Accounting principles, 13th edition ch17

Accounting Principles Thirteenth Edition Weygandt Kimmel Kieso Chapter 17 Statement of Cash Flows Prepared by Coby Harmon University of California, Santa Barbara Westmont College Chapter Outline Learning Objectives LO Discuss the usefulness and format of the statement of cash flows LO Prepare a statement of cash flows using the indirect method LO Analyze the statement of cash flows Copyright ©2018 John Wiley & Son, Inc Usefulness of the Statement of Cash Flows Provides information to help assess: Entity’s ability to generate future cash flows Entity’s ability to pay dividends and meet obligations Reasons for difference between net income and net cash provided (used) by operating activities LO Cash investing and financing transactions during the period Copyright ©2018 John Wiley & Son, Inc Classification of Cash Flows Operating Activities Investing Activities Financing Activities Income Statement Items Changes in Investments Changes in Long-Term and Long-Term Asset Liabilities and Items Stockholders’ Equity Items LO Copyright ©2018 John Wiley & Son, Inc ILLUSTRATION 17.1 Classification of Cash Flows Typical receipts and payment classifications Operating activities—Income statement items Cash inflows: From sale of goods or services From interest received and dividends received Cash outflows: To suppliers for inventory To employees for wages To government for taxes To lenders for interest To others for expenses LO Copyright ©2018 John Wiley & Son, Inc ILLUSTRATION 17.1 Classification of Cash Flows Typical receipts and payment classifications Investing activities—Changes in investments and long-term assets Cash inflows: From sale of property, plant, and equipment From sale of investments in debt or equity securities From collection of principal on loans to other entities Cash outflows: To purchase property, plant, and equipment To purchase investments in debt or equity securities To make loans to other entities LO Copyright ©2018 John Wiley & Son, Inc ILLUSTRATION 17.1 Classification of Cash Flows Typical receipts and payment classifications Financing activities—Changes in long-term liabilities and stockholders’ equity Cash inflows: From sale of common stock From issuance of debt (bonds and notes) Cash outflows: To stockholders as dividends To redeem long-term debt or reacquire capital stock LO Copyright ©2018 John Wiley & Son, Inc (treasury stock) Significant Noncash Activities Direct issuance of common stock to purchase assets Conversion of bonds into common stock Issuance of debt to purchase assets Exchanges of plant assets Companies report noncash activities in either a LO a separate schedule (bottom of the statement) or b separate note to the financial statements Copyright ©2018 John Wiley & Son, Inc Format of the Statement of Cash Flows Order of Presentation: LO 1 Operating activities Investing activities Financing activities Direct Method Indirect Method Copyright ©2018 John Wiley & Son, Inc Company Name Statement of Cash Flows ILLUSTRATION 17.2 Format of statement of cash flows For the Period Covered Cash flows from operating activities (List of individual items) XX Net cash provided (used) by operating activities XXX Cash flows from investing activities (List of individual inflows and outflows) XX Net cash provided (used) by investing activities XXX Cash flows from financing activities (List of individual inflows and outflows) XX Net cash provided (used) by financing activities XXX Net increase (decrease) in cash XXX Cash at beginning of period XXX Cash at end of period XXX Noncash investing and financing activities LO (List of individual noncash transactions) Copyright ©2018 John Wiley & Son, Inc XXX 10 Step 1: Operating Activities Cash Payments for Operating Expenses ILLUSTRATION 17A.11 Operating expenses $111,000 Add: Increase in prepaid expenses 4,000 Cash payments for operating expenses Cash + Increase in Prepaid Payments for = Operating Expenses LO $115,000 Operating Expenses Expenses or - Decrease in Prepaid Expenses ILLUSTRATION 17A.12 Copyright ©2018 John Wiley & Son, Inc + Decrease in Accrued Expenses Payable or - Increase in Accrued Expenses Payable 61 Step 1: Operating Activities Cash Payments for Interest Computer Services reported interest expense of $42,000 on the income statement Interest Payable Cash paid for interest 42,000 1/1/20 12/31/20 LO Copyright ©2018 John Wiley & Son, Inc Balance Expense 42,000 Balance 62 Step 1: Operating Activities Cash Payments for Income Taxes Computer Services reported income tax