Lecture Managerial Accounting for the hospitality industry: Chapter 5 - Dopson, Hayes

Chapter 7 - The statement of cash flows. In this chapter you will learn about the Statement of Cash Flows (SCF). The SCF is a report that tells its readers about increases (inflows) and decreases (outflows) of cash of a business during a specific accounting period.

Chapter The Statement of Cash Flows © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Chapter Outline      Understanding Cash Flows The Purpose of the Statement of Cash Flows Sources and Uses of Funds Creating the Statement of Cash Flows Statement of Cash Flows Analysis © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Learning Outcomes  State the reason cash flows are critical to the operation of a successful business  Identify sources and uses of funds to assist in the creation of a statement of cash flows  Create a statement of cash flows using an income statement and two balance sheets  Analyze a statement of cash flows to better manage the cash flows of your own business © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Understanding Cash Flows  Assume, for example, that you have income from a variety of sources  These sources may include money paid to you from a job, income from parents or other family members, and interest you may earn on savings accounts  In addition, you have living and school expenses that must be paid  You know that you must have enough money on hand to pay your bills as they become due  Having access to cash at the right time (versus having the right amount of cash) is important to individuals It is also critically important to businesses © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes The Purpose of the Statement of Cash Flows  The statement of cash flow shows (SCF) shows all sources and uses of funds from operating, investing, and financing activities of a business  The SCF is designed to report a business’s inflows and outflows of money affecting the cash position as well as its beginning and ending cash and cash equivalents balances for each accounting period  The cash inflows and outflows of a business are of significant importance to a business’s owners, investors, lenders, creditors, and managers © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes The Purpose of the Statement of Cash Flows  Cash on a balance sheet is considered to be a current asset  Cash, in this case, refers to currency, checks on hand, and deposits in banks  Cash is not synonymous with the term “revenue” or “sales.”  Cash equivalents are short-term, temporary investments such as treasury bills, certificates of deposit, or commercial paper that can be quickly and easily converted to cash © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Sources and Uses of Funds  Sources represent inflows and uses represent outflows of funds for the hospitality business  When comparing assets from last period’s balance sheet to this period’s balance sheet, decreases in assets represent sources of funds and increases in assets represent uses of funds  Accumulated depreciation behaves in an opposite manner to the other assets  This is because depreciation is a contra asset account © 2009 John Wiley & Sons     Hoboken, NJ  07030 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 5.1 Sources and Uses of Funds for Assets Assets Current Assets Cash Marketable Securities Net Receivables Inventories Prepaid Expenses Investments Property and Equipment Land Building Furnishings and Equipment Accumulated Depreciation Other Assets © 2009 John Wiley & Sons     Hoboken, NJ  07030 Increases Decreases Use Use Use Use Use Use Source Source Source Source Source Source Use Use Use Source Use Source Source Source Use Source Managerial Accounting for the Hospitality Industry Dopson & Hayes Sources and Uses of Funds  Alternatively, increases in liabilities and owners’ equity represent sources of funds and decreases in liabilities and owners’ equity