Lecture Principles of financial accouting - Chapter 16: Reporting the statement of cash flows

After completing this chapter you should be able to: Distinguish between operating, investing, and financing activities, and describe how noncash investing and financing activities are disclosed; analyze the statement of cash flows and apply the cash flow on total assets ratio; prepare a statement of cash flows; compute cash flows from operating activities using the indirect method.

Chapter 16 Statement of Cash Flows PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGraw­Hill/Irwin         Copyright © 2011 by The McGraw­Hill Companies, Inc. All rights reserved 16 ­ 2 Purpose of the Statement of Cash Flows How Howdoes doesaa company companyobtain obtainits its cash? cash? Where Wheredoes doesaa company companyspend spendits its cash? cash? What What explains explainsthe the change changein in the thecash cash balance? balance? 16 ­ 3 Importance of Cash Flows How Howdid didthe the business businessfund fundits its operations? operations? Does Doesthe thebusiness business have havesufficient sufficientcash cash to to pay pay its its debts debts as as they theymature? mature? Did Didthe thebusiness business make makeany anydividend dividend payments? payments? Did Did the thebusiness business borrow borrowany anyfunds fundsor or repay repayany anyloans? loans? 16 ­ 4 Measurement of Cash Flows Cash Equivalents    Cash Cash Currency Short-term, Short-term, highly highly liquid liquid investments investments Readily Readily convertible convertible into into cash cash Sufficiently Sufficiently close close to to maturity maturity so so that that market market value value is is unaffected unaffected by by interest interest rate rate changes changes 16 ­ 5 C1 Classification of Cash Flows The Statement of Cash Flows includes the following three sections:  Operating Activities  Investing Activities  Financing Activities 16 ­ 6 C1 Operating Activities Inflows Inflows  Receipts Receiptsfrom from customers customers Outflows Outflows  Salaries Salariesand andwages wages  Payments Paymentsto tosuppliers suppliers  Taxes Taxesand and fines fines 16 ­ 7 C1 Investing Activities Inflows Inflows  Selling Sellinglong-term long-termproductive productive assets assets  Selling Sellingequity equityinvestments investments  Collecting Collectingprincipal principalon onloans loans Outflows Outflows  Purchasing Purchasinglong-term long-term productive productive assets assets  Purchasing Purchasingequity equity investments investments  Purchasing Purchasingdebt debtinvestments investments 16 ­ 8 C1 Financing Activities Inflows Inflows  Issuing Issuingits itsown ownequity equity securities securities  Issuing Issuingbonds bonds and andnotes notes  Issuing Issuingshortshort-and andlong-term long-term liabilities liabilities  Contributions Contributionsby byowners owners Outflows Outflows  Purchasing Purchasing treasury treasury shares shares  Repaying Repayingcash cashloans loans 16 ­ 9 C1 Clas s ification of Cas h Flow Ite ms Reporting entities have choices in classifying interest and dividends Operating Investing Financing Interest received Yes Yes Dividends received Yes Yes Interest paid Yes Yes Dividends paid Yes Yes 16 ­ 10 C1 Noncash Investing and Financing Items Items requiring requiring separate separate disclosure disclosure include: include:  Retirement Retirement of of debt debt by by issuing issuing equity equity securities securities  Conversion Conversion of of preference preference shares shares to to ordinary ordinary shares shares 16 ­ 29 P3 Cash Flows from Investing A three-stage process to determine cash provided or used by investing activities: Identify changes in investing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects 16 ­ 30 P3 Cash Flows from Investing This analysis reveals a $40,000 increase in property, plant and equipment from $210,000 to $250,000 and a $12,000 increase in accumulated depreciation from $48,000 to $60,000 16 ­ 31 P3 Cash Flows from Investing Item b: Genesis purchased property, plant and equipment of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash Item c: Genesis sold property, plant and equipment costing $30,000 (with $12,000 of accumulated depreciation) for $12,000 cash, resulting in a $6,000 loss We also reconstruct the entry for Depreciation Expense using information from the income statement 16 ­ 32 P3 Cash Flows from Investing 16 ­ 33 P3 Cash Flows from Financing A three-stage process to determine cash provided or used by financing activities: Identify changes in financing-related accounts Explain these changes using reconstruction analysis Report their cash flow effects 16 ­ 34 P3 Cash Flows from Financing This analysis reveals: 1.an increase in notes payable from $64,000 to $90,000, 2.an increase in share capital from $80,000 to $95,000, and 3.an increase in retained earnings from $88,000 to $112,000 16 ­ 35 P3 Cash Flows from Financing Item e: Notes with a carrying amount of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain Item b: Genesis purchased property, plant and equipment of $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash 16 ­ 36 P3 Cash Flows from Financing Item d: Issued 3,000 no-par ordinary shares for $5 per share Item f: Cash dividends of $14,000 are paid 16 ­ 37 P3 16 ­ 38 P3 16 ­ 39 A1 Analyzing Cash Sources and Uses Most managers stress the importance of understanding and predicting cash flows for business decisions 16 ­ 40 A1 Cash Flow on Total Assets Used, Used, along along with with income-based income-based ratios, ratios, to to assess assess company company performance performance Cash flow on total assets = Operating cash flows Average total assets 16 ­ 41 P4 Appendix 16A: Direct Method of Reporting Operating Cash Flows Adjust income statement accounts related to operating activities for changes in their related balance sheet accounts: Framework for reporting cash receipts and cash payments 16 ­ 42 P4 Appendix 16A: Direct Method of Reporting Operating Cash Flows 16 ­ 43 End of Chapter 16 ... explainsthe the change changein in the thecash cash balance? balance? 16 ­ 3 Importance of Cash Flows How Howdid didthe the business businessfund fundits its operations? operations? Does Doesthe thebusiness... Conversion of of preference preference shares shares to to ordinary ordinary shares shares 16 ­ 11 Format of the Statement of Cash Flows 16 ­ 12 P1 Preparing the Statement of Cash Flows 16 ­ 13... of Cash Flows Cash Equivalents    Cash Cash Currency Short-term, Short-term, highly highly liquid liquid investments investments Readily Readily convertible convertible into into cash cash