expense of $47,000 on the income statement ILLUSTRATION 17A.14 Income Tax Payable Cash paid for taxes 49,000 1/1/20 12/31/20 Cash Payments Income Taxes LO Income = Tax Expense ILLUSTRATION 17A.15 Balance 8,000 Expense 47,000 Balance 6,000 + Decrease in Income Taxes Payable or - Increase in Income Taxes Payable Copyright ©2018 John Wiley & Son, Inc 63 ILLUSTRATION 17A.16 Step 1: Operating Activities Operating activities section of the statement of cash flows Cash flows from operating activities Cash receipts from customers $517,000 Less: Cash payments To suppliers $139,000 For operating expenses 115,000 For interest expense 42,000 For income taxes 49,000 Net cash provided by operating activities LO 345,000 $172,000 Copyright ©2018 John Wiley & Son, Inc 64 Step 2: Investing and Financing Activities Increase in Equipment (1) Equipment purchased for $25,000, and (2) equipment sold for $4,000, cost $8,000, book value $7,000 ILLUSTRATION 17A.17 Equipment 1/1/20 12/31/20 Balance 10,000 Cost of equipment sold Purchases 25,000 Balance 27,000 8,000 Accumulated Depreciation Equipment sold 1,000 1/1/20 12/31/20 LO Copyright ©2018 John Wiley & Son, Inc Balance 1,000 Expense 3,000 Balance 3,000 65 Step 2: Investing and Financing Activities Increase in Equipment (1) Equipment purchased for $25,000, and (2) equipment sold for $4,000, cost $8,000, book value $7,000 Cash 4,000 Accumulated Depreciation—Equipment 1,000 Loss on Disposal of Plant Assets Equipment LO 3,000 8,000 Copyright ©2018 John Wiley & Son, Inc 66 Step 2: Investing and Financing Activities Increase in Land Land increased $110,000 The company investing and financing transaction purchased land of $110,000 by issuing bonds Increase in Building Acquired building for $120,000 cash Increase in Bonds Payable Bonds Payable increased $110,000 The company acquired land by exchanging bonds for land LO Significant noncash Copyright ©2018 John Wiley & Son, Inc Investing transaction Significant noncash investing and financing transaction 67 Step 2: Investing and Financing Activities Increase in Common Stock Increase in Common Stock of $20,000 Increase resulted from the issuance of new shares of stock Financing transaction Increase in Retained Earnings The $116,000 net increase in Retained Earnings resulted from net income of $145,000 and Financing transaction (cash dividend) the declaration and payment of a cash dividend of $29,000 LO Copyright ©2018 John Wiley & Son, Inc 68 Statement of Cash Flows—Direct Method For the Year Ended December 31, 2020 Cash flows from operating activities: Cash receipts from customers $517,000 Less: Cash payments: To suppliers $139,000 For operating expenses 115,000 For income taxes 49,000 For interest expense 42,000 Net cash provided by operating activities 172,000 Cash flows from investing activities: Sale of equipment 4,000 Purchase of building (120,000) Purchase of equipment (25,000) Net cash provided by investing activities (141,000) Cash flows from financing activities: Issuance of common stock LO ILLUSTRATION 17A.18 Payment of cash dividends 20,000 Copyright ©2018 John Wiley & Son, Inc 69 (29,000) Step 3: Net Change in Cash Compare the Net Change in Cash on the Statement of Cash Flows with the Change in the Cash Account Reported on the Balance Sheet to Make Sure the Amounts Agree ILLUSTRATION 17.4 Computer Services Company Comparative Balance Sheets (partial) December 31 Assets 2020 2019 Change Current assets Cash LO $55,000 $33,000 $22,000 Increase Accounts receivable 20,000 30,000 10,000 Decrease Inventory 15,000 10,000 5,000 Increase Copyright ©2018 John Wiley & Son, Inc 70 Appendix 17B Worksheet Indirect Method Companies may use a worksheet to assemble and classify data that will appear on the statement of cash flows The worksheet is merely an aid in preparing the statement Its use is optional LO Copyright ©2018 John Wiley & Son, Inc 71 ILLUSTRATION 17B.3 Completed worksheet- indirect method LO Copyright ©2018 John Wiley & Son, Inc 72 Appendix 17C T-Account Approach The change in cash is equal to the change in all of the other balance sheet accounts If we analyze the changes in all of the noncash balance sheet accounts, we will explain the change in the cash account LO Copyright ©2018 John Wiley & Son, Inc 73 ILLUSTRATION 17C.1 T-account approach LO Copyright ©2018 John Wiley & Son, Inc 74 Copyright Copyright © 2018 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Act without the express written permission 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 Copyright ©2018 John Wiley & Son, Inc 75