represent uses of funds Figure 5.2 Sources and Uses of Funds for Liabilities and Owners’ Equity Liabilities and Owners’ Equity Current Liabilities Accounts Payable Notes Payable Other Current Liabilities Long-Term Liabilities Long-Term Debt Owners’ Equity Common Stock Paid in Capital Retained Earnings © 2009 John Wiley & Sons     Hoboken, NJ  07030 Increases Decreases Source Source Source Use Use Use Source Use Source Source Source Use Use Use Managerial Accounting for the Hospitality Industry Dopson & Hayes Sources and Uses of Funds Figure 5.3 Trick for Remembering Sources and Uses of Funds Sources ↓ Assets* ↑ Liabilities ↑ Owners’ Equity Uses ↑ Assets* ↓ Liabilities ↓ Owners’ Equity *Remember that depreciation is a contra asset account and behaves oppositely of all other assets, so ↑ in depreciation is a source and ↓ of depreciation is a use  Up arrows represent “increases” and down arrows represent “decreases.”  Assets in each column have opposite arrows from liabilities and owners’ equity Also, arrows in the left column are opposite of those in the right column © 2009 John Wiley & Sons     Hoboken, NJ  07030 10 Managerial Accounting for the Hospitality Industry Dopson & Hayes Net Changes in Cash  Net changes in cash represent all cash inflows minus cash outflows from operating, investing, and financing activities  This net change in cash must equal the difference between the cash account at the beginning of the accounting period and the cash account at the end of the accounting period © 2009 John Wiley & Sons     Hoboken, NJ  07030 32 Managerial Accounting for the Hospitality Industry Dopson & Hayes g o fig u re!                      For example, assume Rolando (from earlier in this chapter) prepared his statement of cash flows, which resulted in the following: Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Flow from Financing Activities Net decrease in cash Cash at the beginning of the period Cash at the end of the period ($ 150,000) $ 100,000 +$ 25,000 =($ 25,000) $625,000 $600,000 Notice that his net decrease in cash ($25,000) equals the difference between his cash at the beginning and the ending of the period, $625,000 - $600,000 = $25,000 © 2009 John Wiley & Sons     Hoboken, NJ  07030 33 Managerial Accounting for the Hospitality Industry Dopson & Hayes Supplementary Schedules  Any noncash investing and financing transactions undertaken by a company should be reported in a Supplementary Schedule of Noncash Investing and Finance Activities that is attached as a supplement to the SCF  Also included in the statement of cash flows is the Supplementary Disclosure of Cash Flow Information, which reports cash paid during the year for interest and income taxes © 2009 John Wiley & Sons     Hoboken, NJ  07030 34 Managerial Accounting for the Hospitality Industry Dopson & Hayes Statement of Cash Flows Summary  A complete SCF should include:  A summary of cash inflows and outflows resulting from operating activities  A summary of cash inflows and outflows resulting from investing activities  A summary of cash inflows and outflows resulting from financing activities  Net changes in cash from the beginning to the ending of the accounting period  A supplementary schedule of noncash investing and financing activities (if applicable)  A supplementary disclosure of cash flow information © 2009 John Wiley & Sons     Hoboken, NJ  07030 35 Managerial Accounting for the Hospitality Industry Dopson & Hayes Statement of Cash Flows Example  For a complete illustration of building a Statement of Cash Flows for the Blue Lagoon Water Park Resort, see Figures 5.10, 5.11, and 5.12 © 2009 John Wiley & Sons     Hoboken, NJ  07030 36 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 5.10 Condensed Income Statement and Statement of Retained Earnings Blue Lagoon Water Park Resort Condensed Income Statement and Statement of Retained Earnings For the Period: January through December 31, 2010 Income Statement Revenue © 