received "&$%$$$ dividends from Tiny

Co.

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Slide

13-24


Add: 1ecrease in "alary Payable ;,666

#ash Paid to /mployees 7;,6664


Add: 1ecrease in "alary Payable ;,666

#ash Paid to /mployees 7;,6664

"ales .evenues 766,6664

0ess: ncrease in A>. +7,666-

#ash .eceived from #ustomers 85;,6664

"ales .evenues 766,6664

0ess: ncrease in A>. +7,666-

#ash .eceived from #ustomers 85;,6664


#ash eceived from #ustomers

#ash Paid to /mployees

Slide


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Slide

13-25

nterest /xpense ;7,6@64Add: 1ecrease in nterest Payable =,?66

#ash Paid for nterest 9;,?@64

nterest /xpense ;7,6@64Add: 1ecrease in nterest Payable =,?66

#ash Paid for nterest 9;,?@64


Add : 1ecrease in A>P 9,666

0ess: 1ecrease in nventory +96,666-

#ash Paid for nventory @99,6664


Add : 1ecrease in A>P 9,666

0ess: 1ecrease in nventory +96,666-

#ash Paid for nventory @99,6664


#ash Paid for nventory

#ash Paid for nterest

Slide


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Slide

13-26


Add: 1ecrease in !axes Payable 9,666

#ash Paid for !axes 96,5764


Add: 1ecrease in !axes Payable 9,666

#ash Paid for !axes 96,5764


#ash Paid for !axes

%ther %perating #ash $lows

Slide


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Slide

13-27


#ash $lows $rom %perating Activities

Slide


28/59


Slide

13-28

rate Big #ompany

"tatement of #ash $lows

$or the Period /nding 1ecember 9, ;669

. %perating #ash $lows ;8,9864

. nvesting #ash $lows

Proceeds from sale of /quipment =9,666

. $inancing #ash $lows

Proceeds from sale of "toc) @6,6664

Principal paid on Bonds +66,666-

Principal paid on Notes +6,666- +?6,666-

Net #ash $lows for the Period 6,9864

Add: Beginning #ash Balance ?6,666

/nding #ash Balance 86,9864

/quipment with a boo) value of

4=6,666 was sold for 4=9,666.

/quipment with a boo) value of4=6,666 was sold for 4=9,666.

Notes Payable decreased from486,666 to 4?6,666 during ;669.

Notes Payable decreased from486,666 to 4?6,666 during ;669.

Bonds Payable decreased from4;@6,666 to 4@6,666 during ;669.

Bonds Payable decreased from4;@6,666 to 4@6,666 during ;669.

Slide


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Slide

13-29

rate Big #ompany


$or the Period /nding 1ecember 9, ;669

. %perating #ash $lows ;8,9864

. nvesting #ash $lows

Proceeds from sale of /quipment =9,666

. $inancing #ash $lows

Proceeds from sale of "toc) @6,6664

Principal paid on Bonds +66,666-

Principal paid on Notes +6,666- +?6,666-

Net #ash $lows for the Period 6,9864

Add: Beginning #ash Balance ?6,666

/nding #ash Balance 86,9864

Notice that the /nding#ash Balance per the


agrees with the ;>9>69#ash balance on theBalance "heet.

Notice that the /nding#ash Balance per the

"tatement of #ash $lowsagrees with the ;>9>69

#ash balance on theBalance "heet.

Slide


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Slide

13-30

0ets loo) at thendirect (ethodthat is used byover 58F of all

companies.

Slide


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Slide

13-31

Netncome

Netncome

#ash $lowsfrom %perating

Activities

#ash $lows

from %peratingActivities

Indirect !ethodIndirect !ethod

#hanges in current assets and currentliabilities as shown on the following table.

#hanges in current assets and currentliabilities as shown on the following table.

& 0osses and

* ains

& 0osses and

* ains

& Noncash

expenses such asdepreciation and

amortiEation.

& Noncash

expenses such asdepreciation and

amortiEation.

Slide


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13-32

Gse this table when adusting Net ncometo %perating #ash $lows.

