the statement of cash flows chapter 14 ©2014 pearson education, inc. publishing as prentice...

The Statement of Cash Flows

Chapter 14

©2014 Pearson Education, Inc. Publishing as Prentice Hall 14-1

Learning Objectives

1. Identify the purposes of the statement of cash flows and distinguish among operating, investing, and financing cash flows

2. Prepare the statement of cash flows by the indirect method


Learning Objectives

3. Use free cash flow to evaluate business performance

4. Prepare the statement of cash flows by the direct method (Appendix 14A)

5. Prepare the statement of cash flows by the indirect method using a spreadsheet (Appendix 14B)


Learning Objective 1

Identify the purposes Identify the purposes of the statement of of the statement of

cash flows and cash flows and distinguish among distinguish among

operating, investing, operating, investing, and financing cash and financing cash

flowsflows


Purpose of the Statement of Cash Flows

• Reports on the cash Reports on the cash flows of a business.flows of a business.

• Reports why cash Reports why cash increased or increased or decreased during the decreased during the period.period.

• Covers the same Covers the same period of time as the period of time as the income statement.income statement.

Can be used to:Can be used to:•Predict future cash Predict future cash flows.flows.•Evaluate Evaluate management management decisions.decisions.•Predict ability of the Predict ability of the company to pay company to pay debts and dividends.debts and dividends.


Classification of Cash Flows

Cash Flows From:Cash Flows From:

•Operating Operating ActivitiesActivities

•Investing Investing ActivitiesActivities

•Financing Financing ActivitiesActivities







Cash receipts and Cash receipts and disbursements related disbursements related to revenue or expense to revenue or expense

activities. Includes cash activities. Includes cash flows related to:flows related to:

•interest income and interest income and expenseexpense•dividend revenuedividend revenue•income tax expenseincome tax expense







Cash receipts and Cash receipts and disbursements related disbursements related

to increases and to increases and decrease in long-term decrease in long-term

assets, including:assets, including:

•PP&EPP&E•Notes ReceivableNotes Receivable•InvestmentsInvestments







Cash receipts and Cash receipts and disbursements related disbursements related

to increases and to increases and decreases in long-term decreases in long-term

liabilities and equity. liabilities and equity. Includes:Includes:

•BorrowingBorrowing•Issuing stockIssuing stock•Paying dividendsPaying dividends


Two Formats for Operating Activities

Indirect MethodIndirect Method•Starts with accrual net income.•Adjusts net income to net cash from operations using known relationships.

Direct MethodDirect Method•Restates the Income Statement in terms of cash•Shows actual cash receipts and cash disbursements.


1. Cash receipt from the sale of equipment.

2. Cash payment for salaries.3. Cash receipt from the collection of long-term notes receivable.

4. Purchase of equipment in exchange for notes payable.

5. Cash receipt from the issuance of common stock.

Identify each item as operating (O), Investing (I), Financing (F), or non-cash (N).


I 1. Cash receipt from the sale of equipment.

2. Cash payment for salaries.3. Cash receipt from the collection of long-term notes receivable.






O 2. Cash payment for salaries.3. Cash receipt from the collection of long-term notes receivable.






O 2. Cash payment for salaries.

I 3. Cash receipt from the collection of long-term notes receivable.








N 4. Purchase of equipment in exchange for notes payable.







N 4. Purchase of equipment in exchange for notes payable.

F 5. Cash receipt from the issuance of common stock.




Prepare the Prepare the statement of cash statement of cash

flows by the flows by the indirect methodindirect method


Preparing a Statement of Cash Flows with the Indirect Method

Information Needed:Information Needed:•Current Income Statement•Current Balance Sheet•Immediate past Balance Sheet•Changes in long-term assets and long-term liabilities•Changes in equity

To compute Cash To compute Cash Flows from Flows from

Operations, we need:Operations, we need:•Net IncomeNet Income•Non-cash expensesNon-cash expenses•Gains/LossesGains/Losses•Changes in current Changes in current assets and current assets and current liabilitiesliabilities


Computing Cash Flows from Operating Activities



$40,000 + Non-Cash Expenses + Losses - Gains + Increase in Current Liabilities + Decrease in Current Assets - Decrease in Current Liabilities - Increase in Current Assets = Net Cash Flow from Operating Activities

Smart Touch Smart Touch Learning’s Net Learning’s Net

Income for 2015 Income for 2015 is $40,000is $40,000



$40,000 + 20,000 + Losses - Gains + Increase in Current Liabilities + Decrease in Current Assets - Decrease in Current Liabilities - Increase in Current Assets = Net Cash Flow from Operating Activities

Non-cash Non-cash expense include expense include

Depreciation, Depreciation, Depletion and Depletion and Amortization. Amortization.

Depreciation is Depreciation is $20,000.$20,000.



$40,000 + 20,000 + 0 - 10,000 + Increase in Current Liabilities + Decrease in Current Assets - Decrease in Current Liabilities - Increase in Current Assets = Net Cash Flow from Operating Activities

Smart Touch Smart Touch Learning has no Learning has no Losses, but has Losses, but has a $10,000 Gain a $10,000 Gain on Disposal of on Disposal of Plant Assets.Plant Assets.



$40,000 + 20,000 + 0 - 10,000 + Increase in Current Liabilities + 2,000 - Decrease in Current Liabilities - 17,000 = Net Cash Flow from Operating Activities

Smart Touch Smart Touch Learning’s Learning’s Inventory Inventory

decreased by decreased by $2,000 during $2,000 during 2015, and A/R 2015, and A/R increased by increased by

$17,000.$17,000.



$40,000 + 20,000 + 0 - 10,000 + 40,000 + 2,000 - Decrease in Current Liabilities - 17,000 = Net Cash Flow from Operating Activities

Smart Touch Smart Touch Learning’s Learning’s Accounts Accounts Payable Payable

increased by increased by $40,000 during $40,000 during

2015.2015.



$40,000 + 20,000 + 0 - 10,000 + 40,000 + 2,000 - 5,000 - 17,000 = Net Cash Flow from Operating Activities

Smart Touch Smart Touch Learning’s Learning’s Accrued Accrued

Liabilities Liabilities decreased by decreased by $5,000 during $5,000 during

2015.2015.


Reporting Cash Flows from Operating Activities

$40,000 + 20,000 + 0 - 10,000 + 40,000 + 2,000 - 5,000 - 17,000 = $70,000


Computing Cash Flows from Investing Activities

Smart Touch Learning’s records Smart Touch Learning’s records indicate:indicate:

•$310,000 in plant assets were $310,000 in plant assets were purchased with cash during 2015.purchased with cash during 2015.

•The $10,000 gain resulted from The $10,000 gain resulted from selling plant assets with a cost of selling plant assets with a cost of $55,000 and accumulated $55,000 and accumulated depreciation of $15,000 for $50,000.depreciation of $15,000 for $50,000.


Reporting Cash Flows from Investing Activities


Computing Cash Flows from Financing Activities

Smart Touch Learning’s records Smart Touch Learning’s records indicate:indicate:•$90,000 was borrowed on a note payable.$90,000 was borrowed on a note payable.•$10,000 was paid to retire old notes.$10,000 was paid to retire old notes.•$120,000 was received from issuing shares $120,000 was received from issuing shares of common stock.of common stock.•$20,000 was paid to acquire treasury stock.$20,000 was paid to acquire treasury stock.•$10,000 in dividends were paid.$10,000 in dividends were paid.


Reporting Cash Flows from Financing Activities


Cash receipt from sale of equipment 20,000$ Depreciation expense 12,000 Cash payment of dividends 4,000 Cash receipt from issuance of common stock 12,000 Net Income 30,000 Cash purchase of land 25,000 Increase in current l iabil ities 10,000 Decrease in current assets other than cash 8,000

Owl, Inc.'s accountants have assembled the following data for the year ended December, 31, 2015

Prepare Owl's Statement of Cash Flows using the indirect method for the year ended December 31, 2015. Assume beginning Cash was $12,000 and ending cash is $75,000.



Use free cash flow Use free cash flow to evaluate to evaluate business business

performanceperformance


Free Cash Flow

Measures the amount of cash flow Measures the amount of cash flow available for unexpected opportunities.available for unexpected opportunities.

Free Cash Flow

=Net Cash from

Operating Activities

-

Cash Payments Planned for

Investments in Long-term assets

-Cash

Dividends


Free Cash Flow

Smart Touch Learning expects operating cash Smart Touch Learning expects operating cash flow of $200,000. They plan to spend $160,000 flow of $200,000. They plan to spend $160,000 to modernize its production facilities, and to to modernize its production facilities, and to

pay $15,000 in cash dividends.pay $15,000 in cash dividends.

Free Cash Flow

=Net Cash from


-



-Cash

Dividends

= $ 200,000 - $ 160,000 - 15,000$ = 25,000$


Net cash provided by operating activities 100,000$ Net cash provided by financing activities 10,000 Net cash used for investing activities 20,000 Cash dividends paid to stakeholders 2,000

Kalapono Company expects the following for 2014:

How much free cash flow does Kalapono expect for 2014?

Free Cash Flow

=Net Cash from


-



-Cash

Dividends


Net cash provided by operating activities 100,000$ Net cash provided by financing activities 10,000 Net cash used for investing activities 20,000 Cash dividends paid to stakeholders 2,000

Kalapono Company expects the following for 2014:

How much free cash flow does Kalapono expect for 2014?

Free Cash Flow

=Net Cash from


-



-Cash

Dividends

= $ 100,000 - $ 20,000 - 2,000$ = 78,000$



Prepare the Prepare the statement of cash statement of cash flows by the direct flows by the direct

method method

(Appendix 14A)(Appendix 14A)


Cash Flows from Operating Activities

• Each item on the income statement will Each item on the income statement will be converted from the accrual basis to be converted from the accrual basis to cash basis.cash basis.

• Most of the amounts will be adjusted Most of the amounts will be adjusted based on changes in current asset based on changes in current asset amounts and current liability amounts.amounts and current liability amounts.

• Non-cash expenses and gains and Non-cash expenses and gains and losses will be ignored.losses will be ignored.



• Cash Collections from CustomersCash Collections from Customers

• Cash Receipts of InterestCash Receipts of Interest

Cash Receipts from

Customers =

Sales Revenue

+Beginning Accounts

Receivable -

Ending Accounts

Receivable

Interest Receipts

=Interest Revenue

+Beginning

Interest Receivable

-

Ending Interest

Receivable



• Cash Receipts of DividendsCash Receipts of Dividends

• Payments to SuppliersPayments to Suppliers

Dividend Receipts

=Dividend Revenue

+Beginning Dividends Receivable

-

Ending Dividends Receivable

Cash Paid for Inventory

= COGS -

Beginning Merchandise

Inventory +

Ending Merchandise

Inventory

+Beginning

A/P - Ending A/P



• Payments to EmployeesPayments to Employees

• Payments for Interest Expense and Tax Payments for Interest Expense and Tax ExpenseExpense

Payments to Employees

=Salaries &

Wages Expense

+Beginning

Salaries & Wages Payable

-

Ending Salaries & Wages Payable

Cash Paid for the Expense

= Expense +Beginning

Related Payable -

Ending Related Payable


End of Chapter 14


the statement of cash flows chapter 14 ©2014 pearson education, inc. publishing as prentice...

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