chapter 8 the statement of cash flows. 8-1 multi-step vs. single-step income statement...
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Chapter 8Chapter 8The Statement of The Statement of
Cash FlowsCash Flows
8-1 Multi-Step vs. Single-Step Income 8-1 Multi-Step vs. Single-Step Income StatementStatement
Multiple-stepMultiple-step Single-stepSingle-step
Sales Sales RevenueRevenue
Net SalesNet Sales a a Total Total RevenueRevenue
Cost of Cost of Goods SoldGoods Sold
Gross ProfitGross Profit b b Total Total ExpensesExpenses
Operating Operating ExpensesExpenses
Income from Income from operations operations cc
Non-Non-operating operating itemsitems
Net IncomeNet Income d d
aa Sales - Sales returns - Sales Discounts Sales - Sales returns - Sales Discounts
bb Net sales - Cost of goods sold Net sales - Cost of goods sold
cc Gross profit - Operating expenses Gross profit - Operating expenses
dd Income from operations + Other revenue/gains - other expenses/losses Income from operations + Other revenue/gains - other expenses/losses
Other Revenues and GainsOther Revenues and Gains Other Expenses and LossesOther Expenses and Losses
Interest revenue from notes receivable and Interest revenue from notes receivable and marketable securitiesmarketable securities
Interest expense on notes and loans payableInterest expense on notes and loans payable
Dividend revenue from investments in capital stockDividend revenue from investments in capital stock Casualty losses from recurring causes such as Casualty losses from recurring causes such as vandalism and accidentsvandalism and accidents
Rent revenue from subleasing a portion of the storeRent revenue from subleasing a portion of the store Losses from the sales of abandonment of property, Losses from the sales of abandonment of property, plant, and equipmentplant, and equipment
Gain from sale of property, plant and equipmentGain from sale of property, plant and equipment Loss from strikes by employees and suppliersLoss from strikes by employees and suppliers
8-2 Typical Receipts and Payments 8-2 Typical Receipts and Payments Classified by ActivityClassified by Activity
Operating activitiesOperating activities Cash inflows:Cash inflows: From sale of goods or services.From sale of goods or services. From returns on loans (interest) and on equity securities (dividends).From returns on loans (interest) and on equity securities (dividends). Cash outflows:Cash outflows: To suppliers for inventory.To suppliers for inventory. To employees for services.To employees for services. To government for taxes.To government for taxes. To lenders for interest.To lenders for interest. To others for expenses.To others for expenses.
Investing activitiesInvesting activities Cash inflows:Cash inflows: From sale of property, plant, and equipment.From sale of property, plant, and equipment. From sale of debt or equity securities of other entities.From sale of debt or equity securities of other entities. From collection of principal on loans to other entities.From collection of principal on loans to other entities. Cash outflows:Cash outflows: To purchase property, plant, and equipment.To purchase property, plant, and equipment. To purchase debt or equity securities of other entities.To purchase debt or equity securities of other entities. To make loans to other entities.To make loans to other entities.
Financing activitiesFinancing activities Cash inflows:Cash inflows: From sale of equity securities (company’s own stock).From sale of equity securities (company’s own stock). From issuance of debt (bonds and notes).From issuance of debt (bonds and notes). Cash outflows:Cash outflows: To stockholders as dividends.To stockholders as dividends. To redeem long-term debt or reacquire capital stock.To redeem long-term debt or reacquire capital stock.