Indirect !ethodIndirect !ethod

Slide


33/59


13-33

0ets prepare a

complete"tatement of#ash $lowsusing the

ndirect (ethod.

Slide


34/59


13-34

Ioes Place has prepared the Balance "heetas of (arch 9, ;669, and (arch 9, ;66;.!he ncome "tatement for the year ended

9>9>69 has also been prepared. Ioeneeds help preparing the "tatement of

#ash $lows.

Ioes Place has prepared the Balance "heetas of (arch 9, ;669, and (arch 9, ;66;.!he ncome "tatement for the year ended

9>9>69 has also been prepared. Ioeneeds help preparing the "tatement of

#ash $lows.

7oe4s6lace

Indirect !ethod % E$ampleIndirect !ethod % E$ample

Slide


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13-35

IoeCs Place

ncome "tatement

$or the Dear /nding 9>9>69

evenues 8;8,6664

%perating /xpenses +8=7,666-

1epreciation /xpense +?,666-ain on "ale of 0and 7,666

Net 0oss +5,666-4

IoeCs Place

ncome "tatement

$or the Dear /nding 9>9>69

evenues 8;8,6664

%perating /xpenses +8=7,666-

1epreciation /xpense +?,666-ain on "ale of 0and 7,666

Net 0oss +5,666-4

!he 47,666 gain was theresult of selling land

costing 49;,666 for 4=6,666during the period.

!he 47,666 gain was theresult of selling land

costing 49;,666 for 4=6,666during the period.


Slide


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13-36


Slide


37/59


13-37

Ioes Place issued 4@6,666of no par common stoc) to

settle the 4@6,666 note

payable.

Ioes Place issued 4@6,666of no par common stoc) to

settle the 4@6,666 note

payable.


Slide


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13-38


Slide


39/59


13-39

Jith the indirect method, alwaysstart with the net income or net

loss for the period.

Jith the indirect method, alwaysstart with the net income or net

loss for the period.


Slide

13 40


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13-40


Slide

13 41


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13-41

Accounts receivable decreased.

9>9>69 9>9>6;

4;9,666 * 4=6,666 3 4+8,666-

Accounts receivable decreased.

9>9>69 9>9>6;

4;9,666 * 4=6,666 3 4+8,666-


Slide

13 42


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13-42

Accounts payable increased.

9>9>69 9>9>6;

497,666 * 4;8,666 3 4,666

Accounts payable increased.

9>9>69 9>9>6;

497,666 * 4;8,666 3 4,666


Slide

13 43


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13-43

nventory increased.

9>9>69 9>9>6;

49@6,666 * 4966,666 3 4@6,666

nventory increased. 9>9>69 9>9>6;

49@6,666 * 4966,666 3 4@6,666


Slide

13 44


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13-44

"alaries payable decreased.

9>9>69 9>9>6;

4 5,666 * 4=,666 3 4+@,666-

"alaries payable decreased.

9>9>69 9>9>6;

4 5,666 * 4=,666 3 4+@,666-


Slide

13 45


45/59


13-45

Add bac) non*cash expenses.Add bac) non*cash expenses.


Slide

13 46


46/59


13-46

"ubtract gains."ubtract gains.


Slide

13-47


47/59


13-47

!he operating cashflows amount comes

from the schedule

ust prepared.

!he operating cashflows amount comes

from the schedule

ust prepared.


Slide

13-48


48/59


13-48

0and originally costing 49;,666

was sold for 4=6,666.

0and originally costing 49;,666

was sold for 4=6,666.


Slide

13-49


49/59


13 49

1ividends of 4;6,666 were paid toowners during the year.

1ividends of 4;6,666 were paid toowners during the year.


Slide

13-50


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13 50

#ompute the net change in cashfor the period.

#ompute the net change in cashfor the period.


Slide

13-51


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13 51

#omplete the "tatement of #ash$lows by reconciling beginning

cash to ending cash.

#omplete the "tatement of #ash$lows by reconciling beginning

cash to ending cash.


Slide

13-52


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13 52

Note that the endingcash amount tiesbac) to the Ioes

Place Balance "heetat 9>9>69.

