Financial accounting, 5e

Financial Accounting, 5e Weygandt, Kieso, & Kimmel Prepared by Kurt M Hull, MBA CPA California State University, Los Angeles John Wiley & Sons, Inc CHAPTER 14 14 CHAPTER STATEMENT OF OF CASH CASH FLOWS FLOWS STATEMENT STUDY OBJECTIVES After studying this chapter, you should understand: Usefulness of the statement of cash flows Operating, investing, and financing activities Indirect method Direct method Analysis STUDYOBJECTIVE OBJECTIVE11 STUDY USEFULNESSOF OF CASH CASHFLOW FLOW STATEMENT STATEMENT USEFULNESS The cash flow statement reports CASH RECEIPTS and CASH PAYMENTS from OPERATING, FINANCING, and INVESTING activities The cash flow statement helps users assess: Ability to generate future cash flows Ability to pay dividends and meet obligations Why net income is different from operating cash flows Cash investing and financing transactions STUDYOBJECTIVE OBJECTIVE22 STUDY OPERATINGCASH CASHFLOWS FLOWS OPERATING • Cash inflows: – From sale of goods or services – From return on loans (interest received) and on equity securities (dividends received) • Cash outflows: – To suppliers for inventory – To employees for services – To government for taxes – To lenders for interest – To others for expenses STUDYOBJECTIVE OBJECTIVE22 STUDY INVESTINGCASH CASH FLOWS FLOWS INVESTING • Cash inflows: – From sale of property, plant, and equipment – From sale of debt or equity securities of other entities – From collection of principal on loans to other entities • Cash outflows: – To purchase property, plant, and equipment – To purchase debt or equity securities of other entities – To make loans to other entities STUDYOBJECTIVE OBJECTIVE22 STUDY FINANCINGCASH CASH FLOWS FLOWS FINANCING • Cash inflows: – From sale of equity securities (company's own stock) – From issuance of debt (bonds and notes) • Cash outflows: – To stockholders as dividends – To redeem long-term debt or reacquire capital stock SIGNIFICANT NON-CASH NON-CASH ACTIVITIES ACTIVITIES SIGNIFICANT The following activities are reported in a separate schedule (bottom of cash flow statement) or a note to the F/S Issuance of common stock to purchase assets Conversion of bonds into common stock Issuance of debt to purchase assets Exchanges of plant assets CASH FLOW FLOW CASH STATEMENTFORMAT FORMAT STATEMENT COMPANY NAME Statement of Cash Flows Period Covered Cash flows from operating activities (List of individual items) Net cash provided (used) by operating activities Cash flows from investing activities (List of individual inflows and outflows) Net cash provided (used) by investing activities Cash flows from financing activities (List of individual inflows and outflows) Net cash provided (used) by financing activities Net increase (decrease) in cash Cash at beginning of period Cash at end of period Noncash investing and financing activities (List of individual noncash transactions) XX XXX XX XXX XX XXX XXX XXX XXX XXX INFORMATION REQUIRED REQUIRED INFORMATION TOPREPARE PREPARE CASH CASH FLOW FLOW STATEMENT STATEMENT TO Needed to prepare cash flow statement: Comparative balance sheet Current income statement Additional information The SCF deals with cash receipts and payments, so the accrual concept is not used in the preparation of the SCF STEPSIN IN PREPARING PREPARING STEPS CASHFLOW FLOW STATEMENT STATEMENT CASH INDIRECT METHOD METHOD INDIRECT Using the information provided, the cash flow statement will account for every change on the comparative balance sheet The objective: to determine net cash flow during the period, which should match the change in cash during the period INDIRECT METHOD METHOD INDIRECT Net income 145,000 Adjustments to reconcile net income to cash flow from operations Depreciation exp 9,000 Loss on sale of equipment 3,000 Decrease in A/R 10,000 Increase in inventory (5,000) Increase in prepaid expenses (4,000) Increase in accounts payable 16,000 Decrease in income taxes payable (2,000) Net cash provided by operating activities Purchase of building Purchase of equipment Sale of equipment 172,000 (120,000) (25,000) 4,000 Net cash used by investing activities Issuance of common stock Payment of dividends Net cash used by