Accounting 21th waren reeve fess chapter 16

Chapter 16 Statement of Cash Flows Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives SummarizeAfter the types of cash studying this After studying this flow activities reported in theshould statement of cash chapter, you chapter, you should flows be be able able to: to: Prepare a statement of cash flows, using the indirect method Prepare a statement of cash flows, using the direct method Calculate and interpret the free cash flow Reporting Reporting Cash Cash Flows Flows The statement of cash flows reports cash flows by three types of activities: Cash flows from operating activities – transactions that affect net income Cash flows from investing activities – transactions that affect noncurrent assets Cash flows from financing activities – transactions that affect equity and debt of the entity Reporting Reporting Cash Cash Flows Flows Increases in Cash Operating Decreases in Cash Operating (receipts from revenues) (payments for expenses) Investing Investing (receipts from sales of noncurrent assets) Financing (receipts from issuing equity and debt securities) (payments for acquiring noncurrent assets) Financing (payments for treasury stock, dividends, and redemption of debt securities) Cash Cash Flows Flows from from Operating Operating Activities Activities Typical cash inflows What are some of the typical cash inflows from operating activities?` Typical cash outflows What are some of the typical cash outflows from operating activities? Sales of goods and services Merchandise purchases Interest revenue Payments of wages and other expenses Dividend revenue Tax payments Cash Cash Flows Flows from from Investing Investing Activities Activities Typical cash inflows What are some of the typical cash inflows from investing activities? Sales of fixed assets Sale of longterm investments Typical cash outflows What are some of the typical cash outflows from investing activities? Purchase of fixed assets Purchase of long-term investments Cash Cash Flows Flows from from Financing Financing Activities Activities Typical cash inflows What are some of the typical cash inflows from financing activities? Typical cash outflows What are some of the typical cash outflows from financing activities? Issuing bonds and long-term notes payable Paying cash dividends Issuing preferred and common stock Repaying debt Acquiring treasury stock Noncash Noncash Investing Investing and and Financing Financing Activities Activities  Issuing bonds to acquire land  Issuing common stock for convertible preferred stock  Issuing a long-term note to acquire equipment  Issuing a stock dividend No No cash cash flow flow per per share share isis reported reported in in the the financial financial statements statements because because the the user user might might incorrectly incorrectly interpret interpret this this as as the the amount amount available available for for dividends dividends Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 Cost of merchandise sold 790,000 Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 This is an accrual basis income statement This statement Income taxis an accrual basis income 83,000 The direct flows Net income $ 108,000 The directmethod methodof ofreporting reportingcash cash flowswill will essentially essentiallyconvert convertthis thisto toaacash cashbasis basisstatement statement Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 Cost of merchandise sold 790,000 Cash collected Gross profit $ 390,000 Changes from customers Operating expenses: Debit Credit Depreciation expense $ 7,000 Other operating Sales expenses 196,000 1,180,000 Receivables 9,000203,000 Total operating expenses Income from operations $ 187,000 Other income: Note: The changes in$12,000 the Note: The the current current balance balance Gain on sale of landchanges in Other expense: sheet sheet accounts accountsare are determined determined by by Interest expense 8,000 4,000 comparing the beginning and ending comparing the beginning and Income before income tax $ 191,000 ending balances Income tax 83,000 balances Receivables Receivables increased increased by by Net income $ 108,000 $9,000 during the period $9,000 during the period Rundell Inc Income Statement For the Year Ended December 31, 2006 Sales $1,180,000 Cost of merchandise sold 790,000 Cash collected Gross profit $390,000 Changes from customers Operating expenses: Debit Credit Depreciation expense $ 7,000 Other operating Sales expenses 196,000 1,180,000 Receivables 9,000203,000 Total operating expenses Cash 1,171,000$187,000 Income from operations Other income: Gain on sale of landincrease $12,000 The in receivables The increase in receivables Other expense: represents in representsaa reduction reduction in cash cash Interest expense 8,0004,000 Income before income $ 191,000 inflow relative accrual inflowtax relative to to the the accrual Income tax revenue reported on the 83,000 income revenue reported on the income Net income $ 108,000 statement statement Cash Basis $1,171,000 Rundell Inc Income Statement For the Year Ended December 31, 2006 Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 Gross profit $390,000 Cash payments for Operating expenses: Changes merchandise Depreciation expense $ 7,000 Debit Credit Other operating expenses 196,000 Cost of mdse sold 790,000 Total operating expenses 203,000 Inventories 8,000 Income from operations $187,000 Accounts payable 3,200 Other income: Cashof land Gain on sale $12,000 Other expense: Interest expense 8,0004,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Cash Basis Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000 (785,200) Gross profit $390,000 Cash payments for Operating expenses: Changes merchandise Depreciation expense $ 7,000 Debit Credit