2009 John Wiley & Sons     Hoboken, NJ  07030 25,201,800 Cost of Sales Payroll and Related Expenses Other Expenses Gross Operating Profit 2,854,080 8,877,600 5,934,240 7,535,880 Rent, Property Taxes, and Insurance Depreciation and Amortization Net Operating Income Interest Income Before Income Taxes Income Taxes Net Income 1,760,400 1,260,000 4,515,480 1,272,000 3,243,480 1,297,390 1,946,090 Statement of Retained Earnings Retained Earnings, December 31, 2009 Net Income for 2010 Subtotal Cash Dividends Paid in 2010 Retained Earnings, December 31, 2010 4,949,200 1,946,090 6,895,290 778,440 6,116,850 37 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 5.11 Balance Sheets (With Sources and Uses of Funds) Blue Lagoon Water Park Resort Balance Sheets December 31, 2009 and 2010 2009 2010 Sources Uses Assets Current Assets Cash Marketable Securities Net Receivables Inventories Total Current Assets 2,370,800 4,109,600 1,655,300 897,200 9,032,900 2,314,750 3,309,600 1,053,950 1,497,200 8,175,500 ↓ ↓ ↓ ↑ 4,223,500 5,023,500 ↑ 7,712,550 22,290,500 5,063,655 3,408,900 31,657,805 588,800 45,503,005 7,712,550 22,290,500 7,289,000 4,668,900 32,623,150 669,800 46,491,950 ↑ ↑ ↑ 81,000 2,038,100 2,104,255 1,814,600 5,956,955 1,438,100 1,319,900 1,264,600 4,022,600 ↓ ↓ ↓ 600,000 784,355 550,000 Long-Term Liabilities Long-Term Debt Total Liabilities 13,821,750 19,778,705 14,577,400 18,600,000 ↑ 755,650 Owners’ Equity Common Stock Paid in Capital Retained Earnings Total Owners’ Equity 2,925,000 17,850,100 4,949,200 25,724,300 3,000,000 18,775,100 6,116,850 27,891,950 ↑ ↑ ↑ 75,000 925,000 1,167,650 Total Liabilities and Owners’ Equity 45,503,005 46,491,950 Investments Property and Equipment Land Building Furnishings and Equipment Less Accumulated Depreciation Net Property and Equipment Other Assets Total Assets 56,050 800,000 601,350 600,000 800,000 2,225,345 1,260,000 Liabilities and Owners’ Equity Current Liabilities Accounts Payable Notes Payable Other Current Liabilities Total Current Liabilities Total Sources and Uses of Funds © 2009 John Wiley & Sons     Hoboken, NJ  07030 38 5,640,700 5,640,700 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 5.12 Statement of Cash Flows Blue Lagoon Water Park Resort Statement of Cash Flows December 31, 2010 Net Cash Flow from Operating Activities Net Income Adjustments to reconcile net income to net cash flow from operating activities Depreciation Decrease in Net Receivables Increase in Inventories Decrease in Accounts Payable Decrease in Other Current Liabilities Net cash flow from operating activities Net Cash Flow from Investing Activities Decrease in Marketable Securities Increase in Investments Increase in Furnishings and Equipment Increase in Other Assets Net cash flow from investing activities Net Cash Flow from Financing Activities Decrease in Notes Payable Increase in Long-Term Debt Increase in Capital Stock (Common Stock + Paid in Capital) Dividends Paid Net cash flow from financing activities 1,946,090 1,260,000 601,350 (600,000) (600,000) (550,000) 800,000 (800,000) (2,225,345) (81,000) (2,306,345) (784,355) 755,650 1,000,000 (778,440) 192,855 Net decrease in cash during 2010 Cash at the beginning of 2010 Cash at the end of 2010 Supplementary Disclosure of Cash Flow Information: Cash paid during the year for: Interest Income Taxes © 2009 John Wiley & Sons     Hoboken, NJ  07030 39 111,350 2,057,440 (56,050) 2,370,800 2,314,750 1,272,000 1,297,390 Managerial Accounting for the Hospitality Industry Dopson & Hayes Statement of Cash Flows Analysis  One way to analyze a statement of cash flows is to first look at the sources and uses of funds identified by comparing last year’s balance sheet with this year’s balance sheet  By matching “like” dollar amounts of sources and uses of funds, you can surmise how funds were spent based on how funds were generated © 2009 John Wiley & Sons     Hoboken, NJ  07030 40 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 5.13 