Note that the endingcash amount tiesbac) to the Ioes

Place Balance "heetat 9>9>69.


Slide

13-53


53/59


n addition, on the faceof the statement or in a

supplementalschedule, disclose the

4@6,666 noncashfinancing activity.

n addition, on the faceof the statement or in asupplemental

schedule, disclosethe

4@6,666 noncashfinancing activity.



54/59

Slide

13-55


55/59


#ash Budgets are used by management to plan andforecast future cash flows.

#ash Budgets are used by management to plan andforecast future cash flows.

$ o r c e m a n a g e m e n t t o c o o r d i n a t e a c t i v i t i e s .

P r o v i d e m a n a g e r s w i t h a d v a n c e n o t i c e o f a v a i l a b l e r e s o u r c e s .

P r o v i d e t a r g e t s u s e f u l i n e v a l u a t i n g p e r f o r m a n c e .

P r o v i d e a d v a n c e w a r n i n g s o f p o t e n t i a l c a s h s h o r t a g e s .

A # a s h B u d g e t c a n b e u s e d t o :

!anaging Cash Flows!anaging Cash Flows

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13-56


56/59


ncrease collection of accountsreceivables.

Keep inventory low.

1elay payment of liabilities.

Plan timing of maor expenditures.

nvest idle cash.

ncrease collection of accountsreceivables.

Keep inventory low.

1elay payment of liabilities.Plan timing of maor expenditures.

nvest idle cash.

!anaging Cash Flows!anaging Cash Flows

Slide

13-57

C h & d i


57/59


Cash &udgeting

#ash Budget

(ay Iune Iuly AugustBeginning cash balance ;8,@664 @,6664 *4 *4

Add: #ash receipts 9,@66

!otal available cash 9,6664

0ess: #ash disbursements ?,666/xcess +deficiency- of

available cash over cash

disbursements @,6664

$inancing needed

$inancing repayments *

/nding cash balance @,6664

#ash Budget

(ay Iune Iuly August

Beginning cash balance ;8,@664 @,6664 *4 *4

Add: #ash receipts 9,@66

!otal available cash 9,6664

0ess: #ash disbursements ?,666

/xcess +deficiency- of


disbursements @,6664

$inancing needed

$inancing repayments *

/nding cash balance @,6664

!he ending cash balance of one month becomes thebeginning cash balance of the next month.

!he ending cash balance of one month becomes thebeginning cash balance of the next month.

Slide

13-58

C h & d i


58/59


Cash &udgetingCash &udgeting

#ash Budget

(ay Iune Iuly AugustBeginning cash balance ;8,@664 @,6664 6,6664 6,6664

Add: #ash receipts 9,@66 ;,666 5,666 =,666

!otal available cash 9,6664 8,6664 5,6664 ;=,6664

0ess: #ash disbursements ?,666 7,666 ?,666 7,666/xcess +deficiency- of


disbursements @,6664 +,666-4 9,6664 ?,6664

$inancing needed ,666 * *

$inancing repayments * * 9,666 ?,666

/nding cash balance @,6664 6,6664 6,6664 6,6664

#ash Budget

(ay Iune Iuly August

Beginning cash balance ;8,@664 @,6664 6,6664 6,6664

Add: #ash receipts 9,@66 ;,666 5,666 =,666

!otal available cash 9,6664 8,6664 5,6664 ;=,6664

0ess: #ash disbursements ?,666 7,666 ?,666 7,666

/xcess +deficiency- of


disbursements @,6664 +,666-4 9,6664 ?,6664

$inancing needed ,666 * *

$inancing repayments * * 9,666 ?,666

/nding cash balance @,6664 6,6664 6,6664 6,6664

$inancing is needed in Iune because the companymust maintain a minimum cash balance of 46,666.

$inancing is needed in Iune because the companymust maintain a minimum cash balance of 46,666.

Slide

13-59


59/59

End of Chapter 13End of Chapter 13

#hester, ol#hester, ol

buddy, wonder ifbuddy, wonder if

you could helpyou could helpme with a littleme with a little

cash flowcash flow

problem mproblem m

having

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Financial Accounting chapter 13

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