Other operating expenses 196,000 Cost of mdse sold 790,000 Total operating expenses 203,000 minus Inventories 8,000 Income from operations $187,000 Accounts payable 3,200 plus Other income: Cashof land Gain on sale $12,000 785,200 Other expense: A decrease in Inventories Inventories (credit (credit Interest expenseA decrease in 8,0004,000 change) in Income before income taxand $ 191,000 change) and an an decrease decrease in Accounts Accounts Income tax 83,000have the Payable (debit change) Payable (debit change) have the Net income $ 108,000 opposite opposite effects effects Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000(785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,000 Other operating expenses 196,000 Depreciation Changes Total operating expenses 203,000 Debit$ 187,000 Credit Income from operations Depreciation expense 7,000 Other income: Gain on sale of land depreciation $12,000 Accumulated 7,000 Other expense: Interest expense 8,000 4,000 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 There There isis no no cash cash flow flow for for depreciation depreciation expense expense Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000(785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,0000 Other operating expenses 196,000 (193,800) Total operating expenses 203,000 Cash payments for Changes Income from operations $ 187,000 operating expenses Changes Debit Credit Other income: Gain onOperating sale of land $12,000 expenses 196,000 Other expense: Accrued expenses 2,200 minus Interest Cash expense 8,0004,000 193,800 Income before income tax $ 191,000 Income tax 83,000 Net income $ 108,000 Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000(785,200) Gross profit $ 390,000 Gain on sale of Changes Operating expenses: investments Depreciation expense $ Debit 7,0000 Credit Cash 72,000 Other operating expenses 196,000(193,800) Investments 60,000 Total operating expenses 203,000 Gain on sale of invest Income from operations $ 12,000 187,000 Other income: Gain on sale of land $12,000 Other expense: InterestThe expense 8,000 will 4,000 cash inflow of $72,000 The cash inflow of $72,000 will Income before income tax $ 191,000 be shown in the investing section be shown in the investing section Income tax 83,000 Net income $ 108,000 of and of the the statement statement of of cash cashflows flows and the the gain gain isis ignored ignored Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000(785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,0000 Cash paid for Changes Other operating expenses 196,000(193,800) interest expense Debit 203,000 Credit Total operating expenses Income from Interest operations expense 8,000$ 187,000 Other income: Cash Gain on sale of land $12,000 Other expense: Interest expense 8,0004,000 Income before income tax $ 191,000 There Income tax 83,000 There isis no no interest interest payable payable Net income $ 108,000 account at the end of the year account at the end of the year (8,000) Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000(785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,0000 Other operating expenses 196,000(193,800) Total operating expenses 203,000 Cash paid for Changes Income from operations $ 187,000 income taxes Debit Credit Other income: expense 83,000 Gain onIncome sale oftax land $12,000 Income tax payable plus 500 Other expense: Interest Cash expense 8,000 (83,500) 4,000(8,000) Income before income tax $ 191,000 Income tax 83,000 (83,500) Net income $ 108,000 Rundell Inc Income Statement For the Year Ended December 31, 2006 Cash Basis Sales $1,180,000 $1,171,000 Cost of merchandise sold 790,000(785,200) Gross profit $ 390,000 Operating expenses: Depreciation expense $ 7,0000 Other operating expenses 196,000(193,800) Total operating expenses 203,000 Income from operations $ 187,000 Other income: Gain on sale of land $12,0000 Accrual Cash Accrual Cash Other expense: Interest expense 8,000 4,000(8,000) Basis Basis Basis Basis Income before income tax $ 191,000 Income tax 83,000(83,500) Net income $ 108,000$ 100,500 Two Two different different viewpoints viewpoints of of income income from from operations operations Operating Activities—Direct Method Cash flows from operating activities: 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 83,5001,070,500 Net cash flow from operating activities $ 100,500 Financial Analysis and Interpretation Free Free Cash Cash Flow Flow Dell Corporation Cash flow from operations $4,195,000 Less: Cash used to purchase fixed assets to maintain productive capacity used up in producing income during the period (482000) Less: Cash used for dividends —– Free cash flow $3,713,000 Free cash flow as a percent of cash flow from operating activities 89% Financial Analysis and Interpretation Free Free Cash Cash Flow Flow Dell Corporation Cash operations $4,195,000 Use: To measure the of Use:flow Tofrom measure the financial financial strength strength of aa Less: Cash used toApurchase fixed business company business A company that that has has assets to maintain productive positive free cash flow isis able to fund positive free cash flow able to fund capacity used up in producing internal growth, retire enjoy internal growth, retire debt, debt, and and enjoy income during the period (482000) financial flexibility financial flexibility Less: Cash used for dividends (—) Free cash flow $3,713,000 Free cash flow as a percent of cash flow from operations 89% Chapter 16 The The End End ... studying this After studying this flow activities reported in theshould statement of cash chapter, you chapter, you should flows be be able able to: to: Prepare a statement of cash flows, using... Item Balance 4,000 shares issued for cash ACCOUNT NO 33 Debit Credit 8,000 Balance Debit Credit 16, 000 24,000