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CHAPTER 16

CHAPTER 16. A NALYSIS U SING T HE S TATEMENT O F C ASH F LOWS. Statement of Cash Flows.

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CHAPTER 16

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  1. CHAPTER 16 ANALYSIS USING THE STATEMENT OF CASH FLOWS

  2. Statement of Cash Flows As the cartoon implies, business investments with good long-term cash flow prospects frequently provide poor cash flow in their early years. Measuring net income by means of the accrual basis of accounting mitigates the short-sightedness of cash flow measures.

  3. Purpose of the Statement ofCash Flows The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period. (i.e., it tells where the cash came from and where it went while explaining the change in the cash balance.)

  4. Purpose of the Statement ofCash Flows The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period. We need to sell our inventory and collect our receivables, if we plan to have a good year.

  5. Purpose of the Statement ofCash Flows The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period. In addition, we have to make an investment in new equipment to improve our productivity.

  6. Purpose of the Statement ofCash Flows The statement summarizes the effects on cash of the operating, investing, and financing activities of a company during an accounting period. I guess we will have to borrow some money to afford all this new equipment.

  7. Helps Financial StatementUsers Assess the... Ability to generate positive future net cash flows. Ability to meet obligations. P. 582 Need for external financing. Ability to pay dividends. Reasons for differences between accrual andcash-basis income.

  8. Operating Activities Transactions that enter into the determination of net income • Investing Activities Transactions involving acquisition or disposal of noncurrent assets • Financing Activities Transactions involving creditors and stockholders Cash Flow Terminology

  9. Cash inflows from: Sale of goods or services Interest revenue Dividend revenue Sale of trading securities Other 583 Operating Activities

  10. Cash outflows for: Purchase of inventory Payment of salaries and wages Interest expense Other expenses Purchase of trading securities 583 Operating Activities

  11. Operating Activities Direct Method Deducts from cash sales only those operating expenses that consumed cash.

  12. Operating Activities Indirect Method Starts with accrual basis net income and adjusts net income for items that affected net income but did not involve cash. This is the most popular method and is used by about 95% of companies.

  13. Cash inflows from: Sale of property, plant, and equipment. Sale of securities. Collections of long-term loans. Cash outflows for: Purchase of property, plant, and equipment. Purchase of securities. Making loans. 583 Investing Activities

  14. Cash inflows from: Issuing capital stock. Issuing debt. Cash outflows for: Purchase of treasury stock. Payment of cash dividends. Payment of debt. What about payment of interest on debt? 583 Financing Activities

  15. Steps in Preparing theStatement of Cash Flows • Determine cash flows from operatingactivities using the indirect method. • Analyze all noncurrent accounts for changes in cash resulting from investing or financing activities. • Arrange the information from 1 and 2 in the proper format.

  16. Indirect MethodOperating Activities Accrual basis net income Add: Non-cash expenses (e.g., Depreciation, Depletion and Amortization) Add: Losses not affecting cash Deduct: Gains not affecting cash Adjust: For changes in current assets and current liabilities Cash provided by operating activities(i.e., cash-basis net income)

  17. Indirect MethodOperating Activities Section Add Change Deduct Change For Changes in: to Net Income from Net Income Current assets. . . . Decreases Increases Current liabilities. . Increases Decreases 589

  18. Operating Activities Example East, Inc. reports $125,000 Net Income for the year ended December 31, 1999. Accounts Receivable increased by $7,500 during the year and Accounts Payable increased by $10,000. During 1999, East reported $12,500 of Depreciation Expense. Calculate cash provided by operating activities during 1999.

  19. Operating Activities Solution

  20. Cash Flow Statement XYZ Corporation Statement of Cash Flows For the year ended December 31, 1999 Operating Activities $xx,xxx Investing Activities x,xxx Financing Activities x,xxx Net Increase (decrease) in cash xxx Cash at beginning of year x,xxx Cash at end of year $ x,xxx Optional - see p. 593

  21. Cash Flows Question On the Statement of Cash Flows, the sale of the company’s own Capital Stock for cash would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above.

  22. Cash Flows Question On the Statement of Cash Flows, the sale of the company’s own Capital Stock for cash would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above. a. b. c. d.

  23. Cash Flows Question On the Statement of Cash Flows, the purchase of plant assets would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above.

  24. Cash Flows Question On the Statement of Cash Flows, the purchase of plant assets would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above. a. b. c. d.

  25. Cash Flows Question On the Statement of Cash Flows, the payment of cash dividends would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above.

  26. Cash Flows Question On the Statement of Cash Flows, the payment of cash dividends would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above. a. b. c. d.

  27. Cash Flows Question On the Statement of Cash Flows, the change in Accounts Receivable balance for the year would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above.

  28. Cash Flows Question On the Statement of Cash Flows, the change in Accounts Receivable balance for the year would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above. a. b. c. d.

  29. Cash Flows Question On the Statement of Cash Flows, the purchase of plant assets through the issuance of Capital Stock would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above.

  30. Cash Flows Question On the Statement of Cash Flows, the purchase of plant assets through the issuance of Capital Stock would be classified as a. Cash flow from operating activities. b. Cash flow from investing activities. c. Cash flow from financing activities. d. None of the above. a. This should be classified as a non-cash financing and investing activity and disclosed in a separate schedule or footnote to the financial statements. b. c. d.

  31. Non-Cash Activities The reason that non-cash investing and financing activities must be disclosed in notes to the statement of cash flows: The reader wants to know why all amounts on the comparative balance sheet changed from the beginning to end of year, whether cash was involved or not. Therefore, this is a good place to disclose it.

  32. Cash Flow Statement Example Sample Company is preparing its annual financial statements. The Company provides you with Balance Sheets for 12/31/98 and 12/31/99, and the Income Statement for the year ended 12/31/99. During 1999, the Company paid cash dividends of $10,000. Prepare a Statement of Cash Flows, using the indirect method.

  33. Cash Flow Statement Example Additional information: • On June 8, 1999, Sample purchased land for cash of $11,000. • During 1999, Sample purchased new equipment for $13,000 cash. • On March 18, 1999, Sample sold additional shares of common stock for cash of $10,000.

  34. Cash Flow Statement Example

  35. Start with accrual basis net income and make all necessary adjustments.

  36. Add depreciation, depletion and amortization.

  37. Deduct the increase in the current assets - accounts receivable and Inventory.

  38. Add the increases in the current liabilities - accounts payable and wages payable.

  39. Now that we have completed the cash flows from operating activities section of the statement let’s look at the cash flows for investing activities.

  40. Sample purchased land for cash during 1999.

  41. During the year Sample purchased new equipment paying $13,000 cash.

  42. To raise addition capital Sample sold shares of stock for $10,000 cash.

  43. The company paid $10,000 in cash dividends to its shareholders.

  44. We have now explained what caused the cash account to increase by $52,000 during the year.

  45. Retained Earnings 30,000 Beg. Bal. 10,000 30,000 + X - 4,000 = 36,000X = 10,000 36,000 End. Bal. Analyzing the Comparative Balance Sheet Illustration 16.3, p. 587 Dividends 4,000 X Net Income

  46. Hey, dude, how about going over that stuff one more time? PACIOLI Accounting .

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