principles of accounting chapter 13 ppt

7/30/2019 Principles of Accounting Chapter 13 ppt

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Copyright 2012 The McGraw-Hill Companies, Inc.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPAMcGraw-Hill/Irwin

Statement of Cash FlowsChapter 13


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13-2

Provides information about the cashreceipts and cash payments of a business

entity during the accounting period.

Purpose of the Statement

Helps investors with questions about thecompanys

Ability to generate positive cash flows.

Ability to meet its obligations and to pay dividends. Reasons for difference between net income and net

cash flows from operating activities.

Need for external financing. Investing and financing transactions for the period.


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Statement of Cash Flows

Period Covered

Cash flows from operating activities:

[List of individual inflows and outflows]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 (and equivalents) balance at beginning of period #####

Cash (and equivalents) balance at end of period $ #####


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The Statement of Cash Flows mustinclude the following three sections:

Cash Flows from Operating Activities Cash Flows from Investing Activities

Cash Flows from Financing Activities

Classification of Cash Flows


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+

_

Inflows from: Interest and dividends

received

Sales to customers CashFlows fromOperatingActivities

Operating Activities

Outflowsto: Suppliers of merchandise and

services Employees Lenders for interest Governments for taxes


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CashFlows fromInvestingActivities

+

_

Investing Activities

Inflows from: Sale of investments and

plant assets

Collection of principal on

loans

Outflows to: Purchase investments and

plant assets Purchase debt or equityinvestments

Make loans


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+

_

Financing Activities

Inflows from: Short-term and long-term

borrowing

Owners (for example, fromissuing stock)

Outflows to:

Make payments on borrowedfunds

Owners for dividends Purchase treasury stock

CashFlows fromFinancingActivities


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Cash Equivalents

Cash

Currency

Short-term, highly liquid investments. Readily convertible into cash. So near maturity that market value is unaffected

by interest rate changes.

Cash and Cash Equivalents


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Company Name


Period Covered

Cash flows from operating activities:[List of individual inflows and outflows]

Net cash provided (used) by operating activities $ #####

The operatingcash flows section

can be preparedusing either thedirect method or

the indirectmethod.

Lets look at

the directmethodfor

preparing theStatement ofCash Flows.


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Direct Method: Cash Receivedfrom CustomersAccrual basis revenue includes sales that

did not result in cash inflows.

Can be computed as:

CashReceived from

Customers

Decrease inreceivables

Increase inreceivables

+

=

=

Net Sales


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Direct Method: Cash Receivedfrom Customers

The accounts receivable balance was$80,000 on 12/31/10 and $110,000 on12/31/11. If accrual sales revenue for

2011 was $900,000, what was cash basisrevenue?

=

$30,000Increase inreceivables

Net Sales

$900,000

$870,000Cash Received

from Customers


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Interest

Received=

Interest

Revenue

+ Decrease in

interest receivable

- Increase in interest

receivable

DividendsReceived

= DividendsRevenue

+ Decrease in

dividends receivable- Increase in dividends

receivable

Direct Method: Interest andDividends Received


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Direct Method: Cash Paid forPurchases of Merchandise

Step 1

Step 2

Purchases = COGS+ Increase in inventory

- Decrease in inventory

Cash paid for

merchandise= Purchases

+ Decrease in A/P

- Increase in A/P


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After deducting depreciation and othernoncash expenses, the cash paid for

expenses is affected by(1) whether the expense was prepaid, and(2) whether the expense was accrued.

Direct Method: Cash Paymentsfor Expenses

Cash Paid for

Expenses= Expenses

+ Increase in

prepaid expenses

- Decreasein

prepaid expenses

+Decreasein

accrued liabilities

- Increasein

accrued liabilities


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Martin Co.Comparative Balance Sheets - Assets

December 31,2010 2011

Cash 60,000$ 70,370$Accounts Receivable, net 27,000 35,000Inventory 230,000 200,000Trading Securities - 25,000Equipment, net 500,000 425,000Investments 100,000 130,000

Total Assets 917,000$ 885,370$

Direct Method


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Direct Method

Martin Co.Comparative Balance Sheets - Liabilities and Equity

December 31,

2010 2011

Accounts Payable 15,000$ 12,000$

Salaries Payable 7,000 5,000Interest Payable 11,950 7,350

Income Tax Payable 20,000 17,000

Notes Payable, 1st Bank 70,000 60,000

Bonds Payable 250,000 150,000

Premium on Bonds Payable 5,000 4,000

Common Stock 450,000 500,000

Retained Earnings 88,050 130,020

Total Liabilities and Equity 917,000$ 885,370$


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Martin Co.

