LLH9e Chapter 12

chapter 12 Statement of Cash Flows
Financial Accounting
9e
Libby • Libby • Hodge
Copyright ©2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
12-1
Understanding the Business
Positive cash flows permit a company to . . .
Pay
dividends to Expand its
owners. operations.
Take
advantage of Replace
investment worn assets.
opportunities.
Some Wall Street analysts consider it important to

understand the various sources and uses of cash that are
associated with business activity.
12-2
What Is Cash?
1) Currency
2) Cash Equivalents
§ Short-term, highly liquid investments.
§ Readily convertible into cash.
§ So near maturity that market value is unaffected by
interest rate changes (i.e., they have original
maturities of less than three months).
12-3
Classifications of the Statement of Cash Flows
Cash inflows and outflows directly related

Operating Activities
to earnings from normal operations.
Cash inflows and outflows related to the

acquisition or sale of productive facilities
Investing Activities and investments in the securities of other
companies.
Cash inflows and outflows related to

Financing Activities external sources of financing (owners and
creditors) for the enterprise.
12-4
Exhibit 12.1
Consolidated Statement of Cash Flows
NATIONAL BEVERAGE CORP.
Consolidated Statement of Cash Flows*
Year Ended May 3, 2014 (In thousands)
Cash flows from operating activities:
Net income $43,635
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 10,063
Changes in assets and liabilities:
Accounts receivable 5,864
Inventories (4,680)
Prepaid expenses (2,699)
Accounts payable 1,345
Accrued expenses (259)
Net cash provided by operating activities 53,269
Cash flows from investing activities:
Purchases of property, plant, and equipment (12,124)
Proceeds from disposal of property, plant, and equipment 62
Purchase of short-term investments (1,463)
Proceeds from sale of short-term investments 2,443
Net cash used by investing activities (11,082)
Cash flows from financing activities:
Repayment of principal on long-term debt (22,772)
Proceeds from issuance of long-term debt —
Repurchase of stock (7,024)
Proceeds from issuance of stock — This ending cash
Payment of cash dividends (726)
(30,522)
balance should
Net cash used by financing activities
Net Increase (Decrease) in Cash and Equivalents 11,665 agree with the
Cash and Equivalents—Beginning of Year 18,267
Cash and Equivalents—End of Year $29,932 balance sheet.
*Certain amounts have been adjusted for pedagogical purposes.
12-5
Direct Method vs. Indirect Method
Two Formats for Reporting Operating Activities
Direct Method Indirect Method
Reports the cash effects Starts with accrual net

of each operating activity income and converts to
cash flow from operating
activities
The cash flows from operating activities are always the same,
regardless of whether the direct or indirect method is used.
12-6
Cash Flows from Operating Activities
Inflows
Cash received from:
l Customers
l Dividends and interest on
investments + Inflows
Cash Flows
from Operating
Outflows
Activities
Cash paid for:
l Purchase of goods for
resale and services
(electricity, etc.)
_ Outflows
l Salaries and wages
l Income taxes
l Interest on liabilities
12-7
Cash Flows from Investing Activities
Inflows
Cash received from:
l Sale or disposal of property,
plant, and equipment
l Sale or maturity of investments
in securities + Inflows
Cash Flows from
Investing
Outflows Activities
Cash paid for:
l Purchase of property, plant, and
equipment
_ Outflows
l Purchase of investments in
securities
12-8
Cash Flows from Financing Activities
Inflows
Cash received from:
l Borrowings on notes, mortgages,
bonds, etc., from creditors
l Issuing stock to owners
+ Inflows
Cash Flows from
Financing
Activities
Outflows
Cash paid for:
l Repayment of principal to creditors
(excluding interest, which is an
_ Outflows
operating activity)
l Repurchasing stock from owners
l Dividends to owners
12-9
Net Increase (Decrease) in Cash
Net cash provided by operating activities $53,269

Net cash used in investing activities (11,082)
Net cash used in financing activities (30,522)
Net increase in cash and cash equivalents 11,665
Beginning and
Cash and cash equivalents at beginning of period 18,267 ending balances
Cash and cash equivalents at end of period $29,932 from the
balance sheet
The combination of the net cash flows from operating, investing, and financing
activities must equal the net increase or decrease in cash.
12-10
Relationships to the Balance Sheet and Income Statement
Information needed to prepare a statement of cash flows:
l Comparative balance sheets

l A complete income statement
l Additional details concerning selected accounts
12-11
Relationships to the Balance Sheet and Income Statement
Δ Cash = Δ Liabilities + Δ Stockholders’ – Δ Noncash

Equity Assets
Derives from . . .
Assets = Liabilities + Stockholders’ Equity
12-12
Exhibit 12.2
Selected Cash Transactions and Their Effects on Other Balance Sheet Accounts
Category Transaction Cash Effect Other Account Affected

Operating Collect accounts receivable +Cash –Accounts Receivable (A)
Pay accounts payable –Cash –Accounts Payable (L)
Prepay rent –Cash +Prepaid Rent (A)
Pay interest –Cash –Retained Earnings (SE)
Sale for cash +Cash +Retained Earnings (SE)
Investing Purchase equipment for cash –Cash +Equipment (A)
Sell investment securities for +Cash –Investments (A)
cash –Notes Payable—Bank (L)
Financing Pay back debt to bank –Cash +Common Stock and
Issue stock for cash +Cash Additional Paid-in Capital
(SE)
Copyright ©2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 12-13
Exhibit 12.3
Comparative Balance Sheet
Consolidated Balance Sheet
(In thousands)
May 3, 2014 April 27, 2013
Related Cash Assets
Flow Section Current assets: Change
Change in Cash Cash and cash equivalents $ 29,932 $ 18,267 +11,665
I Short-term investments 2,685 3,665 –980
O Accounts receivable 58,205 64,069 –5,864
O Inventories 43,914 39,234 +4,680
O Prepaid expenses 8,405 5,706 +2,699
Total current assets 143,141 130,941
I* Property, plant, and equipment, net 79,700 77,701 +1,999
Total assets $222,841 $208,642
Liabilities and Stockholders’ Equity

O Current liabilities:
O Accounts payable $ 45,606 $ 44,261 +1,345
Accrued expenses 18,917 19,176 –259
Total current liabilities 64,523 63,437
F Long-term debt 52,117 74,889 –22,772
Stockholders’ equity:
F Common stock 894 1,054 –160
F Additional paid-in capital 24,570 31,434 –6,864
O and F Retained earnings 80,737 37,828 +42,909
Total stockholders’ equity 106,201 70,316
Total liabilities and stockholders’ equity $222,841 $208,642
*The Accumulated Depreciation account is also related to operations because it relates to depreciation.
Exhibit 12.3
Current Income Statement

Consolidated Statements of Income
For the Fiscal Year Ended May 3, 2014
(In thousands)
Net sales $641,135

Cost of sales 423,480
Gross profit 217,655
Operating expenses:
Selling, general, and administrative expense 143,157
Depreciation and amortization expense 10,063
Total operating expenses 153,220
Operating income 64,435
Interest expense (1,326)
Income before provision for income taxes 63,109
Provision for income taxes 19,474
Net income $ 43,635
Certain balances have been adjusted to simplify the presentation.
The statement of cash flows begins with net income

from the income statement.
Reporting and Interpreting Cash Flows from Operating
Activities
The indirect method adjusts net income by

eliminating noncash items.
+ Losses and – Gains

Cash Flows
Net from
Income Operating
Activities
+ Noncash +/− Changes in
expenses such as current assets and
depreciation and current liabilities.
amortization.
12-16
Adjustment for Gains and Losses
Cash received from the sale or disposal of long-term assets is classified as

investing cash inflow. Gains/losses on the income statement, if any, are
subtracted from/added to net income in order to compute cash flow from
operating activities.
Gains must be subtracted from net

Gains income to avoid double counting the gain.
Losses must be added to net income to

Losses
avoid double counting the loss.
12-17
Exhibit 12.1
Year Ended May 3, 2014
(In thousands)
Net income $ 43,635
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Inventories (4,680)
Step 1
Adjust net income for depreciation and amortization
expense.
Exhibit 12.1
Year Ended May 3, 2014
(In thousands)
Net income $ 43,635
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Inventories (4,680)
Step 2
Adjust net income for changes in
current assets and current liabilities.
Change in Accounts Receivable
Accounts Receivable (A)
{
Beginning balance 64,069
Change
Sales revenue (on account) 641,135 Collections from customers 646,999
$5,864
Ending balance 58,205
Accounts Payable (L)

Beginning balance
Cash payments Purchases on account
Ending balance
12-20
Classification of Interest on the Cash Flow
Statement
International
Perspective—
U.S. GAAP and IFRS differ in the cash flow statement IFRS
treatment of interest received and interest paid.
Interest Received Interest Paid
U.S. GAAP Operating Operating

IFRS Operating or Investing Operating or Financing
12-21
Interpreting Cash Flows from Operating Activities
A common rule of thumb followed by financial and credit analysts is to

avoid firms with rising net income but falling cash flow from operations.
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.
Creditors will not lend money if they do not believe that cash
generated from operations will be available to pay back the loan.
12-22
Quality of Income Ratio
KEY RATIO ANALYSIS
Cash Flow from

Operating Activities
$$$
Quality of Income
=
Ratio Net Income
In general, this ratio measures the portion of income that was

generated in cash. All other things equal, a higher quality of
income ratio indicates greater ability to finance operating and
other cash needs from operating cash inflows.
12-23
Reporting and Interpreting Cash Flows from Investing
Activities
Related Balance
Sheet Account(s) Investing Activity Cash Flow Effect
Property, plant, and Purchase of property, Outflow
equipment and intangible plant, and equipment or
assets (patents, etc.) intangible assets for cash Inflow
Sale of property, plant, and
equipment or intangible
assets for cash Outflow
Short- or long-term Purchase of investment
investments (stocks and securities for cash Inflow
bonds of other companies) Sale (maturity) of
investment securities for
cash
Remember that:
• Only purchases paid for with cash or cash equivalents are included.
• The amount of cash that is received from the sale of assets is included,
regardless of whether the assets are sold at a gain or loss.
12-24
Exhibit 12.1
Net income $43,635
Inventories (4,680) We must report
Accounts payable 1,345 individually the cash used
Net cash provided by operating activities 53,269 to purchase equipment
Cash flows from investing activities: and the cash proceeds
Proceeds from disposal of property, plant, and equipment 62 received from the sale of
Proceeds from sale of short-term investments 2,443 equipment. The company
Net cash used by investing activities (11,082) sold old equipment for $62
Repayment of principal on long-term debt (22,772) in cash, an amount equal
Repurchase of stock (7,024) to its net book value.
Proceeds from issuance of stock —
Net cash used by financing activities (30,522)
Net Increase (Decrease) in Cash and Equivalents 11,665
Cash and Equivalents—End of Year $29,932
12-25
Exhibit 12.1
Net income $43,635
Inventories (4,680)
Accounts payable 1,345 Although short-term
Net cash provided by operating activities 53,269 investments is a current
asset, it is reported in the
Proceeds from disposal of property, plant, and equipment 62 investing section on the
Proceeds from sale of short-term investments 2,443 statement of cash flows.
(11,082)
Net cash used by investing activities
The company sold short-
Repayment of principal on long-term debt (22,772) term investments for
Repurchase of stock (7,024) $2,443, an amount equal
—
Proceeds from issuance of stock
to their net book value.
12-26
Capital Acquisitions Ratio
KEY RATIO ANALYSIS
$$$
Capital Cash Flow from Operating Activities
Acquisitions =
Ratio Cash Paid for Property, Plant,
and Equipment
In general, this ratio reflects the portion of purchases of

property, plant, and equipment financed from operating
activities. A high ratio indicates less need for outside
financing for current and future expansions.
12-27
Free Cash Flow
FINANCIAL ANALYSIS
$$$
Free Cash Flow = Cash Flow from Operating Activities
– Dividends – Capital
Expenditures
In general, this measures a firm’s ability to pursue

long-term investment opportunities.
12-28
Reporting Cash Flows from Financing Activities
Related Balance
Sheet Account(s) Financing Activity Cash Flow Effect
Short-term debt (notes Borrowing cash from banks Inflow
payable) or other financial
institutions
Repayment of loan Outflow
principal
Long-term debt Issuance of bonds for cash Inflow
Repayment of bond Outflow
principal
Common stock and Issuance of stock for cash Inflow
additional paid-in capital Repurchase (retirement) of Outflow
stock with cash
Retained earnings Payment of cash dividends Outflow
Remember that:
• Cash repayments of principal are cash flows from financing activities.
• Interest payments are cash flows from operating activities.
• Dividend payments are cash flows from financing activities.
• If debt or stock is issued for other than cash, it is not included in this section.
12-29
Exhibit 12.1
Net income $43,635
Inventories (4,680)
Repayment of principal on long-term debt (22,772) Cash used to repay
—
Proceeds from issuance of long-term debt
Repurchase of stock (7,024) long-term debt.
12-30
Exhibit 12.1
Net income $43,635
Inventories (4,680)
Repayment of principal on long-term debt (22,772) Cash payments to
Repurchase of stock (7,024) repurchase
Proceeds from issuance of stock — common stock.
12-31
Exhibit 12.1
Cash flows from operating activities: Retained earnings
Net income $43,635
Adjustments to reconcile net income to net cash provided by increased by $42,909 due
to the combined effect of
Changes in assets and liabilities: $43,635 of income and
Inventories (4,680) $726 in dividends declared
Prepaid expenses (2,699) and paid.
Repayment of principal on long-term debt (22,772)
Repurchase of stock (7,024)
12-32
Interpreting Cash Flows from Financing Activities
The long-term growth of a company is normally financed from

three sources:
1. Internally generated funds (cash from operating activities)
2. The issuance of stock
3. Money borrowed on a long-term basis
The statement of cash flows shows how management has

elected to fund its growth. This information is used by
analysts who wish to evaluate the capital structure and
growth potential of a business.
Completing the Statement and Additional Disclosures
Three Required Disclosures

1. Reconciliation of net income to cash flow from operations
2. Noncash investing and financing activities
3. Cash paid for interest and income taxes
Chapter Supplement A: Reporting Cash Flows from
Operating Activities—Direct Method
Chapter Supplement A: Reporting Cash Flows from
Operating Activities—Direct Method
Cash flows from operating activities

Cash collected from customers $646,999
Cash payments to suppliers (426,815)
Cash payments for other expenses (146,115)
Cash payments for interest (1,326)
Cash payments for income taxes (19,474)
Net cash provided by operating activities $ 53,269
Remember that when we prepared the operating section using the

indirect method, we also arrived at net cash inflow of $53,269.
Chapter Supplement B: Adjustment for Gains and Losses on
Sale of Long-Term Assets—Indirect Method
Property, plant, and equipment with an original cost of $10,000 and

accumulated depreciation of $4,000 is sold for $8,000 cash.
Cash (+A) ….….……………………………………………………………………….. 8,000

Accumulated depreciation (–XA, +A) …………………………………….. 4,000
Property, plant, and equipment (–A) …………………………………. 10,000
Gain on disposal (+Gain, +SE) ($8,000 – $6,000) ………………… 2,000
Because the gain is included in the computation of income, it is

necessary to remove (subtract) the $2,000 gain from the Operating
Activities section of the statement to avoid double counting.
The $8,000 cash received from the sale is reported

as an investing cash inflow.
Chapter Supplement C: T-Account Approach (Indirect
Method)
Based on the idea that changes in cash must equal the sum of the changes in
all other balance sheet accounts, we can use T-accounts to analyze cash flows
as follows:
1. Prepare a single large T-account to represent the changes that have

taken place in cash, subdivided into the three sections of the cash flow
statement.
2. Prepare additional T-accounts for all noncash balance sheet accounts,
entering the beginning and ending balance in each noncash balance
sheet T-account.
3. Enter the transactions affecting cash in each noncash balance sheet
T-account and in the proper section of the cash T-account until all
changes in noncash balance sheet accounts have been accounted for.
Exhibit 12.9
T-Account Approach to Preparing the Statement of Cash Flows (Indirect Method)
Panel A: Changes in Cash Account

