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Page 1: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-1

Page 2: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-2

Chapter 13

Statement of Statement of Cash FlowsCash Flows

Financial Accounting, IFRS EditionWeygandt Kimmel Kieso

Page 3: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-3

1. Indicate the usefulness of the statement of cash flows.

2. Distinguish among operating, investing, and financing activities.

3. Prepare a statement of cash flows using the indirect method.

4. Analyze the statement of cash flows.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Page 4: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-4

UsefulnessUsefulness

ClassificationsClassifications

Significant non-cash Significant non-cash activitiesactivities

FormatFormat

PreparationPreparation

Indirect and direct Indirect and direct methodsmethods

Step 1: Operating Step 1: Operating activitiesactivities

Step 2: Investing and Step 2: Investing and financing activitiesfinancing activities

Step 3: Net change Step 3: Net change in cashin cash

Free cash flowFree cash flow

The Statement of The Statement of Cash Flows: Cash Flows:

Usefulness and Usefulness and FormatFormat

The Statement of The Statement of Cash Flows: Cash Flows:

Usefulness and Usefulness and FormatFormat

Preparing the Preparing the Statement of Cash Statement of Cash

Flows—Indirect Flows—Indirect MethodMethod

Preparing the Preparing the Statement of Cash Statement of Cash

Flows—Indirect Flows—Indirect MethodMethod

Using Cash Flows to Using Cash Flows to Evaluate a CompanyEvaluate a CompanyUsing Cash Flows to Using Cash Flows to Evaluate a CompanyEvaluate a Company

Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

Page 5: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-5

SO 1 Indicate the usefulness of the statement of cash flows.

Provides information to help assess:

1. Entity’s ability to generate future cash flows.

2. Entity’s ability to pay dividends and obligations.

3. Reasons for difference between net income and net cash

provided (used) by operating activities.

4. Cash investing and financing transactions during the

period.

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

Usefulness of the Statement of Cash Flows

Page 6: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-6

SO 2 Distinguish among operating, investing, and financing activities.

Income

Statement

Items

Operating Activities

Generally Non-Current Asset Items

Investing Activities

Generally Non-Current Liability and Equity Items

Financing Activities

Classification of Cash Flows

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

Page 7: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-7

Types of Cash Inflows and Outflows

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

SO 2 Distinguish among operating, investing, and financing activities.

Illustration 13-1

Page 8: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-8

Types of Cash Inflows and Outflows

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

SO 2 Distinguish among operating, investing, and financing activities.

Illustration 13-1

Page 9: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-9

Types of Cash Inflows and Outflows

Classification of Cash FlowsClassification of Cash FlowsClassification of Cash FlowsClassification of Cash Flows

SO 2 Distinguish among operating, investing, and financing activities.

IFRS requires that the following amounts be disclosed:

Cash paid for taxes.

Cash received and paid from interest and dividends.

Illustration 13-2Daimler’s statement of cash flows note

Page 10: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-10

Significant Non-Cash Activities

1. Direct issuance of ordinary shares to purchase assets.

2. Conversion of bonds into ordinary shares.

3. Direct issuance of debt to purchase assets.

4. Exchanges of plant assets.

Companies report these activities in either a separate note or

supplementary schedule to the financial statements.

SO 2 Distinguish among operating, investing, and financing activities.

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

Page 11: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-11

Page 12: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-12

Order of Presentation:

1. Operating activities.

2. Investing activities.

3. Financing activities.

Direct Method

Indirect Method

SO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

The cash flows from operating activities section always

appears first, followed by the investing and financing sections.

Page 13: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-13

Format of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash Flows

SO 2 Distinguish among operating, investing, and financing activities.

Illustration 13-3

Page 14: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-14

During its first week, Hu Na Company had these

transactions.

Format of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash FlowsFormat of the Statement of Cash Flows

1. Issued 100,000 HK$50 par value ordinary shares

for HK$8,000,000 cash.

2. Borrowed HK$2,000,000 from Castle Bank,

signing a 5-year note bearing 8% interest.