financing activities 27,000 (141,000) 20,000 (29,000) (9,000) Net increase in cash 22,000 Beginning cash 33,000 Ending cash 55,000 REVIEW QUESTION QUESTION REVIEW A company’s net income is $132,000, and during the year the following occurred: Accounts payable increased $10,000, Inventory decreased $6,000 Accounts receivable increased $12,000 Compute cash flows from operations Net income 132,000 Increase in A/R (12,000) Increase in A/P 10,000 Decrease in Inventory Cash flows from operations 6,000 136,000 STUDY OBJECTIVE OBJECTIVE 44 STUDY DIRECT METHOD METHOD DIRECT The direct method does not reconcile net income with cash flow from operations Instead, the operating section lists cash paid and cash received for all income statement items DIRECT METHOD METHOD DIRECT JUAREZ COMPANY Comparative Balance Sheet Assets Cash Accounts receivable Inventory Prepaid expenses Land Equip Accumulated Dep equip Total Liabilities and Stockholders’ Equity Accounts payable Accrued expenses payable Income taxes payable Bonds payable Common stock Retained earnings Total 2006 $ 191,000 12,000 170,000 6,000 140,000 160,000 (16,000) $ 663 ,000 2005 $ 159,000 15,000 160,000 8,000 80,000-0 –0– $ 422,000 $ $ 60,000 20,000 –0– –0– 300,000 42,000 $ 422,000 52 ,000 15 ,000 12,000 130,000 360,000 94 ,000 $ 663 ,000 Change Increase/Decrease $ 32,000 Increase 3,000 Decrease 10,000 Increase 2,000 Decrease 60,000 Increase 160,000 Increase 16,000 Increase $ ,000 Increase ,000 Increase 12 ,000 Increase 130,000 Increase 60,000 Increase 2,000 Increase DIRECT METHOD METHOD DIRECT JUAREZ COMPANY Income Statement For the Year Ended December 31, 2006 Revenues from sales Cost of goods sold Operating expenses (excluding depreciation) Depreciation expense Loss on sale of store equipment Income before income taxes Income tax expense Net income $ 975,000 $ 660,000 176,000 18,000 1,000 855,000 120,000 36,000 $ 84,000 Additional information: (1) In 2006 , the company declared and paid a $32,000 cash dividend (2) Bonds were issued at face value for $130,000 in cash (3) Equipment costing $180,000 was purchased for cash (4) Equipment costing $20,000 was sold for $17,000 cash when the book value of the equipment was $18,000 (5) Common stock of $60,000 was issued to ac quire land DIRECT METHOD METHOD DIRECT OPERATING ACTIVITIES ACTIVITIES OPERATING CASH RECEIPTS RECEIPTS FROM FROM CUSTOMERS CUSTOMERS CASH If accounts receivable decreases from one period to another, Cash collections > credit sales Revenues from sales Add: Decrease in accounts receivable Cash receipts from customers $ 975,000 3,000 $ 978,000 Note in each case, the interaction between balance sheet and income statement accounts PAYMENTS TO TO SUPPLIERS SUPPLIERS PAYMENTS Adjust COGS for the change in inventory to get purchases Adjust purchases for the change in A/P to get payments Cost of goods sold Add: increase in inventory Purchases Add: decrease in A/P Cash payments to suppliers 660,000 10,000 670,000 8,000 678,000 PAYMENTS FOR FOR OPERATING OPERATING EXPENSES EXPENSES PAYMENTS Operating expenses are adjusted for changes in Prepaid assets and accrued expenses Operating expenses Deduct: decrease in prepaid expenses Add: decrease in accrued expenses payable Cash payments for operating expenses 176,000 (2,000) 5,000 179,000 PAYMENTS FOR FOR TAXES TAXES PAYMENTS Tax expense is adjusted for changes in Prepaid taxes and taxes payable Income tax expense Deduct: increase in income tax payable Cash payments for taxes If tax payable increases during the year, Tax expense > cash paid for taxes 36,000 (12,000) 24,000 CASH FLOW FLOW STATEMENT STATEMENT CASH DIRECT METHOD METHOD DIRECT For the year ended December 31, 2006 REVIEW QUESTION QUESTION REVIEW Given the following facts: Beginning A/R is $44,000 Ending A/R is $42,000 Sales during the period are $129,000 Compute cash receipts from customers Sales revenue Add: decrease in A/R Cash collected from customers 129,000 2,000 131,000 STUDY OBJECTIVE OBJECTIVE55 STUDY FREE CASH CASH FLOW FLOW FREE Cash provided by operating activities adjusted for capital expenditures and dividends paid COPYRIGHT Copyright © 2006 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein