You are on page 1of 49

5-1

FINANCIAL ACCOUNTING
Fourth Canadian Edition
LIBBY, LIBBY, SHORT, KANAAN, GOWING

Reporting and Interpreting Cash Flows Chapter 5
PowerPoint Author:

Robert G. Ducharme, MAcc, CA University of Waterloo, School of Accounting and Finance
Copyright © 2011 McGraw-Hill Ryerson Limited

5-2

Understanding the Business Positive cash flows permit a company to . . .
Pay dividends to owners. Take advantage of market opportunities. Expand its operations. Replace needed assets.

Financial analysts consider cash flow an important indicator of a company’s financial health.
Copyright © 2011 McGraw-Hill Ryerson Limited LO 1

5-3

Classifications of the Statement of Cash Flows
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 (i.e., original maturities of less than 3 months).
LO 1

Copyright © 2011 McGraw-Hill Ryerson Limited

5-4

Classifications of the Statement of Cash Flows
Cash inflows and outflows directly related to earnings from normal operations.
Cash inflows and outflows related to the acquisition or sale of productive facilities and investments in the securities of other companies. Cash inflows and outflows related to external sources of financing (owners and creditors) for the enterprise.
LO 1

Operating Activities Investing Activities Financing Activities
Copyright © 2011 McGraw-Hill Ryerson Limited

5-5 CASH INFLOWS Operating Activities Cash received from revenues Investing Activities Sale of operational assets Sale of investments Collections of loans Financing Activities Issuance of shares Issuance of bonds and notes Business Cash paid for expenses Purchase of operational assets Purchase of investments Loans to others Payment of dividends Repurchase of shares Repayment of debt CASH OUTFLOWS Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 .

2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.006) 58 (2.197) 2. This ending cash balance should agree with the statement of financial position. The indirect method is used by 99.126 (1.517 2. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period Copyright © 2011 McGraw-Hill Ryerson Limited 3.562) (5. $ LO 1 .948) (464) 3.006) 5.509) (1.221 - Andrew Peller Limited uses the indirect method.708 (1.5-6 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.165) 727 (3.882 (1.382) (1.5% of companies.

Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 . The Indirect Method of presenting the Operating Activities section of the statement of cash flows adjusts profit to compute cash flows from operating activities.5-7 Cash Flows from Operating Activities The Direct Method of presenting the Operating Activities section of the statement of cash flows reports components of cash flows from operating activities as gross receipts and gross payments.

the same amount of net cash flows from operating activities is generated. Indirect Method Two Formats for Reporting Operating Activities Direct Method Reports the cash effects of each operating activity Indirect Method Starts with accrual profit and converts to cash basis Note that no matter which format is used. Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 .5-8 Direct Method vs.

5-9 Cash Flows from Operating Activities Although IAS 7: Statement of Cash Flows encourages companies to report cash flows from operating activities using the direct method. Many financial executives have reported that they do not use it because it is more expensive to implement than the indirect method. Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 . it is rarely seen in practice.

etc.)  Salaries and wages  Income taxes  Interest on liabilities Copyright © 2011 McGraw-Hill Ryerson Limited + _ Cash Flows from Operating Activities LO 1 .5-10 Cash Flows from Operating Activities Inflows Cash received from:  Customers  Dividends and interest on investments Outflows Cash paid for:  Purchase of goods for resale and services (electricity.

plant and equipment  Sale or maturity of investments in securities Outflows Cash paid for:  Purchase of property. plant and equipment  Purchase of investments in securities Copyright © 2011 McGraw-Hill Ryerson Limited + _ Cash Flows from Investing Activities LO 1 .5-11 Cash Flows from Investing Activities Inflows Cash received from:  Sale or disposal of property.

from creditors  Issuing shares to owners Outflows Cash paid for:  Repayment of principal to creditors (excluding interest. bonds. mortgages. if it is classified an operating activity)  Repurchasing shares from owners  Dividends to owners Copyright © 2011 McGraw-Hill Ryerson Limited + _ Cash Flows from Financing Activities LO 1 .5-12 Cash Flows from Financing Activities Inflows Cash received from:  Borrowings on notes. etc.

transactions and events.  Additional details concerning selected accounts.Relationships to the Statement of Financial Position and the Income Statement Information needed to prepare a statement of cash flows:  Comparative Statements of Financial Position. 5-13 Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 .  Income Statement.

Assets = Liabilities Shareholders’ Equity LO 1 Copyright © 2011 McGraw-Hill Ryerson Limited . . .Relationships to the Statement of Financial Position and the Income Statement 5-14  Cash = Liabilities Shareholders’ Equity Non-cash Assets Derives from .

Relationships to the Statement of Financial Position and the Income Statement Selected Cash Transactions and Their Effect on Other Statement of Financial Position Accounts 5-15 Category Transactions Cash Effect Other Account Affected +Cash -Accounts Receivable (A) Operating Collect trade receivables Pay trade payables -Cash -Accounts Payable (L) Prepay rent -Cash +Prepaid Rent (A) Pay interest -Cash -Retained Earnings (SE) Sell for cash +Cash +Retained Earnings (SE) -Cash +Equipment (A) Investing Purchase equipment for cash Sell investment securities for cash +Cash -Investments (A) -Cash -Notes Payable-Bank (L) Financing Pay back debt to bank +Share Capital (SE) Issue shares for cash +Cash Copyright © 2011 McGraw-Hill Ryerson Limited LO 1 .

5-16 Profit Cash Flows from Operating Activities: Indirect Method + Losses and .Changes in current assets and current liabilities. +/.Reporting and Interpreting Cash Flows from Operating — Indirect Method The indirect method adjusts profit by eliminating non-cash items. LO 1 Copyright © 2011 McGraw-Hill Ryerson Limited .Gains + Non-cash expenses such as depreciation and amortization.

5-17 Current Assets Current Liabilities Use this table when adjusting Profit to Operating Cash Flows using the indirect method. Add to profit. Add to profit. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . Subtract from profit.Reporting and Interpreting Cash Flows from Operating Activities – Indirect Method Change in Account Balance During Year Increase Decrease Subtract from profit.

389 285.212 93.014 105.749 7.708 (1.165) 0 (26) (438) (1.694 103.354 7.457 44.148 7.509 1.184 84.474 7.300 75.537 $ $ $ 24.375 95.767 12.818 5.399 44.818 47.499 276.715 11.375 98.849 132.682 180.006 880 (58) 0 3.721 94.423 9.197 6.164 18.843 124.537 51.069 276.333 6.715 7.875 1.562) 0 2.158 92.5-18 ANDREW PELLER LIMITED Consolidated Statement of Financial Position Dollars in Thousands Sept. 2008 June 30.499 285.046 24.320 $ $ LO 2 .205 14. 30.285 101.882 5. and equipment (net) Long-term investments Goodwill Total assets LIABILITIES & SHAREHOLDERS' EQUITY Bank borrowings Trade payables Accrued liabilities Dividends payable Current portion of long-term borrowings Total current liabilities Long-term borrowings Deferred income taxes Total liabilities Shareholders' Equity Share capital Retained earnings Total shareholders' equity Total liabilities & shareholders' equity Copyright © 2011 McGraw-Hill Ryerson Limited $ $ $ 29.699 74.040 1. 2008 Changes ASSETS Trade receivables Inventories Prepayments Total current assets Property.244 173.388 100. plant.382 1.197 6.

663 1.808 2. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .146 $3.102 20.505 4.168 1.356 40. general and administrative Depreciation of plant and equipment Operating profit Interest expense Profit before income taxes Provision for income taxes Profit $ 69.254 29. 2008 (in thousands of dollars) Net sales Cost of sales Gross margin Selling.5-19 ANDREW PELLER LIMITED Consolidated Statement of Income For the Three Months Ended September 30.517 The Statement of Cash Flows will begin with profit from the Income Statement.126 6.

081 Step 1 Adjust profit for depreciation and amortization expense and other items not affecting cash.5-20 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.562) 4. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivables Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Net cash provided by (used in) operating activities 3. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .517 2.126 (1.

708 (1.165) 727 Step 2 Adjust profit for changes in non-cash operating working capital items. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivables Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities 3.5-21 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.517 2.081 (5.382) (1. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .562) 4.126 (1.006) 5.509) (1.