3. Purchased two semi-trailer trucks for

HK$1,700,000 cash.

4. Paid employees HK$120,000 for salaries and

wages.

5. Collected HK$200,000 cash for services provided.

Financing

Financing

Investing

Operating

Operating

Classification

SO 2 Distinguish among operating, investing, and financing activities.

Page 15: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-15

Three Sources of Information:

1. Comparative statement of financial position

2. Current income statement

3. Additional information

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

Preparing the Statement of Cash Flows

SO 2 Distinguish among operating, investing, and financing activities.

Page 16: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-16

Three Major Steps:Illustration 13-4

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

SO 2 Distinguish among operating, investing, and financing activities.

Page 17: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-17

Three Major Steps:Illustration 13-4

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

SO 2 Distinguish among operating, investing, and financing activities.

Page 18: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-18

Indirect and Direct Methods

Companies favor the indirect method for two reasons:

1. Easier and less costly to prepare, and

2. Focuses on the differences between net income and net

cash flow from operating activities.

Usefulness and FormatUsefulness and FormatUsefulness and FormatUsefulness and Format

SO 2 Distinguish among operating, investing, and financing activities.

Page 19: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-19

Page 20: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-20 SO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash Flows

Indirect Method

Illustration 13-5

Illustration

Page 21: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-21 SO 3 Prepare a statement of cash flows using the indirect method.

Preparing Preparing the the Statement Statement of Cash of Cash FlowsFlows

Preparing Preparing the the Statement Statement of Cash of Cash FlowsFlows

Illustration 13-5

Indirect Method

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Slide 13-22

SO 3 Prepare a statement of cash flows using the indirect method.

Preparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash Flows

Additional information for 2011:

1. The company declared and paid a $29,000 cash dividend.

2. Issued $110,000 of long-term bonds in direct exchange for land.

3. A building costing $120,000 and equipment costing $25,000 were

purchased for cash.

4. The company sold equipment with a book value of $7,000 (cost

$8,000, less accumulated depreciation $1,000) for $4,000 cash.

5. Issued ordinary shares for $20,000 cash.

6. Depreciation expense was comprised of $6,000 for building and

$3,000 for equipment.

Page 23: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-23

Step 1: Operating Activities

Determine net cash provided/used by operating activities by converting net income from an accrual basis to a cash basis.

SO 3 Prepare a statement of cash flows using the indirect method.

Common adjustments to Net Income (Loss):

Add back non-cash expenses (depreciation and

amortization expense).

Deduct gains and add losses that resulted from investing

and financing activities.

Analyze changes in non-cash current assets and current

liabilities.

Preparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash Flows

Indirect Method

Page 24: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-24

Which is an example of a cash flow from an operating activity?

a. Payment of cash to lenders for interest.

b. Receipt of cash from the sale of shares.

c. Payment of cash dividends to the company’s shareholders.

d. None of the above.

QuestionQuestion

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Page 25: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-25

Depreciation Expense

Although depreciation expense reduces net income, it does not

reduce cash.

SO 3 Prepare a statement of cash flows using the indirect method.

Illustration 13-7

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Page 26: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-26

Loss on Sale of Equipment

Because companies report as a source of cash in the investing

activities section the actual amount of cash received from the

sale:

Any loss on sale is added to net income in the operating

section.

Any gain on sale is deducted from net income in the

operating section.

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Page 27: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-27

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Illustration 13-8

Loss on Sale of Equipment

Computer Services’ income statement reports a $3,000 loss on

the sale of equipment (book value $7,000, less $4,000 cash

received from sale of equipment).

Page 28: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-28

Changes to Non-Cash Current Asset Accounts

When the Accounts Receivable balance decreases, cash receipts are higher than revenue earned under the accrual basis.

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Therefore, the company adds to net income the amount of the decrease in accounts receivable.

