Week 12 (Chapter 11) Statement of Cash Flows Statement of Cash Flows: provides a summary of cash inflows and cash outflows

during the reporting period.

THREE CATEGORIES OF A STATEMENT OF CASH FLOWS

Operating Acivities
Includes cash receipts and cash payments for transactions relating to revenue and expense activities Basically, the very same activities on the income statement. Common Examples: collection of cash from customers or payment of cash for inventory, purchases, salaries and rent.

Investing Activities
Includes cash transactions involving the prucahse and sale of long-term assets and current investments

Financing Activities
Inflows and outflows of cash resulting from the external financing of a business Common Examples: borrowing and repaying debt, issuing and repurchasing stock and paying dividends

liability and stockholder s equity accounts from the end of last period to the end of this period to find cash flows from operating. We look at the change in asset. investing and financing activities. Balance Sheets Additional Information .CLASSIFICATION OF CASH FLOWS Cash Flows from Operating Activities Cash Inflows: Sale of goods or services Receipt of interest and dividends Cash Outflows: Purchase of inventory For Operating Expenses For Interest For Income Taxes Cash Flows from Investing Activities Cash Inflows: Sale of Investments Sale of PP&E or intangibles Collection of notes receivables Cash Outflows: Purchase of investments Purchase of PP&E or intangibles Acceptance of notes receivables Cash Flows from Financing Activities Cash Inflows: Issuance of bonds or notes payable Cash Outflows: Repayment of bonds or notes payable SOURCES OF INFORMATION Sources Income Statement Explanation The income statement provides important information in the determination of cash flows from operating activities. Sometimes we need additional information from the accounting records to determine specific cash inflows or cash outflows for the period.

Determine the net cash flows from financing activities by analyzing changes in long-term liabilities and stockholder s equity accounts from the comparative balance sheets. 3.NONCASH ACTIVITIES AND HOW THEY ARE REPORTED They are: y Transactions that don t increase or decrease cash y Excluded from the statement of cash flows y Reported in a separate note to the financial statements as noncash activities Examples: y Purchase of long-term assets by issuing debt y Purchase of long-term assets by issuing stock y Conversion of bonds payable into common stock y Exchange of long-term assets OPERATING ACTIVITIES . financing and noncash activities identically under both methods Indirect Method Begin with net income and then list adjustments to net income in order to arrive at operating cash flows More popular method Easier and less costly Direct Method Adjust the items on the income statement to directly show the cash inflows and outflows from operations Conceptually better method More difficult and more costly y y y y y y STEPS IN PREPARING THE STATEMENT OF CASH FLOWS 1.INDIRECT AND DIRECT METHODS y Differ only in the presentation format for operating activities y We report investing. Calculate net cash flows from operating activities using information from the income statement and changes in current assets (other than cash) and current liabilities from the comparative balance sheets. investing and financing activities and make sure the total AGREES with the net increase (decrease) in cash EXAMPLE: y The income statement. We will use this information in preparing the statement of cash flows following the four basic steps! . 2. 4. Combine the operating. balance sheets and additional information for E-games are provided in the following illustrations. Determine the net cash flows from investing activities by analyzing changes in long-term asset accounts from the comparative balance sheets.

Income Statement For the Year Ended December 31.000 2.0000 $30.000 in equipment by issuing a $20. 2010 2010 2009 Increase/Decrease (I/D) Assets Current Assets: Cash Accounts Receivables Inventory Prepaid Rent Long-Term Assets Investment in Stock Land Equipment Accumulated Depreciation Total Assets: $62.000 $45.000 $20.000 note payable due in three years. Purchased $20.000 loss on sale of land.000 Additional Information for 2010: 1.000 (I) Liabilities and Stockholder s Equity Current Liabilities: Accounts Payable $22. 3.000 $2.000 (I) Income Tax Payable $5.000 $7.000 (I) Retained Earnings $71.000 Expenses: Cost of Goods Sold Operating Expenses (salaries.000 (I) $7.000 $286.000 $5.000 $2. 2010 $1.000 $970.000 $27. Balance Sheet December 31.Revenue: E-Games. No cash was exchanged in the transaction 4.000 $4.000) $300.000 $75.000 $70.000 $70.000 (D) Interest Payable $2.000 (D) Long Term Liabilities: Notes Payable $95.000 (I) $10.000 ($23.000 (D) $20.000 $41.000 for $6. utilities Depreciation Expense Loss on sale of land Interest Expense Income Tax Expense Total Expenses NET INCOME $650.000 $251.000 $35.000 $16.000 $5.000 $0 $80.000.000 $20. Sold land originally costing $10.000 cash 5.000 (I) Stockholder s Equity: Common Stock $105.000 $42.000 $90.000 E-Games.000 $1. resulting in a $4. Declared and paid a cash dividend of $12. Inc.000 (D) $2.000 $48. rent.012.000 ($14.000) $251.000 $27.000 $9.000 $4. Purchases stock in Intendo Corporation for $35.000 $35.000 $1. Inc.000 $14.000 .000 (I) Total Liabilities and Equity $300.000 $5.000 (I) $35.000 (I) $10.000 (I) $9.000 $100. Issued common stock for $5.