Comparison of Source and Uses of Funds for the Blue Lagoon Water Park Resort Source Amount Use Amount Marketable securities $800,000 Investments $800,000 Net receivables Capital stock (Common stock + paid in capital) AND depreciation $601,350 Accounts payable $600,000 $1,000,000 + $1,260,000 = $2,260,000 Furnishings and equipment $2,225,345 Long-term debt Retained earnings (as increase in net income – dividends) $755,650 Notes payable Inventories AND Other current liabilities $784,355 $600,000 + $550,000 = $1,150,000 $1,167,650   © 2009 John Wiley & Sons     Hoboken, NJ  07030 41 Managerial Accounting for the Hospitality Industry Dopson & Hayes Statement of Cash Flows Analysis  Another method of analyzing the statement of cash flows is to compare operating, investing, and financing activities from last year to this year  The dollar or percentage variance shows changes from previously experienced levels, and will give you an indication of whether your numbers are improving, declining, or staying the same © 2009 John Wiley & Sons     Hoboken, NJ  07030 42 Managerial Accounting for the Hospitality Industry Dopson & Hayes Figure 5.14 Cash Flow Summary Comparisons for the Blue Lagoon Water Park Resort Last Year This Year $ Change % Change 2,057,440 226,320 12.4% (3,075,130) (2,306,345) 768,785 25.0% Net Cash Flow From: Operating activities Investing activities 1,831,120 Financing activities Change in Cash 167,010 192,855 25,845 15.5% (1,077,000) (56,050) 1,020,950 94.8%   © 2009 John Wiley & Sons     Hoboken, NJ  07030 43 Managerial Accounting for the Hospitality Industry Dopson & Hayes Statement of Cash Flows Analysis  For many investors and managers, a business’s free cash flow is an important measure of its economic health  Free cash flow is simply the amount of cash a business generates from its operating activities minus the amount of cash it must spend on its investment activities and capital expenditures  Thus, free cash flow is considered a good measure of a company’s ability to pay its debts, ensure its growth, and pay (if applicable) its investors in the form of dividends © 2009 John Wiley & Sons     Hoboken, NJ  07030 44 Managerial Accounting for the Hospitality Industry Dopson & Hayes Statement of Cash Flows Analysis  A company with a positive free cash flow can grow and invest its excess cash in its own expansion or alternative investments  If a company has a negative free cash flow it will need to supplement its cash from other sources, such as borrowing funds or seeking additional investors The formula for free cash flow is: Less Equals © 2009 John Wiley & Sons     Hoboken, NJ  07030 Net cash provided from operating activities Cash used to acquire property and equipment Free Cash Flow 45 Managerial Accounting for the Hospitality Industry Dopson & Hayes Review of Learning Outcomes  State the reason cash flows are critical to the operation of a successful business  Identify sources and uses of funds to assist in the creation of a statement of cash flows  Create a statement of cash flows using an income statement and two balance sheets  Analyze a statement of cash flows to better manage the cash flows of your own business © 2009 John Wiley & Sons     Hoboken, NJ  07030 46 Managerial Accounting for the Hospitality Industry Dopson & Hayes ... 4,109,600 1, 655 ,300 897,200 9,032,900 2,314, 750 3,309,600 1, 053 , 950 1,497,200 8,1 75, 500 ↓ ↓ ↓ ↑ 4,223 ,50 0 5, 023 ,50 0 ↑ 7,712 ,55 0 22,290 ,50 0 5, 063, 655 3,408,900 31, 657 ,8 05 588,800 45, 503,0 05 7,712 ,55 0 22,290 ,50 0... 22,290 ,50 0 7,289,000 4,668,900 32,623, 150 669,800 46,491, 950 ↑ ↑ ↑ 81,000 2,038,100 2,104, 255 1,814,600 5, 956 , 955 1,438,100 1,319,900 1,264,600 4,022,600 ↓ ↓ ↓ 600,000 784, 355 55 0,000 Long-Term... 2,9 25, 000 17, 850 ,100 4,949,200 25, 724,300 3,000,000 18,7 75, 100 6,116, 850 27,891, 950 ↑ ↑ ↑ 75, 000 9 25, 000 1,167, 650 Total Liabilities and Owners’ Equity 45, 503,0 05 46,491, 950 Investments Property and