Accounts Receivable

1/1/011 Balance 30,000Revenues 507,000

Receipts from customers 517,000

12/31/11 Balance 20,000

Illustration 13-9

Page 29: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-29

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Cash flows from operating activities:

Net income 145,000$

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense 9,000

Loss on sale of equipment 3,000

Decrease in accounts receivable 10,000

Net cash provided by operating activities 167,000$

Illustration 13-10

Changes to Non-Cash Current Asset Accounts

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Slide 13-30

When the Inventory balance increases, the cost of merchandise purchased exceeds the cost of goods sold.

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Merchandise Inventory

1/1/11 Balance 10,000Purchases 155,000

Cost of goods sold 150,000

12/31/11 Balance 15,000

As a result, cost of goods sold does not reflect cash payments made for merchandise. The company deducts from net income this inventory increase.

Changes to Non-Cash Current Asset Accounts

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Slide 13-31

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Cash flows from operating activities:

Net income 145,000$

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense 9,000

Loss on sale of equipment 3,000

Decrease in accounts receivable 10,000

Increase in inventory (5,000)

Net cash provided by operating activities 162,000$

Illustration 13-10

Changes to Non-Cash Current Asset Accounts

Page 32: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-32

When the Prepaid Expense balance increases

Cash paid for expenses is higher than expenses reported on

an accrual basis.

Company deducts the increase from net income to arrive at

net cash provided by operating activities.

If prepaid expenses decrease, reported expenses are higher

than the expenses paid.

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Changes to Non-Cash Current Asset Accounts

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Slide 13-33

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Cash flows from operating activities:

Net income 145,000$

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense 9,000

Loss on sale of equipment 3,000

Decrease in accounts receivable 10,000

Increase in inventory (5,000)

Increase in prepaid expenses (4,000)

Net cash provided by operating activities 158,000$

Illustration 13-10

Changes to Non-Cash Current Asset Accounts

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Slide 13-34

Changes to Non-Cash Current Liability Accounts

When Accounts Payable increases

Company received more in goods than it actually paid for.

Increase is added to net income.

When Income Tax Payable decreases

Income tax expense was less than the amount of taxes paid

during the period.

Decrease is subtracted from net income.

SO 3 Prepare a statement of cash flows using the indirect method.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Page 35: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-35

Cash flows from operating activities:

Net income 145,000$

Adjustments to reconcile net income to net cash

provided by operating activities:

Depreciation expense 9,000

Loss on sale of equipment 3,000

Decrease in accounts receivable 10,000

Increase in inventory (5,000)

Increase in prepaid expenses (4,000)

Increase in accounts payable 16,000

Decrease in income taxes payable (2,000)

Net cash provided by operating activities 172,000$

Illustration 13-11

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Changes to Non-Cash Current Liability Accounts

SO 3 Prepare a statement of cash flows using the indirect method.

Page 36: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-36

SO 3 Prepare a statement of cash flows using the indirect method.

Illustration 13-12

Preparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash FlowsPreparing the Statement of Cash Flows

Summary of Conversion to Net Cash Provided by Operating Activities—Indirect Method

Page 37: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-37

From the additional information, the company purchased land of $110,000 by issuing long-term bonds. This is a significant noncash investing and financing activity that merits disclosure in a separate schedule.

SO 3 Prepare a statement of cash flows using the indirect method.

Step 2: Investing and Financing ActivitiesStep 2: Investing and Financing ActivitiesStep 2: Investing and Financing ActivitiesStep 2: Investing and Financing Activities

Land

1/1/11 Balance 20,000Issued bonds 110,000

12/31/11 Balance 130,000

Bonds Payable

1/1/11 Balance 20,000For land 110,000

12/31/11 Balance 130,000

Page 38: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-38

Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of ordinary shares 20,000 Payment of cash dividends (29,000)

Net cash used by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period 55,000$

Disclosure: Issuance of bonds to purchase land 110,000$

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

Illustration 13-14Partial statement

SO 3 Prepare a statement of cash flows using the indirect method.

Page 39: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-39

From the additional information, the company acquired an office

building for $120,000 cash. This is a cash outflow reported in

the investing section.

SO 3 Prepare a statement of cash flows using the indirect method.

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

1/1/11 Balance 40,000Office building 120,000

12/31/11 Balance 160,000

Building

Page 40: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-40

Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of ordinary shares 20,000 Payment of cash dividends (29,000)

Net cash used by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period 55,000$

Disclosure: Issuance of bonds to purchase land 110,000$

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

Illustration 13-14Partial statement

SO 3 Prepare a statement of cash flows using the indirect method.

Page 41: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-41

The additional information explains that the equipment increase resulted from two transactions: (1) a purchase of equipment of $25,000, and (2) the sale for $4,000 of equipment costing $8,000.

SO 3 Prepare a statement of cash flows using the indirect method.

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

1/1/11 Balance 10,000Purchase 25,000

12/31/11 Balance 27,000

Equipment sold 8,000

Cash 4,000Accumulated depreciation 1,000Loss on sale of equipment 3,000

Equipment 8,000

Journal Entry

Equipment

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Slide 13-42

SO 3 Prepare a statement of cash flows using the indirect method.

Statement Statement of Cash of Cash FlowsFlows

Statement Statement of Cash of Cash FlowsFlows

Cash flows from operating activities:Net income 145,000$

Adjustments to reconcile net income to net cashprovided by operating activities:

Depreciation expense 9,000 Loss on sale of equipment 3,000 Decrease in accounts receivable 10,000 Increase in inventory (5,000) Increase in prepaid expenses (4,000) Increase in accounts payable 16,000 Decrease in income taxes payable (2,000)

Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of ordinary shares 20,000 Payment of cash dividends (29,000)

Net cash used by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period 55,000$ Illustration 13-14

Indirect Method

Page 43: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-43

The additional information notes that the increase in share

capital - ordinary resulted from the issuance of new shares.

SO 3 Prepare a statement of cash flows using the indirect method.

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

1/1/11 Balance 50,000Shares sold 20,000

12/31/11 Balance 70,000

Ordinary Shares

Page 44: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-44

Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of ordinary shares 20,000 Payment of cash dividends (29,000)

Net cash used by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period 55,000$

Disclosure: Issuance of bonds to purchase land 110,000$

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

Illustration 13-14Partial statement

SO 3 Prepare a statement of cash flows using the indirect method.

Page 45: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-45

Retained earnings increased $116,000 during the year. This increase can be explained by two factors: (1) Net income of $145,000 increased retained earnings. (2) Dividends of $29,000 decreased retained earnings

SO 3 Prepare a statement of cash flows using the indirect method.

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

1/1/11 Balance 48,000Net income 145,000

12/31/11 Balance 164,000

Dividends 29,000

Retained Earnings

Page 46: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-46 SO 3 Prepare a statement of cash flows using the indirect method.

Statement Statement of Cash of Cash FlowsFlows

Statement Statement of Cash of Cash FlowsFlows

Cash flows from operating activities:Net income 145,000$

Adjustments to reconcile net income to net cashprovided by operating activities:

Depreciation expense 9,000 Loss on sale of equipment 3,000 Decrease in accounts receivable 10,000 Increase in inventory (5,000) Increase in prepaid expenses (4,000) Increase in accounts payable 16,000 Decrease in income taxes payable (2,000)

Net cash provided by operating activities 172,000 Cash flows from investing activities:

Purchase of building (120,000) Purchase of equipment (25,000) Sale of equipment 4,000

Net cash used by investing activities (141,000) Cash flows from financing activities:

Issuance of ordinary shares 20,000 Payment of cash dividends (29,000)

Net cash used by financing activities (9,000) Net increase in cash 22,000 Cash at beginning of period 33,000 Cash at end of period 55,000$

Illustration 13-14

Indirect Method

Step 3: Net Change in Cash

Page 47: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-47

Which is an example of a cash flow from an investing activity?

a. Receipt of cash from the issuance of bonds payable.

b. Payment of cash to repurchase outstanding shares.

c. Receipt of cash from the sale of equipment.

d. Payment of cash to suppliers for inventory.

QuestionQuestion

SO 3 Prepare a statement of cash flows using the indirect method.