Cash (A)
Operating
(1) Net Income 43,635 4,680 (4) Inventory
(2) Depreciation and Amortization 10,063 2,699 (5) Prepaid Expense
(3) Accounts Receivable 5,864 259 (7) Accrued Expenses
(6) Accounts Payable 1,345
Net cash flow provided by operating activities 53,269
Investing
(9) Disposals of Property, Plant, & Equipment 62 12,124 (8) Purchases of Property, Plant, & Equipment
(11) Sales of Short-term Investments 2,443 1,463 (10) Purchases of Short-term Investments
11,082 Net cash used in investing activities
Financing
22,772 (12) Payment of Long-Term Debt
7,024 (13) Repurchase of Stock
726 (14) Payment of Dividends
30,522 Net cash used in financing activities
Net increase in cash and cash equivalents 11,665
Exhibit 12.9
T-Account Approach to Preparing the Statement of Cash Flows (Indirect Method)
Panel B: Changes in Noncash Accounts

Accounts Receivable
Accounts (A)(A)
Receivable Inventory (A) Prepaid Expenses (A)
Beg. bal 64,069 Beg. bal 39,234 Beg. bal 5,706
(3) Decrease 5,864 (4) Increase 4,680 (5) Increase 2,699
End. bal 58,205 End. bal 43,914 End. bal 8,405
Accounts Receivable
Accounts Payable (A)
(L) Accrued Expenses (L) Property, Plant, & Equipment, Net (A)
Beg. bal 44,261 Beg. bal 19,176 Beg. bal 77,701 (2) Depreciation 10,063
(6) Increase (7) Increase 259 (8) Purchases 12,124 (9) Disposals 62
1,345 End. bal 18,917 End. bal 79,700
End. bal 45,606
Accounts Receivable
Short-Term (A) (A)
Investments Long-Term Debt (L) Common Stock (SE)
Beg. bal 3,665 Beg. bal 74,889 Beg. bal 1,054
(10) Purchases 1,463 (11) Disposals 2,443 (12) Payments 22,772 Borrowings 0 (13) Stock repurchased 160 Stock issued 0
End. bal 2,685 End. bal 52,117 End. bal 894
Accounts Receivable
Additional Paid-in(A)
Capital (SE) Retained Earnings (SE)
Beg. bal 31,434 Beg. bal 37,828
(13) Stock repurchased 6,864 Stock issued 0 (14) Dividends 726 (1) Net income 43,635
End. bal 24,570 End. bal 80,737

LLH9e Chapter 12

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LLH9e Chapter 12

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chapter 12 Statement of Cash Flows

Positive cash flows permit a company to . . .

Some Wall Street analysts consider it important to

Cash inflows and outflows directly related

Cash inflows and outflows related to the

Cash inflows and outflows related to

Two Formats for Reporting Operating Activities

Direct Method Indirect Method

Reports the cash effects Starts with accrual net

Net cash provided by operating activities $53,269

Information needed to prepare a statement of cash flows:

l Comparative balance sheets

l Additional details concerning selected accounts

Δ Cash = Δ Liabilities + Δ Stockholders’ – Δ Noncash

Assets = Liabilities + Stockholders’ Equity

Category Transaction Cash Effect Other Account Affected

Liabilities and Stockholders’ Equity

NATIONAL BEVERAGE CORP.

Net sales $641,135

Certain balances have been adjusted to simplify the presentation.

The statement of cash flows begins with net income

The indirect method adjusts net income by

+ Losses and – Gains

Cash received from the sale or disposal of long-term assets is classified as

Gains must be subtracted from net

Losses must be added to net income to

Accounts Receivable (A)

Accounts Payable (L)

Cash payments Purchases on account

Interest Received Interest Paid

U.S. GAAP Operating Operating

A common rule of thumb followed by financial and credit analysts is to

Cash Flow from

In general, this ratio measures the portion of income that was

In general, this ratio reflects the portion of purchases of

In general, this measures a firm’s ability to pursue

The long-term growth of a company is normally financed from

The statement of cash flows shows how management has

Three Required Disclosures

Cash flows from operating activities

Remember that when we prepared the operating section using the

Property, plant, and equipment with an original cost of $10,000 and

Cash (+A) ….….……………………………………………………………………….. 8,000

Because the gain is included in the computation of income, it is

The $8,000 cash received from the sale is reported

1. Prepare a single large T-account to represent the changes that have

Panel A: Changes in Cash Account

Panel B: Changes in Noncash Accounts

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