000 $62. 2010 Cash Flows from Operating Activities: (soon to come) Cash Flows from Investing Activities: (soon to come) Cash Flows from Financing Activities: (soon to come) Net increase (decrease in cash) Cash at beginning of period Cash at the end of period Note: Noncash Activities List of noncash transactions (soon to come) OPERATING ACTIVITIES INDRECT METHOD y Both net income and cash flows from operating activities represent the same operating activities y The income statement reports net income on an accrual basis.BASIC FORMAT E-Games. Revenues and expenses that don t affect cash at all! (adjustments for noncash components of net income) 2.000 Land $10. y We remove noncash components from net income so that what s left is cash flows from operating activities. We can classify the noncash components as: 1.000 Loss on Sale of Land $4. On the other hand.000 $9.000 $42. but not by the amount reported as the revenue or expenses (adjustments for changes in current assets and current liabilities).000 $48. Statement of Cash Flows For the Year Ended December 31. ADJUSTMENTS FOR NONCASH COMPONENTS OF NET INCOME Depreciation Expense and Loss on Sale of Land (have nothing to do with cash) Recording the loss of sale of land (*note look at #2 from additional info): Cash $6.000 $4.000 (We add back Depreciation Expense and Loss on Sale of Land which was earlier subtracted from the net income) .000 Cash Flows from Operating Activities Net Income Adjustments for noncash effectsL Depreciation expense Loss on sale of land $14. Revenues and expenses that do affect cash. the statement of cash flows reports the very same activities on a cash basis. Inc.

000 $42.000 Revenues (from income statement) Cash Flows from Operating Activities Net Income Adjustments for noncash effectsL Depreciation expense Loss on sale of land Increase in accounts receivable $1.000 $(7.000 ($2. ($27.000 $9.ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES 1.000 $4.000) $7.012.000 $4.000) .000-$20. Decrease in Accounts Payable (aka Decrease in Current Liability) 2.000) ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES 1. We SUBTRACT from Net Income Cash Flows from Operating Activities Net Income Adjustments for noncash effectsL Depreciation expense Loss on sale of land Increase in accounts receivable Decrease in Inventory Increase in Prepaid Rent Decrease in Accounts Payable $42. Will be SUBTRACTED from Net Income RECORDING AN INCREASE IN ACCOUNTS RECEIVABLE Cash (plug) $1. Increase in Accounts Receivable (aka Increase in a current asset) 2.000) $10.000 $9.005.000) $10.000 $9. Decrease in Inventory (aka Decrease in Current Asset) will be ADDED back 2.000 (7.000) ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES 1.00 Account Rec. Increase in Prepaid Rent (aka Increase in Current Liability) will be SUBTRACTED Cash Flows from Operating Activities Net Income Adjustments for noncash effectsL Depreciation expense Loss on sale of land Increase in accounts receivable Decrease in Inventory Increase in Prepaid Rent $42.000 ($2.000 $(7.000) ($5.000 $4.

000 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $42.000 $(7. Increase in Interest Payable (aka Increase in current liability) 2.000 Adjustments for noncash effectsL Depreciation expense $9.000) Decrease in Accounts Payable ($5.000 ($2.000 SUMMARY OF ALL ADJUSTMENTS Cash Flows from Operating Activities Net Income Adjustments for noncash effects: For noncash components of income + Depreciation Expense + Loss on sale of assets -Gain on sale of assets For changes in current assets and current liabilities -Increase in current asset + Decrease in a current asset + Increase in a current liability -Decrease in a current liability = Net cash flows from operating activities .ADJUSTMENTS FOR CHANGES IN CURRENT ASSETS AND CURRENT LIABILITIES 1.000) $10.000) Decrease in Inventory $10.000) ($5.000 Loss on sale of land $4.000 $4. Cash Flows from Operating Activities Net Income Adjustments for noncash effectsL Depreciation expense Loss on sale of land Increase in accounts receivable Decrease in Inventory Increase in Prepaid Rent Decrease in Accounts Payable Increase in Interest Payable $42. We ADD back to Net Income 3.000) Increase in Interest Payable $1.000 Increase in Prepaid Rent ($2.000 $9.000) $1.000 Increase in accounts receivable $(7.000 Net Cash Flows from Operating Activities $50.

2. To do this step.000 ($35.000 $62.000) 6.000 ($29.000) $5.000 ($12.000 $48.000) $14. This is the 2nd step in preparing the statement of cash flows.000 $48.000 . we are looking at the LONG-TERM ASSETS SECTION of the balance sheet! Cash Flows from Investing Activities Purchase of Investment (this is a cash outflow) Sale of Land (this is a cash inflow) Net cash flows from investing Activities Cash Flows from Financing Activities (coming soon) (coming soon) Net cash flows from financing activities: Net increase (decrease) in cash Cash as the beginning of the period Cash at the end of the period Note: Noncash Activities Purchased Equipment by issuing a note payable (disclosed in the footnote) FINANCING ACTIVITIES Cash Flows from Investing Activities Purchase of Investment (this is a cash outflow) Sale of Land (this is a cash inflow) Net cash flows from investing Activities Cash Flows from Financing Activities Issuance of Common Stock (this is a cash inflow) Payment of Cash Dividends (this is a cash outflow) Net cash flows from financing activities: Net increase (decrease) in cash Cash as the beginning of the period Cash at the end of the period Note: Noncash Activities Purchased Equipment by issuing a note payable (disclosed in the footnote) ($35.000 $20.000 $62.000 $20.000) 6.000) $14.000 ($29.000) ($7.INVESTING ACTIVITIES 1.

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