8-3 Information Sources for Activities8-3 Information Sources for Activities
OPERATING ACTIVITIESOPERATING ACTIVITIES
Analyze Income statement itemsAnalyze Income statement items
Changes in noncash current asset and current liability Changes in noncash current asset and current liability itemsitems
FINANCING ACTIVITIESFINANCING ACTIVITIES
Analyze increases and decreases in long-term Analyze increases and decreases in long-term
liability and stockholders’ equity itemsliability and stockholders’ equity items
INVESTING ACTIVITIESINVESTING ACTIVITIES
Analyze increases and decreases in investments Analyze increases and decreases in investments
and long-term asset itemsand long-term asset items
8-4 Format of the Statement of Cash Flows8-4 Format of the Statement of Cash Flows
COMPANY NAMECOMPANY NAMEStatement of Cash FlowsStatement of Cash Flows
Period CoveredPeriod Covered
Cash flows from operating activitiesCash flows from operating activities (List of individual items)(List of individual items) Net cash provided (used) by operating activitiesNet cash provided (used) by operating activities
XXXXXXXXXX
Cash flows from investing activitiesCash flows from investing activities (List of individual inflows and outflows)(List of individual inflows and outflows) Net cash provided (used) by investing activitiesNet cash provided (used) by investing activities
XXXXXXXXXX
Cash flows from financing activitiesCash flows from financing activities (List of individual inflows and outflows)(List of individual inflows and outflows) (Net cash provided (used) by financing activities(Net cash provided (used) by financing activities
XXXXXXXXXX
Net increase (decrease) in cashNet increase (decrease) in cash XXXXXX
Cash at beginning of periodCash at beginning of period XXXXXX
Cash at end of periodCash at end of period XXXXXX
Noncash investing and financing activitiesNoncash investing and financing activities (List of individual noncash transactions)(List of individual noncash transactions)
XXXXXX
8-5 Converting Net Income to Net Cash 8-5 Converting Net Income to Net Cash Provided (Used) by Operating ActivitiesProvided (Used) by Operating Activities
Accrual Basis of Accrual Basis of AccountingAccounting
Cash Basis of AccountingCash Basis of Accounting
Earned RevenueEarned Revenue
Net Net
IncomeIncome
Adjust Revenues to Adjust Revenues to Cash ReceiptsCash Receipts Net Cash Net Cash
Provided by Provided by
Operating Operating
ActivitiesActivitiesIncurred Incurred ExpensesExpenses
Adjust Expenses to Adjust Expenses to Cash DisbursementsCash Disbursements
INDIRECT METHODINDIRECT METHOD
1.1. Begin with net income and Begin with net income and adjust for income statement adjust for income statement items that did not effect cash.items that did not effect cash.
2.2. Reconcile net income to net Reconcile net income to net cash provided (used) by cash provided (used) by operating activities.operating activities.
DIRECT METHODDIRECT METHOD
1.1. Adjust each item on the income Adjust each item on the income statement from the accrual statement from the accrual basis to the cash basis.basis to the cash basis.
2.2. Major classes of operating cash Major classes of operating cash receipts and cash payments are receipts and cash payments are reported.reported.
OROR
8-6 Operating Activities – Indirect Method 8-6 Operating Activities – Indirect Method Adjustments for Noncash ItemsAdjustments for Noncash Items
Adjustments for Adjustments for noncash charges noncash charges and creditsand credits
Noncash charges and Noncash charges and creditscredits
Add to (Deduct Add to (Deduct from) Net Incomefrom) Net Income
Depreciation ExpenseDepreciation Expense AddAdd
Patent amortization expensePatent amortization expense AddAdd
Depletion expenseDepletion expense AddAdd
Loss on sale of equipmentLoss on sale of equipment AddAdd
Gain on sales of equipmentGain on sales of equipment DeductDeduct
Adjustments to convert net Adjustments to convert net income to net cash income to net cash provided by operating provided by operating activities.activities.
All noncash expenses are added to net income, and all noncash All noncash expenses are added to net income, and all noncash revenues are subtracted from net income.revenues are subtracted from net income.