Investing and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing ActivitiesInvesting and Financing Activities

Page 48: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-48

Free Cash Flow

Free cash flow describes the cash remaining from operations after adjustment for capital expenditures and dividends.

SO 4 Analyze the statement of cash flows.

Using Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a Company

Page 49: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-49 SO 4 Analyze the statement of cash flows.

Using Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a CompanyUsing Cash Flows to Evaluate a Company

Illustration 13-16

Page 50: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-50

Companies preparing financial statements under both IFRS and

GAAP must prepare a statement of cash flows as an integral

part of the financial statements.

Both IFRS and GAAP require that the statement of cash flows

should have three major sections—operating, investing, and

financing—along with changes in cash and cash equivalents.

Similar to IFRS, the cash flow statement can be prepared using

either the indirect or direct method under GAAP. In both U.S.

and international settings, most companies choose the indirect

method for reporting net cash flows from operating activities.

Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP

Key DifferencesKey Differences Statement of Cash Flows

Page 51: Slide 13-1. Slide 13-2 Chapter 13 Statement of Cash Flows Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

Slide 13-51

The definition of cash equivalents used in GAAP is similar to

that used in IFRS. A major difference is that in certain

situations, bank overdrafts are considered part of cash and

cash equivalents under IFRS, which is not the case in GAAP.

Under GAAP, bank overdrafts are classified as financing

activities.

IFRS requires that non-cash investing and financing activities

be excluded from the statement of cash flows. Non-cash

investing and financing activities should be disclosed in the

notes instead of in the financial statements. Under GAAP,

companies may present this information at the bottom of the

cash flow statement.

Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP

Key DifferencesKey Differences Statement of Cash Flows

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Slide 13-52

Looking to the FutureLooking to the Future

Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP

Presently, the FASB and the IASB are involved in a joint project on

the presentation and organization of information in the financial

statements. One interesting approach, revealed in a published

proposal from that project, is that in the future the income

statement and statement of financial position would adopt headings

similar to those of the statement of cash flows. That is, the income

statement and statement of financial position would be broken into

operating, investing, and financing sections. With respect to the

cash flow statement specifically, the notion of cash equivalents will

probably not be retained. That is, cash equivalents will not be

combined with cash but instead will be reported as a form of highly

Statement of Cash Flows

continued

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Looking to the FutureLooking to the Future

Understanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAPUnderstanding U.S. GAAP

liquid, low-risk investments. The definition of cash in the existing

literature would be retained, and the statement of cash flows would

present information on changes in cash only. In addition, the FASB

favors presentation of operating cash flows using the direct method

only. However, the majority of IASB members express a preference

for not requiring use of the direct method of reporting operating

cash flows. So, the two Boards will have to resolve their differences

in this area in order to issue a converged standard for the statement

of cash flows.

Statement of Cash Flows

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Slide 13-54

Using a Worksheet to Prepare the Statement of Cash Using a Worksheet to Prepare the Statement of Cash Flows-Indirect MethodFlows-Indirect MethodUsing a Worksheet to Prepare the Statement of Cash Using a Worksheet to Prepare the Statement of Cash Flows-Indirect MethodFlows-Indirect Method

Illustration 13A-1

Appendix A

SO 5 Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.

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Slide 13-55

SO 5 Explain how to use a worksheet to prepare the statement of cash flows using the indirect method.

Preparing a Worksheet

1. Enter in the statement of financial position accounts section the

statement of financial position accounts and their beginning and

ending balances.

2. Enter in the reconciling columns of the worksheet the data that

explain the changes in the statement of financial position accounts

other than cash and their effects on the statement of cash flows.

3. Enter the cash line and at the bottom of the worksheet the increase

or decrease in cash. This entry should enable the totals of the

reconciling columns to be in agreement.

Using a Worksheet to Prepare the Statement of Cash Using a Worksheet to Prepare the Statement of Cash Flows-Indirect MethodFlows-Indirect MethodUsing a Worksheet to Prepare the Statement of Cash Using a Worksheet to Prepare the Statement of Cash Flows-Indirect MethodFlows-Indirect Method

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Using a Worksheet Using a Worksheet to Prepare the to Prepare the Statement of Cash Statement of Cash Flows-Indirect Flows-Indirect MethodMethod

Using a Worksheet Using a Worksheet to Prepare the to Prepare the Statement of Cash Statement of Cash Flows-Indirect Flows-Indirect MethodMethod

Illustration 13A-3Completed worksheet—indirect method

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Slide 13-57 SO 6 Prepare a statement of cash flows using the direct method.

1. Under the direct method, companies compute net cash provided by operating activities by adjusting each item in the income statement from the accrual basis to the cash basis.

2. To simplify and condense the operating activities section, companies report only major classes of operating cash receipts and cash payments.

3. For these major classes, the difference between cash receipts and cash payments is the net cash provided by operating activities.

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

Appendix B

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Slide 13-58

Illustration 13B-2

SO 6 Prepare a statement of cash flows using the direct method.

Step 1: Operating Activities

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-59

Illustration 13B-1

SO 6 Prepare a statement of cash flows using the direct method.

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-60

Illustration 13B-1

SO 6 Prepare a statement of cash flows using the direct method.

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

Additional information:1. In 2011, the company declared and paid a $32,000 cash dividend.2. Bonds were issued at face value for $130,000 in cash.3. Equipment costing $180,000 was purchased for cash.4. Equipment costing $20,000 was sold for $17,000 cash when the book value of the

equipment was $18,000.5. Ordinary shares of $60,000 were issued to acquire land.

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Slide 13-61

Illustration 13B-3

Cash Receipts from Customers

SO 6 Prepare a statement of cash flows using the direct method.

For Juarez Company, accounts receivable decreased $3,000.

Illustration 13B-5

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-62

Illustration 13B-6

Cash Payments to Suppliers

SO 6 Prepare a statement of cash flows using the direct method.

In 2011, Juarez Company’s inventory increased $10,000 and cash payments to suppliers were $678,000.

Illustration 13B-9

Illustration 13B-7

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-63

Illustration 13B-10

Cash Payments for Operating Expenses

SO 6 Prepare a statement of cash flows using the direct method.

Cash payments for operating expenses were $179,000,

Illustration 13B-11

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-64

Illustration 13B-12

Cash Payments for Income Taxes

SO 6 Prepare a statement of cash flows using the direct method.

Cash payments for income taxes were $24,000,

Illustration 13B-13

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-65

Increase in Equipment. (1) Juarez purchased for cash equipment

costing $180,000. And (2) it sold for $17,000 cash equipment

costing $20,000, whose book value was $18,000.

SO 6 Prepare a statement of cash flows using the direct method.

Step 2: Investing and Financing Activities

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

Illustration 13B-15

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Slide 13-66

Increase in Land. Juarez’s land increased $60,000. The additional information section indicates that the company issued ordinary shares to purchase the land.

SO 6 Prepare a statement of cash flows using the direct method.

Step 2: Investing and Financing Activities

Significant non-cashinvesting and financing

transaction.

Increase in Bonds Payable. Bonds Payable increased $130,000. The additional information indicated that Juarez issued, for $130,000 cash, bonds with a face value of $130,000.

Financing activity.

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Slide 13-67

Increase in Share Capital - Ordinary. The Share Capital - Ordinary account increased $60,000. The additional information indicated that Juarez acquired land from the issuance of ordinary shares.

SO 6 Prepare a statement of cash flows using the direct method.

Step 2: Investing and Financing Activities

Increase in Retained Earnings. The $52,000 net increase in Retained Earnings resulted from net income of $84,000 and the declaration and payment of a cash dividendof $32,000.

Financing activity (cash dividend).

Significant non-cashinvesting and financing

transaction.

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

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Step 3: Net Change in Cash

Step 2: Investing and Financing Activities

Illustration 13B-16

Statement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct MethodStatement of Cash Flows-Direct Method

SO 6 Prepare a statement of cash flows using the direct method.

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Slide 13-69

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