Subtract from profit. (1.165) 727 and Change in Account Balance During Year Increase Decrease Current Assets Subtract from profit.006) Increase in trade payables 5.708 Decrease in accrued liabilities (1. Depreciation make adjustments changes in current assets Deferred income taxesusing the decision table below.5-22 ANDREW LIMITED activities section.517 Items not affecting cash: of plant and for equipment 2.382) Increase in prepayments (1. 2008 determine the changes in non-cash operating working capital Cash provided by (used in) operating activities items from the beginning of the period to the end period.509) Increase in inventories (1.081 Changes in non-cash operating working capital items: Increase in trade receivables (5. Profit $ of the 3. Add to profit.126 Now. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . Current Liabilities Add to profit.562) current liabilities 4. you To complete the cash flowsPELLER from operating Consolidated Statement of Cash Flows must examine a comparative statement of financial position to Three Months Ended September 30.

509) Increase in inventories (1.006) Increase in trade payables 5.517 2. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes 3. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . 4. Add to profit.165) 727 Change in Account Balance During Year Increase Decrease Current Assets Subtract from profit. Subtract from profit.382) Increase in prepayments (1.081 Changes in non-cash operating working capital items: Increase in trade receivables (5. Current Liabilities Add to profit.708 Decrease in accrued liabilities (1.509 increase in Trade Receivables.562) Subtract the $5.126 (1.5-23 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.

5-24 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30. 4.382 increase in Inventories.562) Subtract the $1. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .006) Increase in trade payables 5. Subtract from profit.081 Changes in non-cash operating working capital items: Increase in trade receivables (5. Current Liabilities Add to profit. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes 3.126 (1.517 2. Add to profit.708 Decrease in accrued liabilities (1.509) Increase in inventories (1.382) Increase in prepayments (1.165) 727 Change in Account Balance During Year Increase Decrease Current Assets Subtract from profit.

708 Decrease in accrued liabilities (1.517 2.509) Increase in inventories (1.081 Changes in non-cash operating working capital items: Increase in trade receivables (5. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .165) 727 Change in Account Balance During Year Increase Decrease Current Assets Subtract from profit. Current Liabilities Add to profit. Subtract from profit.562) Subtract the $1.006 increase in Prepayments.006) Increase in trade payables 5. 4. Add to profit. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes 3.5-25 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.126 (1.382) Increase in prepayments (1.

382) Increase in prepayments (1. Add to profit. 4.708 Decrease in accrued liabilities (1.165) 727 Change in Account Balance During Year Increase Decrease Current Assets Subtract from profit.081 Changes in non-cash operating working capital items: Increase in trade receivables (5.517 2.562) Add the $5.126 (1.5-26 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30. Subtract from profit. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes 3. Current Liabilities Add to profit.708 increase in Trade Payables. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .006) Increase in trade payables 5.509) Increase in inventories (1.

165) 727 Subtract the $1.382) (1.081 (5. 4.5-27 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30. Add to profit.126 (1. Subtract from profit. 2008 Cash provided by (used in) operating activities Profit $ Items not affecting cash: Depreciation of plant and equipment Deferred income taxes 3. Current Liabilities Add to profit.006) 5.509) (1. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 .708 (1.165 decrease in Accrued Changes in non-cash operating working capital items: Increase in trade receivables Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Change in Account Balance During Year Increase Decrease Current Assets Subtract from profit.562) Liabilities.517 2.

5-28 Inventory Changes Copyright © 2011 McGraw-Hill Ryerson Limited Inventory growth can be a sign that planned sales growth did not materialize.Interpreting Cash Flows from Operating Activities Accounts Receivable Changes Managers sometimes attempt to boost declining sales by extending credit terms or by lowering credit standards. LO 2 . The resulting increase in accounts receivable can cause profit to outpace cash flows from operations. A decline in inventory can be a sign that the company is anticipating lower sales in the next quarter.

5-29 Creditors will not lend money if they do not believe that cash generated from operations will be available to pay back the loan.Interpreting Cash Flows from Operating Activities A common rule of thumb followed by financial and credit analysts is to avoid firms with rising profit but falling cash flow from operations. Copyright © 2011 McGraw-Hill Ryerson Limited LO 2 . Investors will not invest in a company if they do not believe that cash generated from operations will be available to pay them dividends or expand the company.

All other things equal. Copyright © 2011 McGraw-Hill Ryerson Limited LO 3 .5-30 Quality of Earnings Ratio Quality of = Cash Flow from Operating Activities Earnings Ratio Profit In general. a higher quality of income ratio indicates greater ability to finance operating and other cash needs from operating cash inflows. this ratio measures the portion of income that was generated in cash.

2008 Changes ASSETS Trade receivables Inventories Prepayments Total current assets Property. plant.694 103.749 7.040 1.721 $ 94.197 6.423 9.499 276.197 6.537 $ 24.843 124.205 14.399 44.388 100.818 47.708 (1.069 276.389 285. 2008 June 30.699 74.165) 0 (26) Let’s focus (438) (1.562) on the investing 0 accounts. 30.006 880 (58) 0 3. 2.509 1.474 7.849 132.014 105.818 5.164 18.333 6.244 173.499 285.212 93.715 7.285 101.148 7.158 92.184 84.537 $ 51.375 95.715 11.457 44.046 $ 24.354 7.382 1.882 5.375 98.300 75.767 12.320 LO 4 $ .875 1.682 180. and equipment (net) Long-term investments Goodwill Total assets LIABILITIES & SHAREHOLDERS' EQUITY Bank borrowings Trade payables Accrued liabilities Dividends payable Current portion of long-term borrowings Total current liabilities Long-term borrowings Deferred income taxes Total liabilities Shareholders' Equity Share capital Retained earnings Total shareholders' equity Total liabilities & shareholders' equity Copyright © 2011 McGraw-Hill Ryerson Limited $ $ $ 29.ANDREW PELLER LIMITED Consolidated Statement of Financial Position Dollars in Thousands 5-31 Sept.

The statement of financial position indicates that Property. 2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.509) (1.197) 2.5-32 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends 3.517 2.006 of new Cash & cash equivalents beginning of period Cash & cash equivalents at end of period $ additions and a reduction for depreciation of $2. Plant.882 (1.948) (464) 3.126.006) 5. Copyright © 2011 McGraw-Hill Ryerson Limited LO 4 . This is made up of $3.382) (1.221 - We must report individually the cash used to purchase equipment and the cash proceeds received from the sale of equipment.165) 727 (3.126 (1.006) 58 (2.708 (1.562) (5. and Equipment (net) increased by $880 Net increase (decrease) in cash & cash equivalents during theat quarter.

006) 58 (2.5-33 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30. LO 4 .948) (464) 3.221 - Long-term investments decreased by a net $58 during the $ quarter. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period Copyright © 2011 McGraw-Hill Ryerson Limited 3.006) 5.197) 2.517 2.382) (1.562) (5.165) 727 (3.882 (1. 2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.509) (1.126 (1.708 (1.

this ratio reflects the portion of purchases of property. Copyright © 2011 McGraw-Hill Ryerson Limited LO 5 . Plant. Ratio and Equipment In general. plant and equipment financed from operating activities.5-34 Capital Acquisitions Ratio Capital Acquisitions = Cash Flow from Operating Activities Cash Paid for Property. A high ratio indicates less need for outside financing for current and future expansions.

this measures a firm’s ability to pursue long-term investment opportunities.5-35 Free Cash Flow Free Cash Flow = Cash Flow from Operating Activities – Dividends – Capital Expenditures In general. Copyright © 2011 McGraw-Hill Ryerson Limited LO 5 .

069 276.300 75.354 7.708 (1.694 103.875 1. plant.749 7.682 180.767 12.ANDREW PELLER LIMITED Consolidated Statement of Financial Position Dollars in Thousands 5-36 Sept.382 1.244 173.399 44.285 101.699 74.849 132.164 18.843 124.562) 0 2. 2008 June 30.375 98.499 276. 2008 Changes ASSETS Trade receivables Inventories Prepayments Total current assets Property.715 7.818 5.537 $ 51.320 LO 6 $ .333 6.509 1. 30.006 880 (58) 0 Let’s focus on the 3.212 93.457 44.165) accounts.388 100.721 $ 94.499 285. and equipment (net) Long-term investments Goodwill Total assets LIABILITIES & SHAREHOLDERS' EQUITY Bank borrowings Trade payables Accrued liabilities Dividends payable Current portion of long-term borrowings Total current liabilities Long-term borrowings Deferred income taxes Total liabilities Shareholders' Equity Share capital Retained earnings Total shareholders' equity Total liabilities & shareholders' equity Copyright © 2011 McGraw-Hill Ryerson Limited $ $ $ 29.423 9.148 7.184 84.389 285.197 6.715 11.474 7.537 $ 24.040 1.375 95.014 105.158 92.882 financing 5.818 47.197 6. 0 (26) (438) (1.205 14.046 $ 24.

509) Long-term debt decreased by the $464 in principal (1.382) (1.708 (1. payments made during the 5.517 2.126 (1.221 LO 6 $ .562) (5.197) 2. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period Copyright © 2011 McGraw-Hill Ryerson Limited 3.948) (464) 3.165) 727 (3.006) quarter.882 (1. 2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.5-37 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.006) 58 (2.

509) Short-term bank borrowings increased by $3.221 LO 6 $ . 2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.197) 2.006) during the quarter.562) (5.006) 58 (2. 5. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period Copyright © 2011 McGraw-Hill Ryerson Limited 3.165) 727 (3.517 2.882 (1.708 (1.126 (1.882 (1.948) (464) 3.5-38 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.382) (1.

509) Cash dividends of $1.948) (464) 3.006) 5.197) 2.382) quarter.882 (1.165) 727 (3.517 2.006) 58 (2.221 LO 6 $ .126 (1.708 (1. 2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.197 were paid during the (1.5-39 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period Copyright © 2011 McGraw-Hill Ryerson Limited 3.562) (5. (1.

and money borrowed on a long-term basis. This information is used by analysts who wish to evaluate the capital structure and growth potential of a business. the issuance of shares.5-40 Interpreting Cash Flows from Financing Activities The long-term growth of a company is normally financed from three sources: internally generated funds. The statement of cash flows shows how management has elected to fund its growth. Copyright © 2011 McGraw-Hill Ryerson Limited LO 6 .

221 LO 6 $ .882 (1.197) 2.126 (1.5-41 ANDREW PELLER LIMITED Consolidated Statement of Cash Flows Three Months Ended September 30.382) (1.562) (5.708 of Financial Position. 2008 Cash provided by (used in) operating activities: Net earnings / Profit $ Items not affecting cash: Depreciation of plant equipment Deferred income taxes Changes in non-cash operating working capital items: Increase in trade receivable Increase in inventories Increase in prepayments Increase in trade payables Decrease in accrued liabilities Cash provided by (used in) investing activities: Purchases of property.509) Now we can reconcile the change in cash to the (1.948) (464) 3. (1.517 2.006) 58 (2. plant and equipment Proceeds from long-term investments Cash provided by (used in) financing activities: Repayment of long-term debt Increase in bank borrowings Payment of dividends Net increase (decrease) in cash & cash equivalents Cash & cash equivalents at beginning of period Cash & cash equivalents at end of period Copyright © 2011 McGraw-Hill Ryerson Limited 3.006) ending cash balance that appears on the Statement 5.165) 727 (3.

3. 2. 5-42 Significant non-cash investing and financing transactions do not involve cash. Example: Purchase of a building with a mortgage. Significant non-cash investing and financing activities. Copyright © 2011 McGraw-Hill Ryerson Limited LO 7 . Companies that use the direct method for computing cash flow from operations usually present a reconciliation of profit to cash flow from operations as a supplemental schedule. Cash paid for income taxes and interest. Reconciliation of profit to cash flow from operations.Completing the Statement and Additional Disclosures Required Supplemental Information 1.

For example. investing. it would be classified as an investing activity. or financing activities. depending on their dominate characteristics. Supplement 5A . 5-43 Gains Losses Copyright © 2011 McGraw-Hill Ryerson Limited Losses must be added to profit to avoid double counting the loss.Supplement A: Adjustment for Gains and Losses— Direct Method Transactions that cause gains and losses should be classified on the statement of cash flows as operating. if the sale of equipment produced a gain. Gains must be subtracted from profit to avoid double counting the gain.

+A) Equipment (-A) Gain on disposal (+Gain.000 cash. it is necessary to remove (subtract) the $2. and equipment with an original cost of $10.000 10. GENERAL JOURNAL Date Description Debit Credit Cash (+A) Accumulated depreciation (-XA. +SE) 8.000 is sold for $8.5-44 Supplement A: Adjustments for Gains and Losses on Sale of Long-term Assets: Indirect Method Property. Copyright © 2011 McGraw-Hill Ryerson Limited Supplement 5A .000 gain from the Operating Activities section of the statement to avoid double counting.000 4. plant.000 and accumulated depreciation of $4.000 2.000 Because the gain was included in the computation of income.

Increase in accounts receivable = Cash collected from customers Other expenses Increase in prepaid expenses Decrease in prepaid expenses Increase in accrued expenses Decrease in accrued expenses Cash paid for expenses 5-45 Interest/Dividend revenue + Decrease in interest/dividends receivable .Supplement B: Reporting Cash Flows from Operating Activities—Direct Method Sales revenue + Decrease in accounts receivable .Increase in interest/dividends receivable = Collections of interest/dividends on investments + + = Copyright © 2011 McGraw-Hill Ryerson Limited + + = Cost of goods sold Increase in inventory Decrease in inventory Increase in accounts payable Decrease in accounts payable Cash payments to suppliers + + = Income tax expense Increase in prepaid income taxes Decrease in prepaid income taxes Increase in income taxes payable Decrease in income taxes payable Payments of income taxes Supplement 5B .

979) (1.928) (22.Supplement B: Reporting Cash Flows from Operating Activities—Direct Method ANDREW PELLER LIMITED Consolidated Statement of Cash Flows For the Three Months Ended September 30.708) 727 Remember that when we prepared the operating section using the indirect method.847 (35. 2008 (Dollars in Thousands) 5-46 Cash flows from operating activities: Cash collected from customers Cash payments to suppliers Cash payments for other operating expenses Cash payments for interest Cash payments for income taxes Net cash provided by operating activities $ $ 63. we also arrived at net cash inflow of $727. Copyright © 2011 McGraw-Hill Ryerson Limited Supplement 5B .505) (2.

Copyright © 2011 McGraw-Hill Ryerson Limited Supplement 5C . On the far left of the bottom half of the spreadsheet. the name of each item that will be reported on the statement of cash flows is entered. On the far left of the top half of the spreadsheet. debit changes.5-47 Supplement C: Spreadsheet Approach The spreadsheet approach offers a systematic way to keep track of data. 3. credit changes. Four columns to record dollar amounts are established (beginning balance. each account name from the statement of financial position is entered. 2. A spreadsheet is organized as follows: 1. and ending balance).

450 4.803 (g) 41.467 Inflows (a) 24.604 (c) (j) 167 (i) 112.754 12.005 44.798 305 (j) 112.450 (f) (b) (c) (h) (m) (a) 6. plant and equipment Maturities (sale) of short-term investments Purchase of short-term investments Net cash provided by investing activities Cash flows from financing activities: Purchase of treasury stock Proceeds from issuance of stock Net cash used in financing activities Net increase in cash & cash equivalents Debits Credits 30-Apr-09 5-48 51.009 81.643 312.209 Subtotals 49.643 109.403 9.NATIONAL BEVERAGE CORP.491) (l) 305 645 (n) 312. to reconcile net income to net cash provided by operating activities: Depreciation and amortization Changes in assets and liabilities: Accounts receivable Inventory Prepaid expense Accounts payable Accrued expenses Net cash provided by operating activities Cash flows for investing activities: Proceeds from sale of equipment Purchases of property.381 48.658 1.186 38.781 (n) (k) (d) (e) (i) 32.489 (f) (h) 6.798 35.891 167 2.450 (3.450 (k) 109.140 53. (m) 950 Copyright © 2011 McGraw-Hill Ryerson Limited Supplement 5C .604 950 24. this is what the spreadsheet looks like.742 Outflows 84.753 39.643 6.549 858 6.497 3.552 79.522 32.612 5.803 160.457 (g) 2.522 32.457 8.891 (d) (e) 4.000 49.658 After entering all the transactions illustrated in the textbook. net Accounts payable Accrued expenses Contributed capital Retained earnings Statement of Cash Flows Cash flows from operating activities: Net income Adj.742 (b) 8.799 9.549 858 1.158 (l) 13. Changes 30-Apr-08 Statement of Financial Position Assets: Cash and equivalents Short-term investments Accounts receivable Inventories Prepaid expenses Equipment.

5-49 End of Chapter 5 Copyright © 2011 McGraw-Hill Ryerson Limited .