8-7 Operating Activities – Indirect Method 8-7 Operating Activities – Indirect Method Adjustments For Current Assets and Adjustments For Current Assets and LiabilitiesLiabilities
Adjustments Adjustments for Current for Current ItemsItems
For Changes In:For Changes In:Add to Net Add to Net IncomeIncome
Deduct from Deduct from Net IncomeNet Income
Current assetsCurrent assets DecreasesDecreases IncreasesIncreases
Current liabilitiesCurrent liabilities IncreasesIncreases DecreasesDecreases
For Changes in For Changes in Individual Accounts:Individual Accounts:
Add to Net Add to Net IncomeIncome
Deduct from Deduct from Net IncomeNet Income
Accounts receivableAccounts receivable DecreaseDecrease IncreaseIncrease
InventoryInventory DecreaseDecrease IncreaseIncrease
Prepaid expensesPrepaid expenses DecreaseDecrease IncreaseIncrease
Accounts payableAccounts payable IncreaseIncrease DecreaseDecrease
Accrued expenses Accrued expenses payablepayable
IncreaseIncrease DecreaseDecrease
Adjustments to convert net income Adjustments to convert net income to net cash provided by operating to net cash provided by operating
activities.activities.
All changes in current assets are handled in a similar manner All changes in current assets are handled in a similar manner and all changes in current liabilities are handled in a similar and all changes in current liabilities are handled in a similar manner, but the adjustments are exactly the opposite.manner, but the adjustments are exactly the opposite.
8-8 Cash Flows from Operating Activities – 8-8 Cash Flows from Operating Activities – Indirect MethodIndirect Method
Problem Problem DataData
DEMONSTRATION COMPANYDEMONSTRATION COMPANYComparative Balance Sheet AccountsComparative Balance Sheet Accounts
December 31December 31
Current AssetsCurrent Assets 20032003 20022002 ChangeChange
Accounts Accounts receivablereceivable
$30,000$30,000 $39,000$39,000 $9,000 Decrease$9,000 Decrease
Prepaid rentPrepaid rent 15,00015,000 10,00010,000 5,000 Increase5,000 Increase
InventoryInventory 20,00020,000 18,00018,000 2,000 Increase2,000 Increase
Current LiabilitiesCurrent Liabilities
Accounts payableAccounts payable 18,00018,000 12,00012,000 6,000 Increase6,000 Increase
Interest payableInterest payable 6,0006,000 2,0002,000 4,000 Increase4,000 Increase
Taxes payableTaxes payable 3,0003,000 5,0005,000 2,000 Decrease2,000 Decrease
DEMONSTRATION COMPANYDEMONSTRATION COMPANYIncome StatementIncome Statement
For the Year Ended December 31, 2005For the Year Ended December 31, 2005
RevenuesRevenues Sales revenueSales revenue Gain on sale of landGain on sale of land Total revenuesTotal revenues
$400,000$400,00020,00020,000
$420,000$420,000
ExpensesExpenses Cost of goods soldCost of goods sold Operating expensesOperating expenses Depreciation Depreciation expenseexpense Interest expenseInterest expense Income tax expenseIncome tax expense Total expensesTotal expenses
280,000280,00075,00075,00015,00015,000
8,0008,0007,0007,000
385,000385,000
Net IncomeNet Income $35,000$35,000
Using the data Using the data provided, provided, prepare the prepare the cash flows from cash flows from operating operating activities section activities section of the statement of the statement of cash flows of cash flows using the using the indirect method.indirect method.