Income Statement Amounts

For the Year Ending December 31, 2011

Sales Revenues 800,000$

Cost of Goods Sold 560,000

Depreciation Expense 5,000Interest Expense 28,050

Income Tax Expense 27,980

Salary Expense 80,000

Other Expenses 71,000

Amortization of Bond Premium 1,000

Gain on Sale of Equipment 3,000

Extraordinary Loss 30,000

Equity in Investee Income 40,000

Net Income 41,970$

Direct Method


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Direct Method

Additional Information Trading Securities were purchased during 2009 at a cost of$25,000.

Equipment with a book value of $40,000 was sold during theyear for $43,000.

Equipment with a book value of $30,000 was destroyed during afreak flood in 2009. There was no insurance. Martin owns 25% of the common stock of another company and

uses the equity method to account for this investment.

Martins tax rate is 40%.

The Notes Payable to the bank carry a 12% rate. The paymentsare due on the first day of each month. The Bonds Payable carry a 9% rate. Interest is payable

semiannually on July 1 & Jan. 1.

Sold stock during 2009 for $50,000.

Received $10,000 dividends from its equity investment.


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Salary Expense 80,000$

Add: Decrease in Salary Payable 2,000

Cash Paid to Employees 82,000$

Sales Revenues 800,000$

Less: Increase in A/R (8,000)

Cash Received from Customers 792,000$

Direct Method

Cash Received from Customers

Cash Paid to Employees


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Interest Expense 28,050$

Add: Decrease in Interest Payable 4,600

Cash Paid for Interest 32,650$

Cost of Goods Sold 560,000$

Add : Decrease in A/P 3,000

Less: Decrease in Inventory (30,000)

Cash Paid for Inventory 533,000$

Direct Method

Cash Paid for Inventory

Cash Paid for Interest


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Income Tax Expense 27,980$

Add: Decrease in Taxes Payable 3,000

Cash Paid for Taxes 30,980$

Add : Dividends from Tiny Co. 10,000$

Less: Purchase of Trading Securities (25,000)

Less: Other Operating Expenses (71,000)

Cash Flow from Other Sources (86,000)$

Direct Method

Cash Paid for Taxes

Other Operating Cash Flows


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Direct Method

Cash Flows From OperatingActivities

Cash Received from Customers 792,000$

Cash Paid to Employees (82,000)

Cash Paid for Inventory (533,000)

Cash Paid for Interest (32,650)

Cash Paid for Taxes (30,980)Cash Paid to Other Sources (86,000)

Cash From Operating Activities 27,370$


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Martin Co.


For the Period Ending December 31, 2011

Operating Cash Flows 27,370$

Investing Cash Flows

Proceeds from sale of Equipment 43,000

Financing Cash Flows

Proceeds from sale of Stock 50,000$

Principal paid on Bonds (100,000)

Principal paid on Notes (10,000) (60,000)

Net Cash Flows for the Period 10,370$

Add: Beginning Cash Balance 60,000

Ending Cash Balance 70,370$


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Martin Co.













Equipment with a book value of$40,000 was sold for $43,000.


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Martin Co.














Bonds Payable decreased from$250,000 to $150,000 during 2011.


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Martin Co.














Notes Payable decreased from$70,000 to $60,000 during 2011.

Bonds Payable decreased from$250,000 to $150,000 during 2011.


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Martin Co.













Notice that the Ending CashBalance per the Statement ofCash Flows agrees with the

12/31/11 Cash balance on theBalance Sheet.


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13-28

Reconciling Net Income withNet Cash Flows

There are two major categories ofreconciling items. They include

adjusting for:1. Noncash Expenses.2. Timing Differences.

Accounts receivableDepreciation Expense


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13-29

NetIncome

Cash Flows from

OperatingActivities

Reporting Operating Cash Flowsby the Indirect Method

Changes in current assets and currentliabilities as shown on the following table

+ Losses and

- Gains

+ Noncash

expenses such asdepreciation and

amortization


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13-30

Use this table when adjusting NetIncome to Operating Cash Flows.

Change in Account Balance During Year

Increase Decrease

Current Subtract from net Add to net incomeAssets income

Current Add to net income Subtract from net

Liabilities income

Reconciling Net Income with NetCash Flows


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13-31

The Indirect Method: ASummaryNet IncomeAdd: Depreciation expense

Decrease in accounts receivable

Decrease in inventories

Decrease in prepaid expenses

Increase in accounts payableIncrease in accrued expenses payable

Nonoperating losses deducted in computing net income

Deduct: Increase in accounts receivable

Increase in inventories

Increase in prepaid expensesDecrease in accounts payable

Decrease in accrued expenses payable

Decrease in deferred income taxes payable

Nonoperating gains added in computing net income

Net Cash Provided by (used in) operating activities


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Cash Budgets are used by management to planand forecast future cash flows.

Force management to coordinate activities.

Provide managers with advance notice of available resources.

Provide targets useful in evaluating performance.

Provide advance warnings of potential cash shortages.

A Cash Budget can be used to:

Managing Cash Flows


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Managing Cash Flows

Increase collection of accountsreceivables.

Keep inventory low.

Delay payment of liabilities.

Plan timing of major expenditures.

Invest idle cash.


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A Worksheet for Preparing aStatement of Cash Flows

2010 2011

Assets

Cash 50,000$ 45,000$

Marketable securities 40,000 25,000

Accounts receivable 320,000 330,000

Inventory 240,000 235,000

Plant and equipment (net of depreciation) 600,000 640,000

Totals 1,250,000$ 1,275,000$

Liabilities & Stockholders' Equity

Accounting payable 150,000$ 160,000$

Accured expenses payable 60,000 45,000Mortage note payable (long-term) - 70,000

Bonds payable (due in 2020) 500,000 350,000

Capital stock (no par) 160,000 160,000

Retained earnings 380,000 490,000

Totals 1,250,000$ 1,275,000$

AUTO SUPPLY COMPANYComparative Balance Sheets

December 31


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A Worksheet for Preparing aStatement of Cash Flows

Additional Information

1. Net income for the year amounted to $250,000.cash dividends of $140,000 were declared andpaid.

2.Autos only noncash expense was depreciation,which totaled $60,000.

3. Marketable securities costing $15,000 were soldfor $35,000 cash, resulting in a $20,000

nonoperating gain.4. The company purchased plant assets for

$100,000, making a $30,000 cash downpayment and issuing a $70,000 mortgage notpayable for the balance of the purchase price.


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13-36

The Worksheet

Balance sheet effects:

Beginning

Balance

Debit

Changes

Credit

Changes

Ending

Balance

Assets

Cash 50,000 45,000

Marketable securities 40,000 25,000Accounts receivable 320,000 330,000

Inventory 240,000 235,000

Plant and equipment (net of depreciation) 600,000 640,000

Totals 1,250,000 1,275,000


Accounting payable 150,000 160,000

Accured expenses payable 60,000 45,000

Mortage note payable (long-term) - 70,000



Retained earnings 380,000 (1) 250,000 490,000

Totals 1,250,000 1,275,000

AUTO SUPPLY COMPANY

For the Year Ended December 31, 2011Effects of Transactions

Worksheet for Statement of Cash Flows

Cash effects:

Sources of

Cash

Uses of

Cash

Operating activities:

Net income (1) 250,000


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The Worksheet


Beginning

Balance

Debit

Changes

Credit

Changes

Ending

Balance

Assets

Cash 50,000 45,000


Accounts receivable 320,000 330,000

Inventory 240,000 235,000

Plant and equipment (net of depreciation) 600,000 (3) 60,000 640,000

Totals 1,250,000 1,275,000


Accounting payable 150,000 160,000

Accured expenses payable 60,000 45,000




Retained earnings 380,000 (2) 140,000 (1) 250,000 490,000

Totals 1,250,000 1,275,000

AUTO SUPPLY COMPANY

For the Year Ended December 31, 2011Effects of Transactions

Worksheet for Statement of Cash FlowsCash effects:

Sources of

Cash

Uses of

Cash

Operating activities:Net income (1) 250,000

Depreciation expense (3) 60,000

Investing activities:

Financing activities:

Dividends paid (2) 140,000

Net change in cash


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13-38

The Worksheet


Beginning

Balance

Debit

Changes

Credit

Changes

Ending

Balance

Assets

Cash 50,000 45,000


Accounts receivable 320,000 (4) 10,000 330,000

Inventory 240,000 (5) 5,000 235,000

Plant and equipment (net of depreciation) 600,000 (3) 60,000 640,000

Totals 1,250,000 1,275,000


Accounting payable 150,000 (6) 10,000 160,000

Accured expenses payable 60,000 (7) 15,000 45,000





Totals 1,250,000 1,275,000

AUTO SUPPLY COMPANY

For the Year Ended December 31, 2011

Effects of Transactions


Cash effects:

Sources of

Cash

Uses of

Cash

Operating activities:Net income (1) 250,000


Increase in accounts receivable (4) 10,000

Decrease in inventory (5) 5,000

Increase in accounts payable (6) 10,000

Decreases in accrued expenses (7) 15,000

Cash effects: Sources of Cash Uses of Cash


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13-39


Beginning

Balance

Debit

Changes

Credit

Changes Ending Balance

Assets

Cash 50,000 45,000

Marketable securities 40,000 (8) 15,000 25,000


Inventory 240,000 (5) 5,000 235,000

Plant and equipment (net of depreciation) 600,000 (9) 100,000 (3) 60,000 640,000

Totals 1,250,000 1,275,000


Accounting payable 150,000 (6) 10,000 160,000Accured expenses payable 60,000 (7) 15,000 45,000

Mortage note payable (long-term) - (9) 70,000 70,000

Bonds payable (due in 2020) 500,000 (10) 150,000 350,000



Totals 1,250,000 415,000 410,000 1,275,000

AUTO SUPPLY COMPANY










Increase in accounts payable (6) 10,000

Decreases in accrued expenses (7) 15,000

Gain on sale of securities (8) 20,000


Preceeds for sale of securities (8) 35,000

Plant acquired for cash (9) 30,000



Retirement of bonds payable (10) 150,000Net decrease in cash 5,000


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The Worksheet


Beginning

Balance

Debit

Changes

Credit

Changes Ending Balance

Assets

Cash 50,000 (x) 5,000 45,000Marketable securities 40,000 (8) 15,000 25,000


Inventory 240,000 (5) 5,000 235,000

Plant and equipment (net of depreciation) 600,000 (9) 100,000 (3) 60,000 640,000

Totals 1,250,000 1,275,000


Accounting payable 150,000 (6) 10,000 160,000Accured expenses payable 60,000 (7) 15,000 45,000

Mortage note payable (long-term) - (9) 70,000 70,000

Bonds payable (due in 2020) 500,000 (10) 150,000 350,000



Totals 1,250,000 415,000 415,000 1,275,000

AUTO SUPPLY COMPANY










Increase in accounts payable (6) 10,000Decreases in accrued expenses (7) 15,000

Gain on sale of securities (8) 20,000


Preceeds for sale of securities (8) 35,000

Plant acquired for cash (9) 30,000



Retirement of bonds payable (10) 150,000

Net decrease in cash (x) 5,000 5,000


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Cash flows from operating activities:

Net income 250,000$

Add: Depreciation expense 60,000

Decrease in inventory 5,000

Increase in accounts payable 10,000

Less: Increase in accounts receivable (10,000)

Decrease in accrued expenses (15,000)

Gain on sale of securities (20,000)

Net cash provided by operating activities 280,000

Cash flows from investing activities:

Proceeds from sale of securities 35,000$

Cash paid for plant assets (30,000)

Net cash provided by investing activities 5,000

Cash flows from financing activities:

Dividends paid (140,000)

Retirement of bonds payable (150,000)

Net cash used for financing activities (290,000)

Net decrease in cash (5,000)

Cash and cash equivalents, January 1, 2009 50,000

Cash and cash equivalents, December 31, 2009 45,000$

AUTO SUPPLY COMPANY




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Supplemental Information

Purchases of plant assets 100,000$

Less: Portion financed by issuance of long-term debt 70,000

Cash paid to acquire plant assets 30,000$

AUTO SUPPLY COMPANYSupplementary Schedule: Noncash Investing and Financing Activities

We are required to disclose information concerningmajor investing and financing activities that do not

involve cash.


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End of Chapter 13

principles of accounting chapter 13 ppt

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