8-8 Cash Flows from Operating Activities – 8-8 Cash Flows from Operating Activities – Indirect Method (continued)Indirect Method (continued)
DEMONSTRATION COMPANYDEMONSTRATION COMPANY
Statement of Cash Flows (Indirect Method)Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2004For the Year Ended December 31, 2004
Cash flows from operating activitiesCash flows from operating activities
Net IncomeNet Income
Adjustments to reconcile net income to net cash provided by operating Adjustments to reconcile net income to net cash provided by operating activitiesactivities
Depreciation expenseDepreciation expense
Gain on sale of landGain on sale of land
Decrease in accounts receivableDecrease in accounts receivable
Increase in prepaid rentIncrease in prepaid rent
Increase in inventoryIncrease in inventory
Increase in accounts payableIncrease in accounts payable
Increase in interest payableIncrease in interest payable
Decrease in taxes payableDecrease in taxes payable
Net cash provided by operating activitiesNet cash provided by operating activities
$15,000$15,000
(20,000(20,000))
9,0009,000
(5,000)(5,000)
(2,000)(2,000)
6,0006,000
4,0004,000
(2,000)(2,000)
$35,00$35,0000
5,0005,000
$40,00$40,0000
8-9 Cash Flows from Operating Activities – 8-9 Cash Flows from Operating Activities – Direct MethodDirect Method
Problem DataProblem Data
DEMONSTRATION COMPANYDEMONSTRATION COMPANYComparative Balance Sheet AccountsComparative Balance Sheet Accounts
December 31, 2005December 31, 2005
20052005 20042004 ChangeChange
Current assetsCurrent assets Accounts receivableAccounts receivable Prepaid rentPrepaid rent InventoryInventory
$30,000$30,00015,00015,00020,00020,000
$39,000$39,00010,00010,00018,00018,000
$9,000 $9,000 DecreaseDecrease
5,000 Increase5,000 Increase2,000 Increase2,000 Increase
Current liabilitiesCurrent liabilities Accounts payableAccounts payable Interest payableInterest payable Taxes payableTaxes payable
18,00018,0006,0006,0003,0003,000
12,00012,0002,0002,0005,0005,000
6,000 Increase6,000 Increase4,000 Increase4,000 Increase
2,000 Decrease2,000 Decrease
DEMONSTRATION COMPANYDEMONSTRATION COMPANYIncome StatementIncome Statement
For the Year Ended December 31, 2005For the Year Ended December 31, 2005
RevenuesRevenues Sales revenueSales revenue Gain on sale of landGain on sale of land Total revenuesTotal revenues
$400,000$400,00020,00020,000
$420,000$420,000
ExpensesExpenses Cost of goods soldCost of goods sold Operating expensesOperating expenses Depreciation Depreciation expenseexpense Interest expenseInterest expense Income tax expenseIncome tax expense Total expensesTotal expenses
280,000280,00075,00075,00015,00015,000
8,0008,0007,0007,000
385,000385,000
Net IncomeNet Income $35,000$35,000
Using the Using the provided data, provided data, prepare the prepare the cash flows from cash flows from operating operating activities activities section of the section of the statement of statement of cash flows cash flows using the direct using the direct method.method.
8-9 Cash Flows from Operating Activities – 8-9 Cash Flows from Operating Activities – Direct Method (continued)Direct Method (continued)
Accrual BasisAccrual Basis AddAdd DeductDeduct Cash FlowsCash Flows
Sales Sales $400,000$400,000 9,000 A/R9,000 A/R $409,000 (+)$409,000 (+)
Gain on sale of Gain on sale of landland
20,00020,000 20,000 Gain20,000 Gain -0--0-
Cost of goods soldCost of goods sold 280,000280,000 2,000 Inv.2,000 Inv. 6,000 A/P6,000 A/P 276,000 (-)276,000 (-)
Operating Operating expensesexpenses
75,00075,000 5,000 P. Rent5,000 P. Rent 80,000 (-)80,000 (-)
Depreciation Depreciation expenseexpense
15,00015,000 15,000 Depre.15,000 Depre. -0--0-
Interest expenseInterest expense 8,0008,000 4,000 Int. Pay.4,000 Int. Pay. 4,000 (-)4,000 (-)
Income tax Income tax expenseexpense
7,0007,000 2,000 Tax. 2,000 Tax. Pay.Pay.
9,000 (-)9,000 (-)
Net IncomeNet Income $35,000$35,000 Cash from operating activitiesCash from operating activities $40,000$40,000DEMONSTRATION COMPANYDEMONSTRATION COMPANY
Statement of Cash Flows (Direct Method) Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2005For the Year Ended December 31, 2005
Cash flows from operating activitiesCash flows from operating activities
Cash receipts from customersCash receipts from customers
Cash paymentsCash payments
To suppliersTo suppliers
For operating expensesFor operating expenses
For interestFor interest
For income taxesFor income taxes
Net cash provided by operating Net cash provided by operating activitiesactivities
$276,000$276,000
80,00080,000
4,0004,000
9,0009,000
$409,000$409,000
$369,000$369,000
$40,000$40,000